Higher prices do not impact demand for fossil fuels

According to the oracles of carbon economics, a carbon tax must be applauded because it is a “market-based” tax that acts just like a “market price” which, under the infallible economic laws of supply and demand, will automatically produce reductions in carbon dioxide emissions more efficiently than regulations and other big-government measures.

As the current $20-a-tonne federal carbon tax — about 4.4 cents per litre of gasoline at the pump — rises to $50 or $100 or even $200 in years to come, fossil fuel consumption will fall, an outcome allegedly guaranteed by economic theory.

None of this carbon tax dogma stands up well in the real world, as I will demonstrate shortly.

Nor should Canadians fall for the new-found carbon tax miracle revealed by the Parliamentary Budget Office and embraced by such carbon tax enthusiasts as Calgary’s Pembina Institute and Toronto’s Globe and Mail, which recently said that “more taxpayers will get back more in carbon tax rebates than they’ll pay in carbon tax.”

Sounds amazing: You pay a tax and the government gives you back more than you pay. Fantastic. Let’s have a bigger carbon tax! Imagine: If a $20 carbon tax produces a refund of $307, then a $200 carbon tax will mean an annual tax refund of more than $3,000.

This is known as the carbon-taxand-dividend plan, advocated by coalitions of activists and corporations, including big U.S. oil firms and other businesses that recently agreed to give millions of dollars to promote the concept in the United States.

When big business conspires to raise taxes on all consumers, consumers and voters should start to think twice before joining the campaign. British Columbia once promised a carbon tax dividend on its carbon tax, but now keeps all the money.

Of all the myths surrounding a carbon tax, the greatest is the foundational

claim that an increase in the price of fossil fuels will lead to major reductions in carbon emissions, thereby saving the world from the perils of climate change. Yale University’s William Nordhaus, a 2018 Nobel Prize winner, argues in The Climate Casino that a “sharp price rise” is needed to “choke off” growing carbon emissions.

Gasoline price history in North America suggests the choke-off theory is at least debatable and more likely unsupportable.

In the United States, the price of gasoline soared more than 60 per cent to US$3 a gallon during the 1970s and went through another price burst to almost $4 a gallon in the early part of the 21st century. Increases of that magnitude — up to $2 a gallon — are equivalent to imposing a carbon tax of $160 a tonne. But U.S. consumption of gasoline declined only slightly, and for other reasons.

In Canada, gasoline consumption has grown steadily over the past 40 years despite bouts of severe price increases that were equivalent to carbon taxes of up to $500 a tonne.

The reason high prices/taxes don’t produce dramatic cuts in demand is well-known. Study after study has concluded that gasoline is dominated by what economists call “price inelasticity.” People do not change their behaviour in the face of rising prices when the product is essential to their economic success. There are some recent counter-studies, but it is clear that the market-price theory is still highly theoretical.

Numerous factors other than price are the real drivers of fossil fuel demand, including economic recessions, demographics, driver behaviour, vehicle fuel efficiencies, better roads, changing lifestyles, living standards and technological change.

Why do most economists tend to play down or even ignore price inelasticity? Nobel-winner Nordhaus argues for a global carbon tax but does not mention “elasticity” or “inelasticity” once in the 300-page text of The Climate Casino.

Price can have an impact, but nothing on the scale suggested by carbon tax theorists, who cite British Columbia as a demonstration case of the effectiveness of carbon taxes. Again, the evidence is murky at best, even murkier today as the price of gasoline in Vancouver hovers around $1.70 a litre, up from $1 in 2015. That’s equivalent to adding a $320 carbon tax. Gasoline consumption in B.C. has been declining, but the $30 carbon tax impact — equal to 8.9 cents at the pump today — is at best a marginal factor compared with the pile of other taxes and costs built into the price of gasoline.

Another folly: For Canada to impose a carbon tax independently is a form of economic suicide. If other trading partners — in North America, Europe, Asia, South America — do not adopt similar carbon taxation, the Canadian economy will become increasingly uncompetitive.

So far, no other country is joining the national carbon tax crusade. Australia just said no to one. Elsewhere, carbon tax schemes are either weak or marginal.

Even Nordhaus, the leading guru of carbon taxation, was categorical that a carbon price will succeed only if most major countries sign an international carbon tax treaty. Under such a treaty member nations would impose tariffs on the goods of non-members and use various “enforcement mechanisms” to promote compliance.

Now there’s a promising idea for a world already twisted into trade wars: Let’s bring in new tariffs to raise the costs of products — cars, steel, shoes, cellphones, fruits, vegetables, clothing, petroleum products — imported from non-carbon-tax countries.

An alternative trade proposal is to find a way to exempt certain Canadian industries from the carbon tax so they would remain internationally competitive.

Which leads us to another delusion. A carbon tax is said to be a beautiful free market substitute for costly and inefficient regulation. Some economists used to say that carbon taxes were preferable because they left “no room for planners.”

On the contrary, carbon control and pricing have become a bureaucratic paradise for central planners and economic control freaks.

In Canada, governments still plan to regulate coal out of existence. Electric vehicle mandates and quotas will be issued; fuel consumption standards will be imposed on non-electric vehicles. Carbon sequestration will be required for major industries. Alternative energy forms must be subsidized. Industrial emission standards will be regulated into existence by state planners, although scores of exemptions will be needed.

The astute reader will by now perceive that the hardcore case for carbon pricing as a “market-based” regime that will let the “market mechanism” of the “carbon price” do the work has been thrown overboard.

Economists who favour carbon taxes now simultaneously advocate complementary “flex-regs,” to be administered by a wise politburo of central planners. Economist Mark Jaccard at Simon Fraser University, a longtime carbon tax backer, wrote last year that Ottawa should now also “heed the evidence on the effective and relatively efficient role that well-crafted regulations can play in driving the major technological and energy transition we so desperately need.”

The alleged reason for abandoning the stand-alone carbon tax is that high prices for fossil fuels are unpopular and therefore difficult for politicians to impose. Canadians, like Australians, are not falling for the carbon dividend ruse.

But there’s another good reason to abandon carbon taxes, which is that the whole “market mechanism” theory does not hold up. Carbon taxation, in practice, requires massive government intervention.

Nationally and globally, state planners must calculate and predict future climate scenarios under different carbon conditions, then determine the acceptable volume of carbon emissions to be produced by industry and by product. Each country must be assigned national targets. With that mostly speculative knowledge in hand, planners must then determine which price of carbon will be effective in reducing emissions using models that pile more speculation on speculation.

What’s the right price — $50 a tonne? $100? $250? Nobody has a clue, because there is no way to calculate the effective price, a standard central planning problem.

Anybody who doubts the coming planning risk should read the Report of the High-level Commission on Carbon Prices, a seminal World Bank paper that portrays a world tied up for the rest of the century in a bureaucratic carbon-price nightmare. “The uncertainties around the carbon-price trajectories that are consistent with a 2oc target imply that policies will have to involve experimentation, be closely monitored over time, and revised when they seem to fail (that is, do not reduce emissions enough) or impose unacceptable costs (e.g., threaten food security).”

Carbon tax schemes are not market based. They are tax-and-control regimes, unprecedented exercises in central planning that Canada does not need and should not adopt until the rest of the world is on side.

Carbon tax policy also rests on the dubious assumption that fossil fuels can be priced and regulated out of existence to make way for alternatives, an assumption U.S. energy expert Mark Mills describes as “An Exercise in Magical Thinking.” But that’s a whole other story.