Last-gasp defence can’t save carbon tax
The April 1 implementation of another hike in the federal government’s carbon tax and the growing prospect that a Poilievre government will abolish the tax, have prompted its advocates to mount a last-gasp defence. Three hundred supporters (not all of them economists) have signed a petition in favour of it. Its backers also fanned out to argue for it in op-eds and numerous appearances on CBC, which willingly provided a soap box for one side of this partisan issue. But, far from being persuasive, advocates mostly demonstrated how little they have learned from their long-standing failure to sell the tax to many politicians and most Canadians.
Carbon tax proponents say it is the most efficient way of reducing greenhouse gas emissions. But their credibility was damaged early on by preposterous claims about British Columbia’s small post-2008 carbon tax having triggered a sharp drop in gasoline sales. In a clear case of hope triumphing over experience, a syndrome economists are supposed to be immune to, this was rationalized as households acting on expectations of future tax hikes.
Supporters of the tax then seized on the supposed B.C. precedent as evidence carbon emissions could be sharply reduced with just a small and largely painless carbon tax, despite abundant evidence that fuel demand is largely insensitive to price hikes. It later became clear lower gasoline sales in B.C. were due to the 2008 recession and cross-border fillups in Washington state at a time when the loonie was trading at parity with the U.S. dollar.
Today, its proponents do acknowledge a carbon tax will have to reach painful levels to meaningfully lower consumption. But their initial willingness to ascribe magical properties to the tax undermined their credibility and gave conservative politicians and economists licence to withdraw their tentative support for the tax.
Those who believe the carbon tax is the best way to lower emissions ignore that, as economist Bjorn Lomborg argues, technological change can be even more effective and can boost economic growth at the same time. The U.S. has both achieved large reductions in emissions and reduced energy costs by switching many power plants from coal to natural gas and other lower-emitting technologies.
Defenders of the carbon tax claim the average Canadian household breaks even on it, since the government sends out cheques compensating households for higher energy costs. But, as the Parliamentary Budget Officer has noted, the carbon tax’s negative effect includes slower economywide growth, not just the direct bite out of people’s pocketbooks. Take slower growth into account and most households are worse off.
There’s also the problem that some carbon tax schemes have made no effort to be revenue-neutral. Few economists objected (never mind started a petition) when former Ontario premier Kathleen Wynne used carbon-tax revenues to increase government spending, thus reinforcing in the public’s mind that the carbon tax was just another government cash grab.
Advocates cite the Bank of Canada’s calculation that annual carbon tax increases of $15 a tonne contribute just 0.15 percentage points to inflation. This sounds trivial when inflation is running at eight per cent, as it was in 2022, but it’s a non-negligible 7.5 per cent of the Bank’s two per cent inflation target. Moreover, the Bank made clear its estimate “does not include second-round effects.” Of course, Catch-22, if the tax’s effect is trivial, that suggests its effect on behaviour must also be limited, which raises the prospect it is more an exercise in virtue-signalling than a serious attempt to lower emissions.
Mcgill’s Christopher Ragan, a leading carbon tax advocate and head of the now-defunct Ecofiscal Commission, recently lamented that the public debate on the tax had degenerated into a “dumpster fire.” But it was ever thus. Except that when carbon tax supporters were in the ascendant, the low level of debate — including the naive belief carbon taxes would be painless and politicians would remit all revenues to households — evidently was not worthy of comment. But now that support for a carbon tax is waning, suddenly the petitions are sprouting.
The reality is that carbon tax advocates have never wanted an open and honest debate. As early as 2015, many declared the matter was “settled” and discussion should be shut down — even though a majority of Canadians were hostile to the tax. As early as 2002, long before the carbon tax, Christopher Essex and Ross Mckitrick observed in their book Taken By Storm that much debate around climate change featured “a fortress, heavily defended by an arsenal of authoritarian pronouncements designed to intimidate outsiders into staying away.” But these outsiders now include a majority of both the provinces and the Canadian public, who are poised to abolish the tax altogether.