Economists miss the point about the carbon tax revolt

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Appeared in the Financial Post, April 2, 2024
Economists miss the point about the carbon tax revolt

An open letter is circulating online among my economist colleagues aiming to promote sound thinking on carbon taxes. It makes some valid points, and will probably get waved around in the House of Commons before long. But it’s conspicuously selective in its focus and unfortunately ignores the main problems with Canadian climate policy as a whole.

There’s a massive pile of boulders blocking the road to efficient policy. They have labels such as “Clean Fuel Regulations,” the oil and gas sector emissions cap, the electricity sector coal phaseout and “net-zero” requirements, strict energy efficiency rules for new and existing buildings, new performance mandates for natural gas-fired generation plants, the regulatory blockade on liquified natural gas export facilities, new motor vehicle fuel economy standards, caps on fertilizer use on farms, provincial ethanol production subsidies, electric vehicle mandates and subsidies, provincial renewable electricity mandates, grid-scale battery storage experiments, the “Green Infrastructure Fund,” carbon capture and underground storage mandates and subsidies, subsidies for electric buses and emergency vehicles in Canadian cities, new aviation and rail sector emission limits, and many more.

Not one of these occasioned a letter of protest from Canadian economists.

In front of that mountain of boulders there’s a twig labelled “overstated objections to carbon pricing” and at the sight of it hundreds of economists have rushed forward to carry it off the road. What a help.

To my well-meaning colleagues I respond that the pile of regulatory boulders long ago made the economic case for carbon pricing irrelevant. Layering a carbon tax on top of current and planned command-and-control regulations does not yield an efficient outcome, it just raises the overall cost to consumers. Which is why I can’t get excited about the carbon-pricing letter. That’s not where help with the heavy lifting is needed.

My colleagues object to exaggerated claims about the cost of carbon taxes. Fair enough. But far worse are exaggerated claims about the economic opportunities associated with the so-called “energy transition” and benefits of reducing carbon dioxide emissions. Some of the latter are traceable to poor-quality academic research, such as the continued use of the RCP8.5 emissions scenario long after it has been shown in the academic literature to be grossly exaggerated, or use of impacts estimates from climate models known to have large persistent warming biases. But a lot of it is simply groundless rhetoric. Climate activists, politicians and journalists have spent years blaming Canadians’ fossil fuel use for every bad weather event that comes along and swinging “climate emergency” declarations and other polemical cudgels to shut down rational debate. Again, none of this occasioned a cautionary letter from economists.

There’s another big issue on which the letter was silent. Suppose we did clear all the regulatory boulders along with the carbon-pricing-costs-too-much twig. How high should the carbon tax be? A few of the signatories are former students of mine so I expect they remember the formula for an optimal emissions tax in the presence of an existing tax system. If not, they can take their copy of Economic Analysis of Environmental Policy by Prof. McKitrick off the shelf, blow off the thick layer of dust and look it up. Or they can consult any of the half-dozen or so journal articles published since the 1970s that derive it. But I suspect most of the other signatories have never seen the formula and don’t even know it exists.

Because if they did, they would know that a major obstacle to emission reductions in Canada is our tax burden. The costlier a tax system, the lower the marginal value of emission reductions and the lower the optimal carbon tax rate. Based on reasonable estimates of the social cost of carbon and the marginal costs of our tax system, our carbon price is already high enough, and probably too high. I say this as one of the only Canadian economists who has published on all aspects of the question. Believing in mainstream climate science and economics does not oblige you to dismiss public complaints that the carbon tax is too costly.

Which raises my final point: the age of mass academic letter-writing has long since passed. Academia has become too politically one-sided. Universities don’t get to spend years filling their ranks with staff drawn from one side of the political spectrum then expect to be viewed as neutral arbiters of public policy issues. As such, the more signatories on letters like this the less impact it will have. People nowadays will make up their own minds, thank you very much, and a well-argued essay by an individual willing to stand alone will likely carry more weight.

Online conversations today are about rising living costs, stagnant real wages and deindustrialization. Even if carbon pricing isn’t the main cause, climate policy is playing a growing role and people can be excused for lumping it all together. The public would welcome insight from economists about how to deal with these challenges. A mass letter enthusing about carbon taxes is no substitute.