Car­bon tax flawed, but it’s best op­tion for now

Calgary Herald - - CANADA - AN­DREW COYNE

For months op­po­nents of a fed­eral car­bon tax have been ham­mer­ing away at it as a tax grab that will leave con­sumers poorer — and the poor­est con­sumers poorer still.

Well, now the Lib­eral gov­ern­ment has un­veiled the de­tails of the plan, which will in­clude off­set­ting pay­ments to ev­ery house­hold in the four prov­inces (Saskatchewan, Man­i­toba, On­tario and New Brunswick) in which the fed­eral tax will ap­ply — pay­ments that for most house­holds will ex­ceed the cost of the tax.

So, in a trice, the for­mer tax grab has be­come an ir­re­spon­si­ble give­away.

Con­ser­va­tive leader An­drew Scheer de­nounced the re­bates as a “gim­mick” in­tended to “trick” Cana­di­ans into “pay­ing higher taxes on ba­sic ne­ces­si­ties,” ap­par­ently obliv­i­ous to his own sup­port for taxes of up to 300 per cent on ba­sic ne­ces­si­ties like milk and eggs. It’s a “cyn­i­cal vote-buy­ing scheme,” agreed Saskatchewan Premier Scott Moe. On­tario Premier Doug Ford went so far as to claim the re­bates would cease as soon as the fed­eral elec­tion was out of the way. By to­mor­row, they will be back to talk­ing about the “tax on ev­ery­thing” as if the re­bates did not ex­ist.

Of course, in one re­spect, the crit­ics are right. The fed­eral plan is not “rev­enue-neu­tral,” ei­ther over­all or with re­gard to each prov­ince. That would be the case if the gov­ern­ment had opted to off­set the tax with equiv­a­lent cuts in other taxes, such that it took in no more rev­enue af­ter the tax than be­fore.

But the Cli­mate Ac­tion In­cen­tive Pay­ments, as the Lib­er­als have cho­sen to call them, are not tax cuts, but sim­ply a new spend­ing pro­gram. Ot­tawa will col­lect bil­lions more in taxes ev­ery year that it will then award to re­cip­i­ents of its choice in amounts it de­cides, i.e. spend.

What is al­most cer­tainly true, how­ever, is that the plan will be neu­tral to pos­i­tive in its ef­fects on (most) house­hold bud­gets. Op­po­si­tion on this point leans heav­ily on eye-rolling ap­peals to what “ev­ery­body knows.” A tax that makes you bet­ter off ? Har!

But while Scheer can scoff that a “measly $12.50 a month” (the amount a sin­gle On­tar­ian would re­ceive in the first year of the plan, when the tax is low­est) could not pos­si­bly cover the “true cost” of the tax, the plan’s es­ti­mates of the tax’s im­pact on house­holds are broadly in line with in­de­pen­dent es­ti­mates that he him­self used to cite.

If the amounts Cana­di­ans will re­ceive are “measly,” so are the amounts they pay in tax. To be sure, the $244 (ris­ing to $564 in 2022) the tax will cost the aver­age On­tario house­hold is a lot of money to a poor fam­ily. But so, by the same rea­son­ing, must be the $300 (ris­ing to $697) re­bate they will re­ceive.

Does that make the whole thing, as many crit­ics seem to be­lieve, a wash, with lit­tle real im­pact on emis­sions?

Is the gov­ern­ment, as Man­i­toba Premier Brian Pal­lis­ter fumed, sim­ply “tak­ing money and giv­ing it back”? Not a bit. The tax, which ap­plies at dif­fer­ent rates to dif­fer­ent fu­els de­pend­ing on their car­bon con­tent, al­ters the rel­a­tive prices of things; like all price sig­nals, it en­cour­ages con­sumers to change their be­hav­iour in or­der to stay within their bud­get.

The re­bates, on the other hand, are lump­sum: every­one gets the same amount, no mat­ter what.

Well, that’s not quite true. Peo­ple who live in higher-emit­ting prov­inces like Saskatchewan will get more than their coun­ter­parts in On­tario or New Brunswick. So will peo­ple in the coun­try, com­pared to city folk. So to some ex­tent the plan “for­gives” those who con­sume more.

Still, peo­ple in those ar­eas will have the same in­cen­tive as oth­ers to cut back on their con­sump­tion of fos­sil fu­els at the mar­gin. Maybe the ex­tra in­come might cause peo­ple to con­sume a lit­tle more — but not as much as the in­crease in price causes them to con­sume less, or to sub­sti­tute lower-taxed fu­els in their place. They still get the full re­bate even if they don’t. But they get to keep a lot more of it if they do.

Pal­lis­ter knows this, which is why his own plan pro­posed much the same, be­fore it was abruptly canned three weeks ago. The other Con­ser­va­tive op­po­nents also know it — just as they know their pre­ferred al­ter­na­tives, a mix of reg­u­la­tory and sub­sidy schemes much like the ones that have so sig­nally failed to re­duce Canada’s green­house gas emis­sions to date, would cost con­sumers more than the car­bon tax. Only with­out any off­set­ting re­bates.

I have my own prob­lems with the Lib­eral plan. It’s overly com­pli­cated, with too many ex­cep­tions (e.g. green­houses, cer­tain types of farm­ing and fish­ing). The rev­enues would have been bet­ter used to re­duce cor­po­rate and per­sonal taxes, rather than sim­ply handed out as re­bates. And it lay­ers car­bon pric­ing on top of ex­ist­ing reg­u­la­tions, rather than re­plac­ing them, as it should.

Last, I re­main un­per­suaded of the need for “out­put-based pric­ing” for heavy emit­ters in “trade-ex­posed” sec­tors. The idea is to ex­cuse them from pay­ing tax on much of their emis­sions — ef­fec­tively, a sub­sidy — while still of­fer­ing them an in­cen­tive to re­duce at the mar­gins. The ar­gu­ment is that this is nec­es­sary to keep them from shift­ing pro­duc­tion to ju­ris­dic­tions with­out a car­bon tax, namely the United States, on the grounds that this would sim­ply shift emis­sions from one coun­try to the other, rather than re­duc­ing them.

But that’s not our con­cern: Canada is re­spon­si­ble for its own emis­sions un­der the Paris Ac­cord, not Amer­ica’s. We’re not the ones free rid­ing: they are.

Of course we’d pre­fer, other things be­ing equal, that heavy-emit­ting in­dus­tries didn’t shift pro­duc­tion else­where. But it’s not worth sub­si­diz­ing them to stay, since sub­si­dies are al­ways paid for by other firms and in­dus­tries.

But even with these quib­bles, the Lib­eral plan re­mains su­pe­rior to the al­ter­na­tives. In­deed, as of to­day, it re­mains the only plan on of­fer.


Justin Trudeau’s Lib­er­als have lay­ered car­bon pric­ing on top of ex­ist­ing reg­u­la­tions, rather than re­plac­ing them, as they should, colum­nist An­drew Coyne writes.


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