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Andrew Coyne: The federal carbon tax has become unnecessarily costly

national post 2017-05-20 05:50:00

Like much else this government touches, the carbon tax started out as a simple idea that has grown steadily more complex.

The case for the carbon tax was very much tied to its simplicity: a uniform national tax, applied economy-wide, based on the carbon content of every good and service. Where regulations encourage compliance up to the level required and no further; where subsidies often pay people to do what they would have done anyway; and where both apply only to those activities it occurs to the planners to apply them to, a carbon tax gives everyone a permanent incentive to reduce emissions, by whatever means they can devise, so far as it still costs less to do so than to pay the tax.

Small wonder that every economic study shows that carbon taxes achieve far more reductions per dollar spent, by orders of magnitude, than alternative approaches. What is more, the evidence suggests they are superior to their close cousin, cap and trade. While conceptually identical, the practical difficulties of establishing and running a worldwide market for emissions credits have soured economists on its potential.

But this is Canada, where there are practical obstacles to doing anything. The first of these was the provinces. By the time the federal government decided to get serious about reducing emissions, several provinces already had their own schemes: some using a carbon tax (British Columbia), some cap and trade (Ontario and Quebec), some neither, but all with different rules, different exceptions, and different effective prices. This presented a nightmare for any business so foolish as to attempt to operate in two or more provinces.

The planned federal carbon tax plan, details of which were released this week, will at least put a floor under all this. Provinces will have to impose a federally-mandated minimum tax on carbon, or its equivalent in cap-and-trade terms, or have a “backstop” tax imposed by the feds. But it still means a more costly, complex system than it might have been. Moreover, rather than implement a carbon tax as a substitute for other, costlier approaches, the Liberals have simply loaded it on top of the existing pile. Indeed, they have added new ones.

This much was already known. But this week’s technical paper adds some new wrinkles. The federal “backstop” tax would include special exceptions for heavy industry, known as output-based allocations, following the Alberta model. Large emitters — those over 50 kilotonnes a year — would effectively only be taxed on a portion of their emissions.

It’s odd to be sparing heavy emitters from a tax whose whole point is to deter emissions. The justification, that this is necessary to keep them competitive with foreign rivals, assumes that to oblige them to bear the full cost is anomalous and unnatural — as if in the calculus of comparative advantage carbon costs somehow didn’t “count.”

There is a cost to emitting carbon just as there is a cost to hiring labour. It’s just that until now companies have been able to slough off those costs onto society rather than include them in their own cost base: carbon emissions are what economists call an “externality.” But they are just as real as any other costs, even if the government has to force companies to pay them. If we wouldn’t spare a company from competition because its labour costs were higher than its rivals’ — and we shouldn’t — why should we do the same for heavy emitters?

Well, one reason comes to mind: if companies face a carbon tax in Canada, but not in the United States, they might simply move production across the border. Whatever reduction in emissions was recorded here would be offset by an increase there: so-called “carbon leakage.” This would, it is argued, defeat the whole purpose of the exercise. That’s what Alberta Progressive Conservative leader Jason Kenney meant when he said the tax was “all economic pain and no environmental gain. All it does is to push investment outside the province into the energy sector elsewhere. It doesn’t reduce carbon emissions. It’s just another tax grab and that’s why we will repeal it.”


  • What we still don’t know about the federal carbon-pricing plan
  • ‘Polluters should pay’: Trudeau to force carbon tax and cap on holdout provinces
  • Claudia Cattaneo: National carbon plan is on shaky ground with shifting priorities in the West

The supposition is that unless emissions are reduced globally, there’s no point. But you could just as well make the case that there’s no point anyway. With just 1.6 per cent of global emissions, we’re more or less irrelevant, as far as saving the planet is concerned. That’s not an argument for doing nothing. It’s an argument for doing our part — as long as we are under no illusions what “our part” means.

Climate change is an example of a collective action problem. Though each country might make very little difference on its own, together they make a great deal of difference. Yet if every country, following the logic of its own unimportance, did nothing, no one would do anything.

Usually these sorts of problems are resolved by compulsion: it’s why you have to pay taxes. At the international level, it can only really be by agreement — though there may be penalties for non-compliance. Living up to our promised emissions reductions isn’t about saving the world so much as staying onside with the world, if for no other reason than there may be costs to not doing so.

The choice facing us as a country, then, is rather like that facing a company under a carbon tax: to reduce emissions, so long as it is less costly than the alternative. One implication of that is we should do so in the least costly way possible, namely by taxing carbon. At some point, if we keep piling on unnecessary costs, it will be cheaper to renege.

The other is that it is our own emissions we should be concerned with, not someone else’s. If a reduction here is offset elsewhere — because a plant relocates, say — that’s a statement about that jurisdiction’s climate policies, not ours. Certainly, it is not an argument for offering exemptions to some sectors that imply greater costs for every other.