Thursday, June 26, 2008

Axe the Tax?

What a pity that Opposition NDP hopes are pinned to a considerable extent on opposing what most economists and environmentalists agree is just about the best policy instrument we have for combating global warming.

Sure, a recent poll showed that 59% of British Columbians--worried by rising gas prices and a shakier economy--now oppose Gordon Campbell's carbon tax plan. Serves Campbell right for announcing his plan last fall without sufficient planning and consultation, right? Well, perhaps. But it doesn't constitute an argument against the carbon tax.

A simple carbon tax is far less bureaucratic and costly than the cap-and-trade + sectoral regulations + ethanol mandates + ecoAuto rebates, etc. that the federal Harper government is proposing, or the regulation +cap-and-trade plus public investment in green technologies that the federal and provincial NDP both support. Of course, cap and trade and public investment may be useful complements to a good carbon tax scheme, but the latter should be the centerpiece . A cap-and-trade system is susceptible to unnecessary economic damage because misjudging the number of permits can lead to volatile changes in the prices of permits, as can be seen in the experiences of both Europe's Emissions-TradingScheme and America's market for trading suphur dioxide to reduce acid rain (tradable permits for SO2 have varied on average by more than 40% per year---see The Economist June 16th 2007, p.86). Even without such volatility, economists reckon that cap-and-trade produces fewer incentives than a carbon tax for innovations that reduce emissions. A carbon tax also generates more revenue--which can then be used to reduce other inefficient taxes, or compensate those, such as the poor, who are hit disproportionately hard by fuel taxes. (Picture single moms with station wagons. Should they have their gas-guzzling ways subsidized because they are relatively "poor", or should they be cut a cheque to change their ways instead?)

Of course, the NDP still supports "putting a price on emissions" via a "carbon tax at source."(For B.C. I guess that would mean taxing BC companies that produce natural gas at wellhead, and taxing importers of oil from outside of the province.)

They even concede in their policy document that "all pricing models include a cost to consumers." This shows that they are aware that some or all of the costs of their tax will eventually be passed along to you as well. But maybe not as much. And even if it hits you, it won't be called a "tax".

This may sound reassuring to some working class British Columbians and Northern voters who are worried that the BC Liberal Government's carbon tax won't be revenue neutral for them. But with the forest being devoured by beetles and the polar caps melting, and with a desperate need for Canada to set a good example, I suggest that playing such political games is an approach unworthy of the NDP. To the extent that "taxing at source" is passed on fully to consumers, it will have the same effect on lower-income and rural British Columbians as Campbell's tax will. (And if it lacks Campbell's offsetting tax cuts, it will actually hurt ordinary British Columbians more.) To the extent that it is not passed on to consumers, the effects are more uncertain. My guess is that it may result in higher emissions (since demand for fuel will not be curtailed as much), coupled with some search for cleaner technologies on the supply side--or lower investment and employment in B.C. 's oil and gas sectors than would exist under the BC Liberal plan.

The NDP should support a carbon tax, and then distinguish itself from the Liberals by better targetting revenues to help lower-income and rural and Northern British Columbians make the transition to cleaner energy, instead of pretending that it can accomplish as much in fighting climate change on the cheap by taxing some faceless corporation instead.

"Of the policies available, a direct tax on emissions is the most effective way to reduce emissions at the lowest possible cost. There are lots of ways to force down emissions, but the problem is that most of them cost too much. Using a price instrument like a carbon tax ensures the emissions are reduced at the lowest cost."---Dr. Ross McKitrick ,Associate Professor of Environmental Economics at the University of Guelph, and coauthor of Taken By Storm: The Troubled Science, Policy and Politics of Global Warming.


Bill Tieleman said...

Mark - the fact that Premier Gordon Campbell did not attempt to take the politics out of his carbon tax plan - by working with the Opposition NDP on a jointly developed solution - shows that the BC Liberals are not very sincere in their new-found environmental fervour.

An all party committee making a unanimous recommendation would have been the obvious approach to take - otherwise Campbell's crocodile tears about the NDP "playing politics with the environment" - and his Greek chorus of environmental groups who have been snookered - is just too much to take seriously.

You also don't mention that much of the tax cuts go to big business and that none - not a cent - of the $1.8 billion revenue over three years - does anything at all for the environment.

Yet people are supposed to reduce gas and fuel consumption without any new public transit or other alternatives that let them do so!

Mark Crawford said...

Bill: These are very fair comments. You are certainly right to point out that CAmpbell has been playing politics with this issue as well. In fact, your comments are not all that much different from my conclusion that the "NDP should..distinguish itself fromn the Liberals by better targetting revenues to help lower-income and rural and Northern British Columbians make the transition to cleaner energy."
The NDP should not distinguish itself by opposing the principle of a clear and explicit carbon tax with offsetting income tax cuts as a primary policy instrument.