Writing in the Financial Post, Macdonald-Laurier Institute Senior Fellow Philip Cross re-opens the debate surrounding carbon taxes in Canada.Philip Cross

He argues that the example many hold up as proof of its effectiveness, a carbon tax in British Columbia, is far from conclusive evidence.

“Claims that the matter is “settled” emanating from universities is at odds with their traditional role in our society as the place where new policy ideas are best discussed”, writes Cross.

By Philip Cross, Jan. 22, 2015

After initially being a walkover, at least within the world of economists and policy wonks, the question of whether other governments should follow B.C. in adopting a carbon tax is now the subject of a healthy debate.

There are several problems with using B.C.’s carbon tax as a model for other provinces. The structure of B.C.’s economy is unique, with no large oil refinery and no petrochemical industry (fuel is trucked from elsewhere). The main use B.C. industry has for petroleum products is diesel fuel for transportation. So the carbon tax had much less impact in B.C. than it would in Alberta, Ontario or Quebec, all of which have large industries that rely on petroleum inputs. These producers in central Canada already are at disadvantage with competitors in Indiana and Illinois, who have access to low-cost feedstock from Alberta’s oilsands (denied to central Canada by their foot-dragging over new pipelines). Adding a carbon tax would further hurt the competitiveness of these industries.

It is unrealistic to expect a significant impact on consumption from a small levy like B.C.’s 7 cent a litre carbon tax, especially now that crude oil prices are plummeting. Even when gas prices were high, gasoline consumption in B.C. (adjusted for purchases made outside the province) rose the same as the rest of Canada despite the new carbon tax. The Rivers and Schaufele study that found magical effects on fuel demand in B.C. compared with the rest of Canada is vague about the exact mechanism by which a small carbon tax provoked such large changes in demand. They are reduced to speculating that a carbon tax reduces “free-rider” effects (I won’t drive less if I think you’ll take advantage of less congestion by driving more, with no net benefit to society). Even if true, this hypothetical effect in B.C.’s low carbon and more environmentally conscious society will not translate to other parts of the country.

The fundamental conundrum of carbon taxes is that, to significantly reduce emissions, carbon taxes will need to be much heftier than B.C.’s token levy. A modest carbon tax is just another tax grab by governments, not a serious attempt to lower carbon emissions. However, a carbon tax hefty enough to alter behaviour will be very unpopular with the public, leading to the election of parties that will reverse it.

Another claim is that no reputable economist questions carbon taxes. A quick search reveals skeptics ranging from David Henderson (the former chief economist at the OECD) to the University of Guelph’s environmental economics professor Ross McKitrick to Robert Murphy, an economist at the Institute for Energy Research who specializes in climate change. One reason for their skepticism is that carbon taxes are only ideal if they are imposed on an economy which otherwise does not regulate or tax fossil fuels, clearly not the case here or anywhere in the world. There is also skepticism that governments will be able to restrain themselves from the temptation to use carbon tax revenues to expand their spending. This is probably why Ontario’s Wynne government will find a carbon tax irresistible, despite the implicit admission its renewable energy policy was an expensive and futile waste.

Rational people can oppose a carbon tax for other reasons. The renowned environmental economist Bjorn Lomborg, during his cross-Canada tour in the spring of 2013, reminded people that Canada is one of the few countries that stands to benefit from global warming (basically, it expands our cultivable landmass to the north), and that any price we pay to reduce carbon emissions is for the benefit of people in other countries.

This is not the first time Canadians have heard the siren call from experts for “smart” taxes. There is almost unanimous agreement among economists that the GST is preferable to income taxes. Like carbon taxes, on paper the GST was designed to be revenue neutral with offsetting income tax cuts. Nevertheless, Canadians have always hated the GST, something on display as recently as 2011 when B.C. voters voted down converting their provincial sales tax to harmonize with the federal GST.

There is something indecent about the haste to cut off debate about a carbon tax, based on data for one province covering a short time when the economy was going through a wrenching recession. Claims that the matter is “settled” emanating from universities is at odds with their traditional role in our society as the place where new policy ideas are best discussed.

Philip Cross is the former Chief Economic Analyst at Statistics Canada.

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