Friday, July 04, 2008

The New Utilitarians: Ignatieff, Campbell, Dion, and the Inadequacy of Revenue Neutrality

As the late Harvard Professor John Rawls pointed out in his classic A Theory of Justice, one of the problems with utilitarianism (the theory that we should act so that to maximize "the greatest good for the greatest number") is that it did not take the different situations of individuals sufficiently into account. By ignoring distributional considerations, utilitarian calculations risked harming the rights of minorities. I recognize a similar flaw in the boasts of Michael Ignatieff, Gordon Campbell, and Stephane Dion , all of whom have touted the global "revenue neutrality" of their proposed carbon taxes as supposed proof of their unselfishness and concern for the common good and social justice. The fact that government takes in the same amount of revenue as before totally ignores the differential impacts that their policies may have on particular individuals, classes, regions, and industries.
It is relatively easy for Gordon Campbell to point out how urban middle and upper class voters (his natural constituency) can 'win' by trading in their Hummers for Hybrids and bicycle paths, or by claiming any number of tax incentives as write -offs on their income taxes. Poorer citizens who have less income will realize far fewer gains through the tax system; more seriously entire industries are threatened by higher fuel prices augmented by carbon taxes. These include most notably the tourism, agriculture and ranching/cattle industries in the interior and north of our province. These are the likely losers in the revenue neutral system, and they are also likely to be the losers in other provinces in Canada under Mr. Dion's federal plan.
Clearly, what is needed is for carbon taxes to replace excise taxes on fuel. That would be revenue neutral for the user, and not just for the government or their supporters in upper middle class urban neighbourhoods. In the parlance of welfare economics, substituting carbon taxes for excise taxes would also be "pareto efficient": everyone who could reduce their carbon emissions would be better off, and nobody would be worse off, since those who could not easily switch to lower carbon emissions would be paying the same amount that they would have paid in excise taxes. Of course, under such a scheme the government could actually lose revenue as people switched to to more efficient and environmentally-friendly ways of living, but I am sure we could all live with that. If not, government could raise taxes elsewhere, instead of just making an income tax gift to the wealthy and to urban-dwellers.

On the other hand, I cannot accept without heavy qualification Carole James's statement that "the market has already taken care of giving people incentives to change their behaviour" because gas has risen 30 cents a litre. The market is also giving the signal to Saudi Arabia, OPEC, and the Oil Companies to increase fossil fuel supplies, including those from Alberta's dirty tar sands. Market analysts are already predicting that gas prices may come back down somewhat as a result. Carbon taxes should be in place to ensure that $1.50 per litre is a floor, and not a ceiling. Carbon taxes should be in place to ensure that energy sources substituted for gasoline and oil are not simply other types of fossil fuel or their derivatives.

As I pointed out in my previous posting, the NDP cannot very well axe the tax without also axing the tax cuts that go along with it. NDP taxes on industry will to a large extent be passed along to consumers, who will not have the same benefit of offsetting tax cuts. (While I was impressed with John Horgan's point expressed on Voice of BC that costs associated with caps on emissions of industrial exporters can be passed on to foreign customers, it must be remembered that (1) these emissions probably don't account for more than about 30% of the total; and (2) we cannot assume that raising the price of exports will not cause lost sales, investment and employment.)

The best policy may be one which offers some degree of exemption above $1.50 per litre, but which makes it clear that there will be no return to cheap gas, even if world market conditions allow it. With transportation accounting for 38% of provincial greenhouse gas emissions, it would be irresponsible to simply "axe the gas tax".

The best policy would still have a role for cap-and-trade as a flexible tool for regulating industrial emissions, such as those in in the gas, aluminum, concrete, commercial and manufacturing sectors; this would form part of the growing North American system of emissions trading. (As far as I know, the Liberals are in favour of this. )

Finally, the best policy would make much better decisions than the BC Liberals are doing about how to allocate revenues from carbon taxes. This would not only mean spending more of the revenues on environmentally sound policies such as public transit and helping those sectors and regions of the province that are not fully compensated by income tax cuts to make the transition to a greener economy; it would mean spending additional revenues on top of those raised by the carbon tax in order to attend to public infrastructure and distributional issues associated with climate change.

Academics and journalists who have been rightly applauding Gordon Campbell for showing some initiative need to get beyond the rectitude of the carbon tax as a concept and attend to these very important details. If they don't, the result may only serve to discredit an otherwise intellectually sound policy.


David Schreck said...

The best solution might be to regulate light trucks, including SUVs, as sedans are regulated with respect to fuel efficiency. We have avoided the Malthusian dilemma so far because of technological change. I think we are far more likely to save the world through technological change, than through anything BC does with a tax scheme.

--David Schreck

Mark Crawford said...

Or as California did when it tried to legislate 5% zero-emissions vehicles? I would have loved to see those electric charging stations spread up the coast...

Your comment is excellent;
prices/taxes can also be a spur to adoption of technological change, but now that oil and gas prices are closer to where they should be, maybe it is time for a good old fashioned regulation.

Mark Crawford said...

P.S. Onthe other hand--while BC won't save the world through its tax scheme, I still think that carbon taxes are a key part of the global policy picture. As Tim Flannery wrote on p.169 of The Weather Makers, citing the article in the prstigious journal Science by economist Micheal Mastrandrea and climatologist Steven Schneider, "a carbon tax of US $200 per tonne, implemented by 2050 ... is sufficient to reduce the possibility of dangerous climate change to zero."

I suggest that BC and other jurisdictions should guard against the possibility of another temporary oil glut giving Detroit an excuse to sell off its inventory of SUVs and using the carbon tax to guarantee a floor of $1.50 per litre.

spence said...

I think the concept of a tax floor is a good one, and one that needs to be pursued. Thanks for the article.

Mark Crawford said...

Thanks Spence. Unfortunately, neither of the two main BC political parties are likely to pick up on this particular compromise in the near future. Campbell is unresponsive to criticisms and the NDP still wants to oppose any tax at all if it applies to gasoline.

Nevertheless, I am optimistic that this solution could have some legs in the future, at least in some jurisdictions in Canada.