Tuesday, July 15, 2008

"As I was Saying".....What to do about Carbon Taxes and Gasoline Taxes, etc.

While critics of carbon taxes like to point out the incentives that high energy prices give consumers to conserve, two headlines from yesterday's news illustrate perfectly the double-edged quality of higher oil prices in terms of their effect upon the environment. The front page of the Vancouver Sun proclaims, "B.C. Oil Could Ease Crisis: Offshore exploration should be considered, agency says"--quoting a senior official of the International Energy Agency as saying that exploration of the Alberta tar sands and drilling off the B.C. coastline would enable Canada to play a "crucial role" in the alleviation of the international energy crisis. Meanwhile, in the United States, President George W. Bush announced his intention to lift the moratorium on offshore drilling and drilling in the Alaskan wildlife refuge in order to reduce America's dependency on foreign oil. In a similar vein, a group of representatives from OECD countries (most of whom are signatories to the Kyoto Accord) were featured passing a resolution calling on Saudi Arabia to increase oil production in order to ease the current energy crisis.

Aaaahhh....the miracle of the market!

When I first wrote on this subject on June 26 , it was with something of a knee-jerk reflex, but a well-informed one. If both Science and The Economist agree with me, and if David Suzuki and Tim Flannery agree with the economists at the Canadian Centre for Policy Alternatives, and all of these people plus William Nordhaus of Yale and Marc Jaccard of SFU and Jeffery Sachs of Columbia all seem to agree that carbon taxes are the best and most efficient policy instrument for tackling global warming, I have no reason to apologize for my opinion. I was simply reflecting something close to a consensus of the best minds who have thought about the subject. Of course, a well-designed cap-and-trade system is better than a poorly designed carbon tax; but a comprehensive policy would include both, with cap-and-trade for large industrial emitters.

But what if a surge in oil prices threatens stagflation and global recession? Do high energy prices, backed by long-term pressures stemming from Asian economic development, make carbon taxes inadvisable, redundant or unnecessary? My answer is no--but with considerable qualfication in the short run. If we are entering a period of economic disequilibrium, we should probably not follow through on the Campbell version of carbon taxes as they apply to gasoline, but modify the policy. We also need some kind of federal-provincial agreement on tax-shifting in order to create some order out of the current policy chaos.

The principles guiding such a coordinated national tax strategy for global warming should be: (1) initially restrict the role of carbon taxes with respect to gasoline to simply setting a floor price --I suggest that for the time being there be no additional tax burden on gas above $1.50 per litre. This is to guard against temporary gluts in oil production causing a price fall and a consequent relaxation of the transition to greater conservation and fuel efficiency in either industry or the public at large. (2) Additional carbon taxes on gasoline above the $1.50 mark should come at the expense of other excise and sales taxes on gasoline. Here the folks at Petro Canada and the Canadian Taxpayers Federation surely have a point---the average Canadian motorist pays about 28% of the price of gas in government taxes and as much as 34% in British Columbia after the government's recent carbon tax addition. This includes an insulting (to our intelligence) charge of the GST on the total pump price , including all federal provincial and federal taxes--in other words, a tax on the tax. While it is true that half of this revenue is dedicated to roads, highway and bridge improvements, a large chunk of it should simply converted to carbon taxes. (3) Mother nature doesn't care whether greenhouse gases are being produced by a small number of large emitters or a large number of small emitters. There should be a value-added (or, more properly, a carbon-added) tax, which taxes both producers and consumers according to how much they use the atmosphere as a garbage dump. As it happens, major industrial polluters in BC are responsible for roughly half of the emissions, while us regular motorists and homeowners are responsible for the other half. Taxes should apply to both sides now. (4) It is becoming readily apparent that revenue neutrality, even when it is believed, is only revenue neutrality for the government. We need greater revenue neutrality for all of the users of petroleum products, and for all of the regions and industries in the province.

So here is the summary of my recommendations:

*in the short run, increase tax only to secure a reasonable floor price.

*Beyond that, carbon taxes on gasoline should only be substituted for other taxes. They should not raise the net total of taxes on gasoline.

*Carbon taxes should take the form of a value-added or carbon-added tax (C.A.T.)

* These and other measures should help to ensure revenue neutrality for the most affected taxpayers and not just for the government itself. In fact, governments should even be willing to surrender some revenue if consumers and businesses can pay less tax by reducing their gas consumption.

* Let's not just have made-in BC or made-in Alberta cap and trade regimes for industrial polluters. Cap and trade ideally works best in the context of a global market price for emission credits, which is less susceptible to political manipulation and lobbyist meddling.

*Remember that if we need to impose carbon tariffs (i.e. import taxes) on India and China in the future, we will have no legal, moral or political leg to stand on unless we have a clear, comprehensive carbon tax regime domestically. Even if one argues that carbon tariffs could be applied exclusively to major industrial polluters, a relevant domestic cap-and-trade scheme would ideally need to have pollution credits set by an international (market) price. The more comprehensive, effective and transparent the carbon tax regime is domestically, the better it will be for the purpose of applying carbon tariffs in international trade law.

* Let's not forget that in addition to an improved tax structure, there is a role for good old-fashioned regulation, as both David Schreck (in his comment on my previous posting) and Marc Lee and Seth Klein at CCPA have pointed out. For example, we could mandate car-like standards for light trucks and SUVs; and in the longer term some form of bio-diesel (not made with regular corn or other grains that would push up food prices too much) for the big trucks that cannot get sufficient torque from electric or hybrid engines.


Anonymous said...

Hi Mark,

A very informative column on the carbon tax. The NDP is being hammered by the environmentalist in Victoria. I'd say for good reason, given your comments.

On the other hand, I've been sent two anti-carbon-tax rants filled with vitriol. The Fed Conservatives may win on this one.

I've sent your blog reference to Rod Dobel,

Keep up the great column. Being a computer minimizer, I've never mastered the blog login protocol.

Merwan H. Engineer
Department of Economics
University of Victoria

Mark Crawford said...

Merwan: Thanks,
athough the NDP is raising a good point about the Liberals' inattention to the distributive implications of the carbon tax and the appropriateness of the carbon tax being the first aspect of the climate change plan in the context of surging oil and gas prices. (See the comments by Bill Tieleman and David Schreck on my previous blogs)Since this was about my third posting on this subject, I 'll send you the previous one, as well, which accuses the Liberals of utilitarianism!

I suspect that while academics are a bit guilty of being attracted to the abstract virtues of carbon taxes, they are also attracted to the concrete benefits of UVIC and SFU receiving a shot in the arm as major international research centres on climate change....