Fraser Forum

Carbon tax advocates flip-flop on revenue neutrality

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For many years, advocates of carbon taxes have acknowledged the necessity of “revenue neutrality” as a means of mitigating the economic damages such tax measures cause to households and the economy. In normal economic parlance, “revenue neutrality” means that when the government imposes a new tax, they lower other taxes in proportion to the new tax, so that no new net revenue is generated for the government.

The British Columbia government’s webpage on its carbon tax expressly says that “A key principle of the carbon tax is revenue neutrality, allowing the government to send a consistent price signal without increasing the overall tax burden, ensuring that British Columbia’s economy remains strong and competitive."

In Alberta, Premier Rachel Notley vowed that Alberta’s carbon tax would be revenue neutral, though she abuses the terminology by considering a tax “revenue neutral” so long as the government spends all the revenues. In fact, what she has in mind is the opposite of revenue neutrality.

Even Prime Minister Justin Trudeau felt compelled to sell the federal carbon tax on “revenue neutral” grounds, though again, the Trudeau government misuses the term by only insisting that any federal revenues collected would be given back to the province from which they came. At that point, one presumes, premiers would be free to rebate the taxes, but they’d also be free to use them for spending projects.

Predictably, once the provincial carbon tax money flows were established, the saving grace of revenue-neutrality was quickly tossed out the window in favour of spending the revenues on the same old (and demonstrably failed) environmentalist wish list for more windmills and solar panels, more electric cars, more “energy efficiency” programs, more mass transit, more bicycling, etc. In a recent editorial, we noted the final abandonment of revenue neutrality in B.C. by the new NDP government, which has pledged to increase the B.C. carbon tax by $5 per tonne of greenhouse gas emisions in 2018, rising to $50 per tonne in 2021, and have explicitly walked away from revenue neutrality.

As we have written elsewhere, an honest reading of the economic literature would suggest that carbon taxes should be used to lower other distortionary taxes such as income taxes; should displace regulations rather than pile on top of them; and carbon tax revenues should not be used to favour particular lower-carbon technologies over others. In fact, incenting consumers to find the most affordable lower-carbon options for meeting their needs is undercut by such actions.

Surprisingly, in their own op-ed, a pair of economists at Simon Fraser University declared in response that “Revenue neutrality of carbon taxation is found to be neither necessary nor sufficient to ensure efficient and effective climate policy.” Professors Olewiler and Kesselman also reject our insistence that carbon taxes be implemented in ways that allow people to respond to a carbon price in ways that minimize the cost of carbon reductions, while avoiding economically distortionary regulatory interventions.

The professors seem to be a bit confused, because while they endorse the economic logic behind carbon pricing, they reject what they call our “rigid” requirements for carbon tax implementation, which amounts to the same thing. And they go on to admit with apparent approval that the B.C. government violates all of the principles of efficient pricing.

For example, at one point, they observe that the B.C. government spent “some $500 million labelled as tax cuts using carbon-tax revenues were in effect subsidies for children’s fitness and arts classes, interactive digital media, and the film industry.” But they then argue that “These actions contravene the Fraser Institute admonition against using the revenues for ‘pet’ projects.” Well, yes, because they are not measures that reduce the distortions of the rest of the tax code, instead they amount to new spending projects aimed at politically-favoured constituencies. How can one deny that funding such projects with carbon tax revenues amounts to using it for “pet projects?”

In another part of their op-ed, the professors again admit that B.C.’s aggressive regulatory regime rejects “the Fraser Institute admonition against using regulatory restraints on the ‘free market’ for energy development.” Actually our admonition is against layering carbon taxes on top of pre-existing regulations rather than substituting one for the other. They also state that “Proper economic analysis repudiates the Fraser Institute’s rigid prescriptions for B.C. climate policy, its rejection of regulatory climate measures, and, in particular, its insistence on revenue neutrality.”

It would have been nice if the professors offered up some evidence for this claim, instead of merely waving away what are considered fundamental principles of taxation. They seem to believe that, because B.C. has managed to implement its climate change programs in violation of sound economic reasoning, economic reasoning is no longer valid or applicable. This is obviously not the case.

We’re sorry for the B.C. residents who’ll wind up paying the price for the kind of carbon policies proposed by professors Olewiler and Kesselman in terms of self-inflicted economic harm, and anti-competitive measures that can only put B.C. at a disadvantage in world trade.