A recent opinion column on carbon taxes published by the CBC initially left me, and I suspect many others, somewhat confused. There are a number of dubious claims, and I hope this response can clear some of them up.
A major point of the article is that Canada’s carbon taxes will not actually reduce emissions because they are so small “people barely notice.” At the same time, the column says the carbon tax is so big that it is “vacuuming up money at the gas pump” for the government. That doesn’t add up. The column provides another twist by calling for a higher carbon tax – one that people will presumably notice. I assume the call for a higher tax is in jest since the author also says people’s “tolerance for taxation is limited.” This is almost assuredly right. A high carbon tax is politically toxic. But this does not mean a carbon tax should not be implemented, nor that starting with a small carbon tax won’t achieve its desired goals.
There are several good, non-political reasons for starting small and gradually increasing the price of carbon.
First, such a tax trajectory avoids harmful shocks to businesses and households that would occur with an initially high tax. A carbon tax is supposed to change behaviour, but many behaviours cannot be changed overnight. The choice of what car to buy is made over time, rather than a spontaneous purchase. A sudden high carbon tax would be harmful to folks who might have made recent long-lasting investments like a new vehicle with poor fuel economy. Starting with a lower price that “people barely notice” reduces the punitive impact of decisions made prior to the enactment of the carbon tax.
Second, starting the carbon tax low with a predictable increase will send important market signals to consumers to change their behaviour in the future. If consumers know that a carbon tax will increase in the future, they can make informed and planned decisions that will reduce how much carbon tax they pay. When it is time for a new vehicle, a consumer might opt for a car with better fuel economy – maybe even go electric.
At the same time, a gradually increasing carbon tax also sends market signals to businesses, investors and inventors who now know there will be a market in the future for low-carbon products and innovation. The market will mobilize to provide low-cost and low-carbon technology, which makes reducing the impact of a carbon tax even easier for consumers.
The column also claims that the Canadian government has not made any effort to “collect data and measure the supposed change in consumer behavior.” This is simply untrue. In fact, Statistics Canada collects and distributes an immense amount of energy related data from electricity generation to natural gas consumption. Do you want to know how much energy Canadian textile mills consumed from 2012 to 2016? How about emissions trends from electricity production or transportation? Statistics Canada has it. Environment and Climate Change Canada produces an annual greenhouse gas inventory for the entire country, which tracks emissions by economic sector and province.
On top of this, the column cites – but brushes off – academic studies that quantify the emission reductions due to British Columbia’s carbon tax as “out of date.” Studies that are three years old are not exactly out of date, but it’s also true that the fundamentals of economics don’t really change much over time. All else the same, increasing the cost of an activity will reduce that activity, which is exactly what these studies showed. They found a 5-15 per cent reduction in emissions due to British Columbia’s carbon tax even after accounting for things like the global economic downturn. Oh and by the way, the studies also relied on government data for their analysis.
Finally, it’s hard to describe the carbon tax as a tax grab when, for the most part it is either returned to those for whom the burden is most onerous or used to kick-start investment in the technologies that will get us to where we want to go a lot cheaper and more effectively than today’s technology.
A carbon tax is by far the most cost-effective way to reduce emissions. Other options like command-and-control regulation will reduce emissions, but at a much greater cost. Avoiding the issue altogether because people don’t like taxes has an even greater cost. Let’s go with the best option we have, and let’s stop spreading misleading information.
– Nick Martin is a policy analyst at the Canada West Foundation