The Ontario Progressive
Conservative(PC) Leadership race has again brought to front and centre the
issue of a carbon tax. After the resignation of Patrick Brown as leader, all
four candidates running to succeed him have come out against such a tax although
the party had just (at Brown’s insistence) adopted a platform that included a
carbon tax. Prior to this, Justin Trudeau’s Liberal federal government has
mandated that provinces must adopt either a carbon tax or a cap-and-trade
scheme. If not, the federal government will institute a carbon tax itself in
those provinces in order to meet Trudeau’s commitment to fight climate change.
Both British Columbia and Alberta have already implemented such a tax. Ontario and Quebec have introduced cap-and-trade-plans that achieve the same goal. In the meantime, the U.S.
government under Donald Trump has backpedaled on any climate change commitment.
As a candidate, Trump had already made it clear that under no
circumstances would he support a carbon tax.
Obviously,
a carbon tax (or cap-and-trade) will drive up energy prices, inevitably lead to
higher consumers costs and reduce family incomes. Should we, therefore, jump on
the conservative bandwagon to reject the carbon tax? Of course, the answer to
this question depends on your belief about man-made climate change. Personally,
I remain a skeptic about the necessity to take drastic steps to deal with
climate change. I do not think the science on this issue is “settled”. However,
if there is a good chance that we can reduce the predicted negative effect of
climate change, Christians should favour maintaining God’s creation for our
children and grandchildren. On the other hand, I think it is folly for Canada
to take major action while the U.S., our most important trading partner refuses
to do so. The uncertainty concerning the renewal of NAFTA and Trump’s overall
protectionist attitude (e.g. tariff on steel and aluminum) are bad enough for
us—considering how many Canadian jobs depend on exports to the U.S.
Nevertheless,
a complete rejection of a carbon tax may be a bit hasty. After all, as government you have to get the money somewhere. For all his
left-leaning platform, Brown at least recognized that his proposed spending
increases have to be offset by new revenues[1]. Those vying to succeed
him have not made clear how they intend to fill the financial gap left by their
rejection of the carbon tax. Economists generally recognize that we should tax
the bad rather than the good. Instead of a tax on jobs—e.g. income tax
or corporate tax, a tax on cigarettes or luxury items is preferable—as are
sales taxes in general. If you believe carbon is bad, it should be taxed. A
carbon tax can be revenue neutral by reducing other taxes. Reducing income
taxes will even increase economic growth[2]. In effect, if you accept
the need to fight climate change, then a carbon tax is, in principle, not a bad
idea.[3]
A market oriented policy
In fact, a carbon tax is entirely consistent with the
preference for the market that I have been advocating on this blog.[4] Before the carbon tax (or
cap-and-trade), the most prevalent government instrument to fight climate
change and to curb pollution in general--has been regulation
(command-and-control); government specifies what companies and consumers can
and cannot do.
Regulation, however, is costly and enforcement is frequently inadequate. Past
regulation has frequently been too precise or with too short a compliance
deadline, so that flexibility to implement the latest, best technology is
reduced. Establishment of regulations is a time-consuming process and provides
opportunity for companies and bureaucrats to subvert the system. Moreover,
regulations are likely to become obsolete and become the norm rather than
minimum standards. Thus, continued improvement is discouraged.
A carbon tax, on the other
hand—like all “green” taxes—leaves the basic decisions to the market rather
than government. It follows a very important economic principle that has been accepted , in theory,
by most industrialized countries since the 1970's—that is to seek to "make
the polluter pay the cost” or putting it differently, to make the user pay
the “full” cost. This principal would
seem to be in accordance with the biblical concept of personal responsibility.
In economic terms, that means to force the producer to "internalize"
the "externalities" (or neighbourhood effects). To the extent that
this can be done, the cost will be reflected in production and buying
decisions--the market price will reflect the full cost in the final price.
Thus, consumers will be motivated to buy less of the polluting product or
scarce resource. Pollution will be reduced and/or the scarce resource will be
used up more slowly.
Consider,
for example, the production of gasoline. While the actual cost of production is
reflected in the price of gasoline, various indirect costs are excluded: e.g.
the cost of treating respiratory illnesses and the deaths caused by breathing
polluted air, the cost of repairing acid rain damage to lakes, forests, crops
and buildings caused by the emissions as well as the potential costs of oil
spills and of climate change–ice melting, more destructive storms and
relocation of refugees from rising sea levels.
To the extent that these costs are not currently reflected in the price
of gasoline through taxes, the consumer uses more gasoline than is economically
warranted. If the gasoline were to fully reflect these environmental
neighbourhood effects, the price would, no doubt, increase.[5] At the higher price, consumers would
use less (by reducing driving, purchasing more fuel efficient cars etc.). That
is, the market's mechanism for efficiently allocating resources now
"counts the cost" of pollution and climate change.
