Canada’s flawed carbon pricing

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Appeared in the Edmonton Sun, May 8, 2019
Canada’s flawed carbon pricing

The first test, that provinces will be able to resist the new federal carbon tax, has concluded. And opponents of the federal carbon tax have come away empty-handed.

In a split 3-2 decision, last week the Saskatchewan Court of Appeal found that the federal government has authority over greenhouse gas emissions. Writing in the National Post, Andrew Coyne (with whom I often agree) said this decision is just wonderful—“a victory for the planet, federalism and the rule of law, not to say common sense.”

If there was any chance that a federal carbon price could be levied according to optimal economic theory, I might agree with Coyne. The problem is, as the Fraser Institute has repeatedly shown, the way that Canada has implemented carbon pricing flies directly in the face of what economic theory dictates for an efficient tax.

Let’s start at the beginning. Much is being made of the fact that the federal carbon tax will be revenue neutral (it won’t actually be fully revenue neutral, only 90 per cent will be rebated). And indeed, economic theory states that a carbon tax should indeed be revenue neutral. But there’s a caveat here—to offset the harm the carbon tax does to the economy, the tax revenues must be used to reduce existing distortionary taxes such as the personal income tax or the corporate income tax. Rebating the revenues as lump sum rebates eliminates the opportunity to offset the harm of the tax by reducing other distortionary taxes.

Another explicit assumption about optimal carbon taxation is that it must be emplaced in lieu of regulations—not layered on top of them. Layering a carbon tax on top of regulations makes the regulations even more economically damaging. But the Trudeau government shows no indication that it’s ready to make that trade.

In fact, the government plans to implement a “Clean Fuel Standard” that “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.”

That does not sound much like a swap of a carbon tax for regulations.

Finally, as a 2017 Fraser Institute study showed, no government in Canada has adopted or long-maintained a genuinely revenue neutral carbon tax that satisfies the conditions for pricing carbon efficiently while protecting the environment.

The Saskatchewan Court of Appeal decision has carbon tax aficionados celebrating. The Saskatchewan suit will likely head to the Supreme Court of Canada, offering a slender reed of hope for carbon tax opponents. Unfortunately for Canadians, having the case come down to “to tax or not to tax” obscures the fact that Canada’s carbon taxes will not be the economically benign greenhouse gas control regime Canadians were promised.

It will be an economically damaging carbon tax that only extends federal control over emissions—control that’s best utilized by provinces, which have specific knowledge of their economies and how their people would respond to incentives to lower greenhouse gas emissions.