Carbon Tax Discussion Begins

The National Roundtable on the Environment and Economy released a report this week that will help foster a discussion on our climate change policy options.

The report was clear: Implementing an economy wide carbon tax, perhaps combined with a cap and trade program for large emitters, was the least cost, and most effective way to reduce emissions. The report also stated that starting sooner rather than later will save us money in the long run, as the impact of the tax on capital stock turnover must begin now, to avoid stranded investments in the future. The table must be set today so we can eat well tomorrow.

Our Minister of the Environment responded by rejecting carbon taxes out of hand, saying it sounded like a “Liberal idea”. Of course the Liberals rejected the idea of a carbon tax when they signed Kyoto in an effort to buy peace in the oil patch. Our government’s summary rejection of the Roundtable’s report within hours of its release is disappointing, and will ensure that we either won’t hit targets, or that the cost to do so will be far greater than it needs to be, or both.

Carbon taxes affect emissions in two ways. For consumers, a higher price for emissions, which means higher energy costs, will cause the economics of investing in efficiency and conservation to become much more viable. People will change light bulbs, add insulation to their home, car pool, or take transit in the short run. They will use a clothesline, and turn off the lights when they leave a room. In the long run they may move closer to work, choose a fuel efficient vehicle or an energy efficient house, or change their furnace to a more efficient one.

Carbon taxes also have an effect on production. Coal fired electricity generation without carbon sequestration would become very expensive to operate. Investments in renewable energy would become relatively more competitive. Fuel switching would increase – co-firing of biomass, or switching from coal to natural gas would be more viable, as coal emits twice the carbon of natural gas.

But to me, the discussions presented so far are shallow. A carbon tax must be high enough to influence behaviour. Quebec has a carbon tax, but it has raised the cost of fossil fuels by a tiny amount, and therefore has virtually no impact on consumption. But a high carbon tax would have many negative impacts. Electricity prices would rise dramatically in fossil based systems like Nova Scotia and Alberta, but would not rise in hydro based systems like Manitoba, British Columbia, or Quebec. So consumers of electricity in those provinces would have no incentive to conserve, limiting the potential savings, and reducing the amount of clean electricity that could be used elsewhere, such as export to the fossil intensive US market, or to neighbouring provinces. Electricity intensive businesses would feel pressure to move. Fuel intensive businesses like oil refining, pulp and paper, steel, or cement would face dire consequences. If an efficient Canadian steel mill shuts down due to high electricity prices, and instead we import steel from inefficient China, we have actually increased emissions in the planet.

We need a better way. The use of price as a market signal is important. Instead of carbon taxes, we should tax all energy based on its energy content, at the consumer level. This would raise the price of electricity equally in all jurisdictions, as well as the price of natural gas, gasoline, and heating oil. And it would drive efficiency in all jurisdictions, allowing Quebec or Manitoba to export more of their clean power to their neighbours. Renewable fuels such as wood would be exempt, as collecting the tax would be difficult due to the large number of small woodlot owners, and furthermore, wood can be a sustainable energy source.

The energy tax should apply equally to the consumer and commercial sectors. For most commercial business, such as retailers, banks etc., the cost of energy is a small component of their operations. These business would simply have additional incentive to conserve, without having a drastic impact on their operations. Industrial operations, trucking, and farming, where energy is a large cost component, could be eligible for a rebate on some or all their energy taxes. This would minimize industrial disruption, and prevent companies from moving to other jurisdictions based on energy costs. Then other measures could be used to encourage efficiency for industry. The measures could include a Cap and Trade system, tax incentives for investments in efficiency, targeted subsidy programs to encourage development of very efficient co-generation, or use of waste streams to provide energy.

To make an energy tax politically palatable, the revenue raised by the tax should be recycled in tax cuts for businesses, and employment. We could eliminate the employer share on EI premiums or Canada Pension, and use the energy tax revenues to fund it. We could cut taxes on lower and middle class Canadians, who would be the most hard pressed by energy price increases. We could lower corporate tax rates.
As an example, if we taxed electricity at 5 cents/kWh, the delivered consumer price would rise by about 50%. This would raise $27 billion, a huge sum, less the amount rebated to industry. The tax on gasoline (about 50 cents/litre), natural gas, and heating oil would raise even more than this. So total taxes in the economy in general could be decreased by more than 25%, making it more lucrative to work or to invest in Canada. Consumers would become more efficient. Capital stock additions, like new cars, would be more efficient. We would become a more energy efficient economy, and emissions would decrease.

Carbon taxes, or preferably energy taxes, must be considered as part of Canada’s climate strategy. But they must be well designed, to avoid unintended consequences. And other taxes should be reduced to encourage hiring of employees, investment, and working.

We should not dismiss taxation as a method of moving to a sustainable economy. As the Roundtable points out, taxation will change behaviour, and save us money in the long run.

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