Carbon Taxes and Economic Myths

OpinionsTristan Masson — Published October 18, 2016

He was referencing his Liberal Party competitor Stéphane Dion, who proposed a carbon tax. Now the Canadian government is re-introducing the policy and Dion is travelling the world as Canada’s Minister of Foreign Affairs. Harper has since bowed out of politics to start a consulting firm. Oh, how the tables have turned.

The rhetoric resurfaced recently, illustrating that consensus on a carbon price lays unresolved. After falling to the Liberals in the last federal election, Jason Kenney announced his hunt for the top spot in Alberta, with Harper’s endorsement. His self-proclaimed mission is to “restore the Alberta advantage through the lowest taxes in Canada.” This includes “repealing the NDP’s job-killing carbon tax.”

Brad Wall, the longtime premier of Saskatchewan, isn’t having it either. Earlier this month, Prime Minister Justin Trudeau announced that the federal government would impose a minimum carbon price if provinces failed to craft one on their own. In response to the announcement, Wall exclaimed that such a carbon policy will “siphon over $2.5 billion from Saskatchewan’s economy when fully implemented and make our province a less competitive place to do business.”

His office unfortunately or conveniently refused to provide the numbers behind his statement. Nonetheless, several misconceptions are worth pointing out, beginning with the $2.5 billion figure. Saskatchewan has the highest per capita emissions rate in Canada, but one would have to multiply the federal government’s carbon tax fivefold to get in the range of Wall’s $2.5 billion. What’s more, the tax revenue collected is returned to the province from which it originates, discrediting the so-called “syphon” accusation.

This money should go into economic diversification and support those in affected industries. Wall’s announcement came while the various ministers of the environment were meeting in Montreal to hammer out a national carbon price.

The ministers of Saskatchewan, Nova Scotia, and Newfoundland and Labrador immediately walked out of the meeting, while several others expressed disappointment about lack of collaboration.

This reaction seems inconsistent with the timeline. Eight provinces sent delegations to the 2015 Paris Climate Conference last December—including Premier Wall. The federal government also made it clear there would be a carbon price nationwide at a First Ministers meeting last March. Be that as it may, there’s disagreement over the economic vices and virtues of a carbon price. The public debate on this issue is critical and requires that we cut through some of mystery.

Pricing Carbon

In 2015, Jeffrey Sachs, professor of economics at Columbia University, wrote The Age of Sustainable Development.

An important contribution to our understanding of economics, it summarizes years of research and history, and lays a roadmap to the most daunting global challenges we face. On climate change, Sachs notes a twofold strategy: mitigation and adaptation. For our purposes, we’ll stick to mitigation, as it corresponds to reducing greenhouse gas emissions—humankind’s contribution to climate change.

Being the most abundant and significant of these gases, carbon is a logical point of departure.

Carbon isn’t accounted for as a cost in production, but imposes costs on all in the form of climate change. Additionally, private firms have no incentive to reduce the carbon intensity of their activity seeing as it will increase costs.

On a global scale, we call this the “Tragedy of the Commons.”

While no single individual accounts for the problem, it arises collectively. This is where a carbon price comes in handy: a government imposed carbon price internalizes the costs of carbon intense production. In other words, the economy becomes more accountable for the social costs of its activity. The common policies are carbon markets or a carbon tax. Some provinces are already testing the misty waters of de-carbonization. British Columbia has had a carbon tax since 2008, with research confirming it reduced gas consumption over time.

Likewise, Quebec, Ontario and Mexico have recently agreed to work together on their respective carbon markets, with the goal of a common market on the horizon.

Debunking the Bunkered

The problem for detractors, once again, is a misunderstanding of the policy and of economics. Joseph Heath, professor at the University of Toronto, reminds us that the price elasticity of demand must be considered in the short and long term. In the short term, we can expect a marginal decrease of gas consumption in response to the carbon price, but in the long term this marginal decrease will be greater.

The reason is intuitive: consumers respond to price changes and the more time consumers have to adjust, the greater the change. The point isn’t to end gasoline consumption, but marginally so over time.

This leads to Harper’s elegant claim that the policy would “screw everybody.” There’s a fear the cost of living will rise dramatically and, while legitimate, needs some grounding.

Economist Trevor Tombe explains that the impact of the carbon price will vary across products, with a relatively small, indirect increase in the price of non-energy products. On average, the cost for Canadians will be $1,100 per year, accounting for direct and indirect costs. Putting this number into perspective, this only accounts for 1.5 per cent of the average household spending.

To limit the heavier burden for low-income households, public policy should provide support.

The logic seems airtight and the cause more urgent than ever. Even major players in the private sector recognize the necessity of a carbon price, forming the international Carbon Pricing Leadership Coalition. This group also includes fossil fuel giants such as Shell, BP and Enbridge.

Of course none of this guarantees reaching Canada’s commitment to the Paris Agreement. A carbon price won’t do that alone and still needs work. Wall and the remainder of the unconvinced can—indeed should—question the merits of a policy.

That being said, when criticism based on supposed economic truths serve to cement Canada’s climate inaction, this becomes objectionable. Sustainable development has spawned a wave of innovative economic thinking, reminding us that economics is scientific and not a set of ideological rules justifying idleness. The choice isn’t between economics and the environment.