Not all carbon-pricing schemes equal
Politicians sure are wily. The federal Conservatives started by insisting the NDP wants a carbon tax, which is not true. The NDP wants a cap- andtrade system. But as pundits rushed to correct the record, they kept pointing out that carbon taxes and cap-and-trade systems can have identical economic results. Which, once you rub off all nuance, is exactly the message the Conservatives were trying to get out. See? Wily. Leave aside, for now, the hypocrisy. We’ll come back to the fact that the Conservatives themselves championed a capand-trade system as recently as 2009. For now, let’s focus on this idea that cap-and-trade and a carbon tax are two terms for the same thing. They’re not. A perfectly designed cap-andtrade system would achieve the same result as a perfectly designed carbon tax: It would change incentives by raising prices on emissions- heavy goods while fully compensating consumers by lowering other taxes. Cap-and-trade controls the supply, and carbon taxes control the price. But they differ in their design, implementation, adjustment mechanisms, politics and bureaucracy. So the results over time are not guaranteed to be the same. There are reasons economists and environmentalists have spent years arguing over which system is better.
Some jurisdictions have, or are considering, both participation in cap-and-trade and a carbon tax. If they were two terms for the same thing, that wouldn’t make any sense.
As a rough analogy, consider the quota system for dairy, eggs and poultry in Canada. In effect, it’s a transfer from consumers to farmers, through higher prices.
The government could achieve much the same result by simply taxing citizens and using that money to subsidize farmers. But the two policies are not identical. One is more visible than the other, and visibility affects how open the system is to reform and adaptation.
A tax- and- subsidy system has different points of political leverage than a supply management system has, and different vulnerabilities to lobbying and corruption. It requires different rules and bureaucratic support. Factor all these things in, and it becomes clear that, although the two policies could be designed to have identical effects, the effects probably won’t be identical, especially over the long term.
Back to carbon pricing. Capand-trade advocates argue it provides greater control over emission reductions because it starts by capping emissions and lets the price flow from that — rather than setting a price and hoping emissions fall.
But carbon taxes are simpler, more visible and more predictable when it comes to price and revenue, which makes offsetting them through tax reductions easier.
Ideally, both a cap-and-trade system and a carbon tax would be revenue neutral. You might pay more for some products, but your income taxes would go down by the same amount (a crucial point for the NDP to remember).
In the best kind of cap-andtrade system, the government auctions off emissions credits — so polluters pay (and so do their customers, which is the bit the NDP doesn’t want you to think about). The government then takes that revenue and uses it to lower taxes — just as it would under a revenue-neutral carbon tax.
The alternative would be a cap-and-trade system in which credits were simply given to companies as rewards for green behaviour or for other reasons. This would establish a price on carbon, passed down to consumers. But consumers would get nothing back in taxes. Many carbon-tax advocates argue that cap-and-trade models are vulnerable to lobbying that exempts companies or gives them discounts.
Economist Greg Mankiw — Romney adviser and carbontax advocate — puts it this way on his blog: “Economists recognize that a cap-and-trade system is equivalent to a tax on carbon emissions with the tax revenue rebated to existing carbon emitters, such as energy companies. That is, Cap-and-trade = Carbon tax + Corporate welfare.”
Imagine that a city has 50 taxis in a free market. It decides, for some reason, to reduce that to 20. So it issues 20 tradable plates. If the city gives them away initially, it recoups no money. The effect to consumers/citizens is that the cost of a cab ride goes up, as the plates get more valuable as the city grows and anyone wanting to operate a cab now has to buy a plate on the market the city government created.
Replace the right to operate a taxi with the right to pollute, and you have the worst kind of cap-and-trade system. This is the kind of cap-and-trade system the Conservatives apparently supported, until a couple of years ago.
This, according to MP Peter Van Loan in a recent interview on CBC television, is why the Conservative cap- and- trade system never amounted to a “carbon tax” like the NDP’s plan. “The difference is this. The NDP are looking to take revenue. ... You can see lots of cap-and-trade system across the world that don’t involve governments taxing.”
Host Evan Solomon: “Is your fundamental position that a cap-and-trade system is a carbon tax? Is that what you’re arguing?”
Van Loan: “We’re saying that the NDP proposal is a carbon tax because they have $21.5 billion in revenue coming from it.”
The alternative to “taking revenue” from a cap-and-trade system is to give away the credits, making life more expensive for Canadians without gaining any ability to lower taxes.
That’s the worst carbon-pricing plan but only the secondworst possible climate change strategy.
The Conservatives have now abandoned that plan, for the worst possible climate change strategy: regulation. The most inefficient, slow, bureaucracy laden and economically damaging option.
Almost any policy that includes carbon pricing is preferable to that. But not all policies that include carbon pricing are the same.