An unwillingness to offset with lower taxes and an inability to get buy-in from all portions of the political spectrum has doomed a carbon tax to failure, writes Philip Cross.
By Philip Cross, June 26, 2017
Carbon tax advocates can be forgiven if they look back on 2017 with a sense of triumph, after the Trudeau government negotiated the implementation of various provincial schemes that effectively amount to a national carbon tax. It would be premature to celebrate, however, since the carbon tax seems doomed to failure over the long run because of its design flaws and poor political packaging.
The main economic selling point for a carbon tax is that it leads to a better tax system. However, this is strictly-based on being revenue neutral; every dollar raised by the carbon tax must be offset by lower income or payroll taxes. Outside of British Columbia, this simply has not happened. It was easily predictable that cash-strapped premiers like Ontario’s Kathleen Wynne would jump at the chance to raise carbon taxes and not bother cutting others. Only the politically naïve professors who champion a carbon tax did not see this outcome; ordinary people, who actually pay the taxes, knew this better than academics. It is why, to quote William F Buckley Jr, I would rather be governed by the first 400 people listed in the telephone directory than the staff of Harvard University.
The carbon tax seems doomed to failure over the long run because of its design flaws and poor political packaging.
Carbon taxes (or their equivalents under “cap and trade” tax schemes) are manifestly unsuited to a nation like Canada with a large exposure to international trade. By raising the cost of domestic production but not taxing imports based on their carbon-intensity, carbon taxes penalize domestic producers in Canada’s domestic market. This may curtail Canada’s carbon emissions but does nothing for global warming if production simply moves overseas to countries with lower emissions standards. Meanwhile, Canadian exporters are at a competitive disadvantage with the United States, since the states we most trade and compete with don’t have carbon taxes.
Most carbon taxes increase income inequality. Low-income people spend proportionately more on basics such as home heating and gasoline, and so are penalized the most by carbon taxes. This issue has never been adequately addressed by carbon-tax advocates, who in their spare time vociferously express horror at the inequality in our society.
As a practical matter, the $50 a ton carbon tax set to take effect next year is the equivalent of paying about 10 cents a litre more at the gas pump. At a time when world oil prices are slipping below US$50 a barrel, this does not even offset the windfall people have received from lower energy prices. As a result, there is no reason to expect real change in people’s behaviour, the very point of a carbon tax. Proponents of the tax have a responsibility to disclose what level of tax will be required to actually alter behaviour enough to achieve Canada’s climate change commitments. And to be clear, they are talking about a major shove, not just a nudge, to people’s spending habits. At its proposed level, the carbon tax is no more than buying a papal dispensation for sin.
Beyond its technical drawbacks, there are two fundamental flaws with the campaign for a carbon tax. First, it maintains that changing long-standing behaviours is best done by tinkering with the price system. This ignores that the true miracle of capitalism is not the efficient allocation of resources through the price system (although that is certainly one of its attributes), but its capacity for relentless innovation and technological change. Game-changing new technologies will solve climate change, not government fiddling with relative prices. Already the price of solar power in the U.S. has fallen to levels that on their own induce people and firms to switch from fossil fuels, a triumph of technology without the burden of carbon taxes.
The real long-term threat to carbon taxes is that its advocates failed to gain the support across the political spectrum that legitimizes a tax and insulates it from election results. Brooking no intellectual dissent, refusing to listen to any objections or answering legitimate questions, academics sold their arguments to other left-wing elites but not to ordinary people. The politicians who most enthusiastically support a carbon tax are identified with left-wing governments such as in Ontario and Alberta. Michael Chong, the one candidate in the Conservative leadership race who supported a carbon tax, was regularly booed during public debates. Carbon taxes have become politicized, just as Al Gore’s partisan exaggeration of the threat of climate change polluted the U.S. debate, preventing any chance of a repeat of Republican support that drove support for a cap and trade system for sulfur dioxide and emissions permits and taxes on CFCs during the Reagan years.
The real long-term threat to carbon taxes is that its advocates failed to gain the support across the political spectrum that legitimizes a tax and insulates it from election results.
Instead of cultivating right-wing support, proponents of a carbon tax smugly stayed inside the safety of an echo chamber with their left-wing elite supporters and declared victory. Without political support across the political spectrum that would ensure the long-term viability of a carbon tax, the tax risks disappearing after its opponents are elected. It is relatively easy to get elected by promising to reduce or eliminate an unpopular tax, as proved by the GST (which also had widespread approval from experts, but never won popular approval). The carbon tax is unpopular because it was sold by academics to only a small cadre of like-thinking people and because short-sighted, tax-hungry politicians refused to offset them with cuts to other taxes.
Philip Cross is a Munk Senior Fellow at the Macdonald-Laurier Institute.
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