A take on carbon tax

The other day, I was asked by a friend to explain how carbon taxes could work. I am probably not the best person to offer an explanation because I don’t like the way the carbon tax was rolled out in this province. But I will give it a try.

In essence, taxes and tariffs have the effect of increasing the price of a commodity. There are various good reasons for imposing either. Generally, tax revenue is intended to be used for things we call public goods. For example, school taxes help to offset the cost of a public school system which we all value. Similarly, a road tax helps pay for the cost of maintaining our roads.

Tariffs have a slightly different purpose as they are intended to prevent other countries from undercutting local businesses by dumping low cost goods onto our market. There are reasons why countries put these in place but the desire is to secure the domestic market.

A carbon tax has slightly different objectives.

It is intended to do a number of things. In one sense, it is a sin tax in the same way taxes on cigarettes and alcohol exist. Part of the intent of a sin tax is to encourage people to change their behaviour. For example, the idea behind taxes on cigarettes is to increase the cost of smoking and the increased cost will either induce people to smoke less or to quit entirely.

Does it work? Judging by the societal shift we see, it has in one sense. Over the past 20 years, consumption by the average smoker has dropped from 17 per day in 1999 to 13.8 per in 2017. But was this entirely due to the increasing price of a pack or did it have to do with a persistent advertising campaign designed to decrease smoking? Or societal pressure in the form of bans on public smoking? Or links to cancer?

So will increasing the cost of fossil fuels have a similar effect on our consumption pattern?

Proponents of a carbon tax argue yes. As the cost of fuel increases, consumption will decline as fewer people will be able to afford to buy it. Imagine how many people would be driving if gasoline was $20 per litre. The roads would be empty of private vehicles for all but the rich. And, of course, our economy would be in tatters. Our economy would collapse because much of it is predicated on the consumption of fossil fuels.

This is where the social engineering aspects of a carbon tax fall apart. While increasing the price of cigarettes can inhibit smoking, no one actually needs to smoke (yes, I realize nicotine is addictive) whereas our present economic structure is intrinsically linked to the consumption of fossil fuels. Fossil fuels are presently not a luxury but a necessity.

This is where the second objective of carbon taxes comes into play. A carbon tax is intended to induce a shift in our economy to non-fossil fuel based alternatives.

Consider transportation. In the early 1900s, electric vehicles were a significant portion of the market but they couldn’t compete with the cheaper to run internal combustion engine. Gas powered cars and diesel engines won the price battle.

Over the last 100 years, advances in battery technology and electrical motors have enabled electric vehicles to gain a toehold once more. But what is the incentive to retool our transportation sector? Billion, if not trillions, in capital will need to be spent if we are to enjoy our present level of transportation freedom and usage using electric vehicles.

The imposition of a carbon tax will increase the price of fossil fuels and what we pay at the pump. Eventually, when considering a new car or truck, consumers will – in theory – opt for the electric vehicle because the overall cost of purchase and operation will be less. If you are presently paying $1,500 per year for gas and a carbon tax shifts the total to $3,000, over the lifetime of a car – say, five years – that is an extra $7,500 (and a total operational cost of $15,000). The intent is for this extra cost to induce someone to pay for the slightly more expensive electric vehicle with minimal electrical costs.

Will this work? Eventually, when the price of using fossil fuels gets to a point where the alternatives are cheaper to buy and easier to use. Unfortunately, no one knows exactly where that price point is.

In the meantime, we will need to implement tariffs to prevent economies without carbon taxes from dumping low-priced products onto Canadian markets. The net result is we will pay no matter what. After all, death and taxes are the only sure things in life.