Report swings and misses at carbon price 'myths'

In a previous blog post, I explored whether the “10 Myths about carbon pricing in Canada” recently published by the Ecofiscal Commission were really all that mythical. The previous post looked at myths one to five. This post will look at myths six to 10.

Myth number six is that “Carbon Pricing is a Cash Grab” because the federal government is returning all carbon-pricing revenues to the provinces, with 90 per cent in lump sum rebates to households. Ecofiscal is correct on this one—mostly. It’s only “mostly” true because Ottawa will capture revenues from the increased GST collected due to higher prices caused by carbon taxes. One estimate suggests the GST on top of the carbon price in 2019 could bring in $250 million in GST revenues, which will increase with the carbon tax. And of course, provinces with a Provincial Sales Tax (PST) will also see additional revenues, even if they also rebate all the revenues of the carbon tax itself. Of course, provinces with existing carbon-pricing programs deemed equal to that of the federal backstop are under no such obligation to return all revenues, as we’ve seen in British Columbia, which abandoned revenue neutrality only fives years into its carbon tax, and the NDP Horgan government tabled a budget that eliminated from law the requirement for offsetting tax cuts. Instead, as the Globe and Mail notes, “From now on the Horgan government plans to use its carbon tax windfall to ‘create jobs, benefit communities and reduce climate pollution.’ In other words, all the usual things governments spend your tax dollars on already.”

Myth number seven, that “people cannot change their behaviours in response to carbon pricing.” Yes, people can change their behaviour, but when it comes to essential energy demands such as transportation and home heating there are few options that don’t cause large inconveniences and even hardship. That’s why making significant reductions using carbon pricing will require much higher costs that will be politically unpalatable. In a study for the Macdonald Laurier Institute, Fraser Institute senior fellow Ross McKitrick modelled what price would be necessary to cause a reduction in motor vehicle greenhouse gas emissions by 30 per cent. Because fuel demand is so inelastic, gasoline would need to rise to $2.30 per litre and emission reductions would cost $195 per tonne.

Myth number eight, that “there is no point to carbon pricing if governments rebate the revenues” is indeed a myth. To the extent that recipients of carbon tax rebates want to pocket their lump sum rebate (which is fixed) to say, go on vacation, they will be motivated to reduce their carbon tax bill by reducing emissions. That way, more of their rebate is “gravy,” that they can use elsewhere.

Myth Number nine, that “we can use other, better policies to shrink our emissions” falls flat because the eco-authors present a false comparison. They argue carbon pricing is more efficient than traditional regulations, but don’t address the problem that the government is not replacing regulations with a carbon tax but is adding one on top of the others. Here the Ecofiscal Commission really fails in its mandate, because while they advocate for carbon pricing, they ignore the fact that by maintaining and even expanding its regulatory reach, the government is eliminating the conditions where a carbon price can be efficient. As I’ve noted, none of the provinces that implemented carbon pricing did so in lieu of regulations, rather the tax was layered on top of regulations, and still more regulations came after the tax. For example, the Trudeau government implemented a federal carbon price, and now plans to implement a “Clean Fuel Standard,” which would “incent the use of a broad range of low carbon fuels, energy sources and technologies, such as electricity, hydrogen, and renewable fuels, including renewable natural gas. It would establish lifecycle carbon intensity requirements separately for liquid, gaseous and solid fuels, and would go beyond transportation fuels to include those used in industry and buildings. The approach would not differentiate between crude oil types produced in Canada or imported. The Clean Fuel Standard would complement the pan-Canadian approach to pricing carbon pollution.” Would you like another tax with your tax?

Finally, myth 10, that “there is no need to reduce Canada’s emissions” is both true and false. It’s true there’s a need to reduce Canada’s emissions, but that need is essentially a political choice rather than an action that will reduce impacts on Canada from future climate change. The authors repeat boilerplate language about extreme weather without mentioning that the carbon tax will have no effect on extreme weather because minor changes in Canada’s emissions won’t change the global concentration of CO2. Canada’s contribution of greenhouse gases, as Ecofiscal itself acknowledges, is only 1.6 per cent of global emissions. Even if Canada cut that in half (a herculean task), any future reduction in warming would be virtually unmeasurable. And of course with massive growth in emissions in China and throughout Asia, Canada’s share will grow smaller over time. Tinkering with it would have even less effect on climate change in the year 2100.

Many economists do, indeed, champion the idea of using pricing to control greenhouse gas emissions, but governments are unwilling to adhere to the economic principles that makes such pricing efficient or economically benign. But the repeated failure of provinces to institute (or maintain) genuine revenue-neutrality and displace regulations, and the desire of governments to pick winning technologies, suggests that an economically rigorous carbon tax seems more mythical than probable.