A comprehensive, “carbon tax” on the
burning of all fossil fuels reflects the full costs to society of mining coal
and pumping oil, of the air pollution associated with their use and climate
disruption; the increased price simultaneously reduces consumption. With a
carbon tax, companies are left free to innovate and choose the most
cost-effective way of reducing their carbon emissions. To save on the carbon
tax, they have every incentive to do so.
Better solutions can, moreover, be adopted as soon as they become
available. On the other hand, if bureaucrats have to specify the solution,
those who make the decision are not the ones who pay the costs and may not
possess all the relevant information. The process becomes cumbersome and
time-consuming as all affected parties have to be given opportunity to provide
input and comment. Once specific regulations are put in place they may stay in
place for a long time. There is little incentive for governments to reopen this
arduous process when new technology becomes available. The process also reduces the motivation for
companies to keep searching for better solutions. Finally, carbon taxes can be
introduced gradually and increased over time so that companies’ activities are
not halted abruptly and their employees thrown out of work in one fell swoop.
Increases according to a predetermined schedule will permit industry to adjust.
Pollution charges, such as the
carbon tax, require government only to set the amount of the charges—the
“price” of carbon. The market is then free to decide how best to reduce the
pollution. Competition will motivate companies to continue to improve and keep
looking for improved technology. If regulation mandates the installation of
certain pollution control devices, once the requirement is implemented no
further improvement in pollution abatement is likely. However, if a company is
taxed on its emissions, they will be motivated to continue to seek better and
lower-cost abatement methods regardless of how much they have already done in
this regard. The most cost-effective alternatives are, therefore, likely to be
obtained using the market (leaving companies to make choices) rather than by a
regulating agency[6].
While a carbon tax can be used in
conjunction with regulations, in theory at least, regulation can be
significantly reduced. In practice, governments will use all the tools at its
disposal including subsidies. In Ontario, for example, subsidies continue for
wind turbines and solar through, among others, above-market prices paid to
generators of these sources of power. However, with an escalating carbon tax, at
some point, companies would decide for themselves that the cost of generating
electricity using coal or natural gas (including the carbon tax) is higher than
the alternatives of wind or solar. They would then switch the best alternative
without the incentive of subsidies.
Now an argument can be made that a
carbon tax would hit hardest on the less wealthy. That is true, since
electricity and heating are larger part of their budget than it is for those
who are better off and have more discretionary spending. However, the higher
prices for heat and light would also motivate them to be more stewardly with
the use of these resources. Instead of, for example, providing them with a
discount on their power bills, this incentive should remain. Rather, they
should be compensated in a way that will not affect their decisions about power
use but maintain income: e.g. refundable tax credits.
In sum, the carbon tax is a market-based solution
to predicted climate change problems. If you accept the need to do something
about climate change, this policy tool should not be rejected out of hand. It
provides companies and consumers with the incentive to do something about it
while leaving them free to choose what that action will be. Ideally, a carbon
tax should be revenue-neutral by reducing other taxes. The weak in society
should be compensated for the extra costs but through and income-related
refundable tax credit rather than subsidies related to their use of power.
[2] In 2003, prominent economist N.
Gregory Mankiw wrote, “Cutting income taxes while increasing gasoline taxes
would lead to more rapid economic growth, less traffic congestion, safer roads,
and reduced risk of global warming–all without jeopardizing long-term fiscal
solvency. This may be the closest thing to a free lunch that economics has to
offer.” See Lester R.
Brown, Plan B: Rescuing a Planet under Stress and a Civilization in Trouble,
W.W. Norton & Co. Ltd., New York, 2003. p. 232. That is all the more true
when one considers another benefit to family life that may be obtained if the
increased gas taxes provide incentives for employers and employees to relocate
to reduce commute times. Increasing the potential for both spouses to exercise
their familial responsibilities can only
be regarded favourably by Christians--see Michael Schluter and John Ashcroft,
ed. Jubilee Manifesto: A framework, agenda & strategy for social reform,
Inter-Varsity Press, Leicester, 2005, p.170 ,174.
[3]
Although, from an economic perspective, cap-and-trade is better.
[5]
While it would be impossible to determine
these costs exactly, that is not necessary. Rough approximations will suffice
to justify setting relevant charges. In any case, some charge is better than no
charge; charges can be increased over time.
[6] Of
course, these advantages of a carbon tax do not take place instantaneously. It
takes time for companies to invest in new methods of production and for
consumers to change their buying habits.
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