The existing policy framework has destroyed the possibility for carbon taxes to achieve efficiency
In his March 2 article, “The cheapest way to cut carbon,” economist Trevor Tombe is definitely the basic logic of emission taxes as applied to CO2. In theory, a uniform carbon price would minimize the cost of emission reductions since it would prompt emitters to identify and implement abatement options that are less expensive at the margin than make payment on tax. Letting the market find cheap abatement options underneath the guidance of a uniform prices are, theoretically, a neat method to cut emissions at the lowest possible macroeconomic cost. Traditional regulatory measures, which economists call command-and-control, cannot make this happen.
That, at any rate, may be the theory. And in theory, as Yogi Berra said, there isn’t any distinction between theory and practice, however in practice there’s. The issue using the theory of carbon prices are that, in Canada, the present policy framework has destroyed the possibility for taxes to attain efficiency.
The textbook theory assumes that a carbon tax is implemented instead of, not on surface of, command-and-control. If command regulations already exist, they first have to be removed before imposing the tax. Otherwise, adding emission taxes does not fix the inefficiencies, it just exacerbates them. So when the Ecofiscal Commission and others demand carbon taxes, they aren’t contributing to better environmental policy-making; they are proposing to make a bad situation worse.
The existing Canadian policy framework includes a host of command-and-control regulations which have imposed carbon dioxide abatement at far more than any reasonable estimate of the appropriate tax rate. The government ethanol mandate is a example. A few years ago my colleague Doug Auld and I published research showing that greenhouse gas reductions from corn ethanol production cost between $400 and $3,300 per tonne. Adding an additional tax on fuel won’t fix that, it will just boost the distortion at the margin.
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A 2013 study I did for that Fraser Institute showed that Ontarians were incurring over $4 billion each year in costs associated with the Green Energy Act, the centrepiece of which was the move to phase out coal-fired power plants. The province’s underlying scientific study showed there’d be almost no resulting improvement in quality of air, however it has instead pointed to the approximately 25 megatonne carbon-equivalent reduction in CO2 emissions because the main rationale. At the time of my study the switch to renewables had only resulted in replacing less than one-third of the generating capacity lost when the Lambton and Nanticoke power plants were lost. Spending $4 billion to eliminate 8 million tonnes of emissions implies an expense of $500 per tonne. Once again, adding a carbon tax (or tradeable permits, as Queen’s Park is proposing) to the Ontario electricity grid is only going to amplify these costs without introducing any new efficiencies.
Tombe argues that a national minimum carbon price will be a wise decision. A much better idea, however, will be a national maximum carbon price, along with a pledge to get rid of all of the regulatory abatement measures that exceed it. This would be much closer to what a carbon tax is supposed to do.
There is no credit in calling for the introduction of carbon taxes if a person hasn’t first helped within the much harder task of working for removing the policies that created the conditions in which carbon taxes can’t function. I’ll believe the Ecofiscal Commission is seriously interested in increasing the economic efficiency of Canada’s environmental policy framework if this starts putting as much effort into publicly criticizing the Notley government’s intend to phase out coal in Alberta, or even the federal ban on B.C. coastal tanker traffic, or the Quebec campaign against the Energy East pipeline, as it does into with new taxes on Canadian firms and households.
Out of nowhere, carbon pricing has become a political fad. All the government’s favourite experts and beautiful individuals are on board. But the underlying theory simply does not support the superficial claims being thrown around. Carbon pricing might help control some aspects of the costs of reducing greenhouse gas emissions, but only in some circumstances and not within the ways typically being claimed in Canada.
Ross McKitrick is really a professor of economics in the University of Guelph and chair of one’s, Ecology and Prosperity in the Frontier Centre for Public Policy.
