Fraser Forum

Canada’s climate policy—we’ll (not) always have Paris

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The consequences of adopting extreme targets for reducing Canadian greenhouse gas emissions became somewhat clearer recently, as a secret memo from Environment Canada to Environment and Climate Change Minister Catherine McKenna (pictured above) was obtained by the National Post.

The memo showed meeting the prime minister’s greenhouse gas emission target (the same as that set by former prime minister Stephen Harper), which is a 30 per cent reduction from 2005 emission levels by 2030, would require a carbon tax of $100.00 per tonne as soon as 2020, which would have to escalate to between $200.00 and $300 per tonne by 2050.

The government has said that they chose to go with a lower carbon tax—the federal price floor of $50 by 2022—but will “complement” the impact of that tax with new regulations such as clean fuel standards and building codes. But this is actually more problematic than the $300 tax would be. First, if they actually could ever implement a “tax only” approach to managing greenhouse gas emissions, and they managed to avoid the pitfalls that have afflicted most tax-based approaches in Canada, they would actually meet that elusive, ivory tower definition of the “most efficient way” to bring down greenhouse gas emissions. Regulations are widely considered to be much less efficient than pricing mechanisms. As the OECD puts it in Environmental Taxation—a Guide to Policy Makers:

Most regulatory approaches involve the government specifying how to reduce emissions or who should do the reduction. Similarly, subsidies and incentives for environmentally preferable goods or practices involve the government steering the economy in favour of certain environmental solutions over others. Both approaches involve the government trying to “pick winners” – directing the market in a prescriptive way. This requires significant information about ever-changing conditions and technologies, and carries significant risk of making suboptimal choices. Regulations generally result in higher costs than taxes, since they force particular types of abatement, even if cheaper alternatives are available.

So, by relying more on regulation, the price tag in 2050 will actually be considerably more than $300 per tonne, but Canadians would only pay a fraction via direct taxation, and the rest indirectly through the costs that regulations inflict on the economy.

Of course, this should come as no surprise, because prior research into consumer responses to carbon taxes have shown that a very high price is required to cause significant change in people’s energy use. Fraser Institute senior fellow Ross McKitrick examined the question of how high a tax on gasoline would be needed to achieve a 30 per cent reduction in GHG emissions from light-duty vehicles. McKitrick found that hitting that target, in the short term, would require a gasoline tax of $2.30 per litre, which is equivalent to a $975.00 per tonne carbon tax. Stretched over a longer term, the tax required would be $195.00 per tonne.

This is the problem with carbon taxes, and crazy targets, like those of the Paris agreement—governments know that people would never accept the level of carbon taxation that would be necessary to achieve such targets, and so they hide most of the cost in regulations, only taxing people at the level they think they can sell successfully (or ram through regardless of public opinion). Ultimately, the unreachable nature of the Paris greenhouse gas reduction targets will become manifest, and the targets will be dropped, or kicked down the road, but not before plenty of economically bad policies dip deeply into the pockets of Canadians.


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