Canadians should reject Trudeau-style carbon taxes
According to a recent poll by a group called Canadians for Clean Prosperity, the Conservative Party should reconsider its opposition to carbon taxes.
There is, indeed, a strong textbook case to be made for taxes on conventional pollution and carbon emissions—that if factories dirty the environment by emitting smoke, factory owners should pay taxes to compensate society for the pollution. In theory, we can apply the same idea to carbon emissions, which contribute to climate change.
However, there are compelling reasons why Canadians should be very skeptical of carbon taxes. Famed economist Milton Friedman, who the group cites as a possible supporter of carbon taxes, also noted that when government intervenes on environmental issues “it also is emitting smoke.” Like smoke from a factory’s chimney, imperfect government arrangements are a form of pollution because they impose costs on third parties not involved in making those arrangements. As Friedman put it, “there’s a smokestack on the back of every government program.”
For carbon taxes, the smokestack is very large. The criteria that a carbon tax must meet to be sensible policy is considerably narrower than almost all carbon tax proponents will say, and in practise, carbon tax policies in Canada have deviated from these criteria, unnecessarily damaging the economy.
First, the tax rate must relate to the environmental harm of emissions or the “social cost of carbon,” which the Trudeau government assumes to be $50 per tonne. But in fact, according to economic literature, the optimal carbon tax is actually much lower than the social cost. Because of how carbon taxes compound the burden of existing taxes, the social cost should be discounted by the marginal cost of public funds (a measure of the economic cost to the private sector of raising an additional dollar of government revenue).
In the Canadian context, as economist Ross McKitrick has written, this likely means discounting the social cost of carbon by about half. Then, as other economists note, the tax rate should be discounted again to account for the fact that in some cases, the tax would not reduce emissions but simply cause emission-intensive activities to relocate, producing an economic loss without any environmental benefit.
Therefore, if the tax rate is instead targeted to reduce emissions by a certain amount—as in the Trudeau government’s plan for a $170 per tonne to achieve the Paris agreement targets—then it’s contrary to the economic logic of how a carbon tax should work.
In addition, to mitigate the economic harm of a carbon tax, the revenues to government should be offset by equivalent cuts to other economically-harmful taxes such as personal or corporate income taxes. Unfortunately, no current carbon tax policy in Canada looks like this.
Lastly, the economic logic of the carbon tax is to make emitters pay for the environmental harm they cause, eliminating the need for any other policies to reduce carbon emissions. Indeed, the case for a carbon tax relies on the tax completely replacing—not being layered on top of—existing policies designed to reduce carbon emissions.
Unless a proposed carbon tax meets these criteria, or at least comes very close, it should be rejected. Current carbon tax policies in Canada differ materially from these criteria, and thus do more harm than good. They are, as Milton Friedman would say, like a giant smokestack.