Canada’s Got a Good Thing Going

It’s tax season and this makes many Americans pretty grumpy. According to a recent poll/parody, 27% of those surveyed indicate they would rather get an IRS tattoo than pay their taxes.

tattoo

Source

Given the deep-seated ire that taxation can inspire in U.S. taxpayers, it’s not altogether surprising that calls for an economy-wide carbon tax do not find broad support.

Things are different in my native land, Oh Canada, where tax is not a four-letter word. Public support for judicious taxation and public spending are, in my mind, among the shared values that define the Canadian identity (up there with health care, hockey, and Neil Young).  Recent surveys suggest Canadian support for taxation extends to carbon.  According to this comparative study, a majority of Canadians support a carbon tax. Responding to the same survey, less than a quarter of Americans share this view.

Given this cultural bent, it’s not surprising that the highest carbon price in North America is found in Canada.  In 2008, the Canadian province of British Columbia implemented an economy-wide, revenue-neutral carbon tax.  A tax of $30/ton of CO2e  (or approximately $23 USD) applies to all fossil fuels consumed in the province. Carbon tax revenues, which account for approximately 6 percent of provincial tax revenues, offset other taxes (e.g., income and corporate taxes) or are directly transferred to households.

bctax  Sources of British Columbia Tax Revenue : Source

This carbon tax has won international acclaim and support at home. Last year, even the Business Council of British Columbia recommended keeping the BC carbon tax in place. A recent poll shows six in 10 support their home-grown BC carbon tax.

The new Canadian Prime Minister is hoping to leverage this important carbon tax foothold. During election season, many swooned over Justin Trudeau’s legendary perfect hair. His hair is perfect. But what made my heart skip a beat was his election promise to pursue a national carbon price that would apply across the country.

Earlier this month, Trudeau convened a ministers’ meeting to accelerate action on this important promise. But alas, even in my tax-tolerant Canada, a nation-wide carbon price is meeting with formidable resistance.  Although all parties at the meeting ultimately signed on to endorse “some form” of carbon pricing, this compromise language hinges on a very loose interpretation of carbon pricing.

ministers

First Ministers Meeting in Vancouver, B.C., Thursday, March. 3, 2016.  SOURCE

Perhaps the most creative interpretation comes from Saskatchewan Premier Brad Wall. Pointing to the CCS project in his province that captures carbon dioxide from a coal-fired power plant and sells it to oil companies for use in extracting crude, he maintains that this could fall under the umbrella of carbon pricing, very broadly defined.  Others point to government regulations mandating renewable energy and clean technology development, noting that these programs put a hidden price on carbon, paid for by industry, taxpayers, and electricity consumers.

We have seen similar debates play out here in the U.S. where renewable energy mandates, tax incentives, and clean technology programs are the preferred policy response. Across the U.S., a patchwork of these prescriptive policies have been implemented. The good news is that many of these programs are delivering real emissions reductions.  The bad news is that many of these emissions reductions come at higher-than-necessary cost.

Pursuing a GHG emissions reduction target without a carbon price amounts to tackling climate change with one (invisible) hand tied behind your back.  Mandating levels of investment in specific technologies or mitigation options – versus using a strong carbon price signal to coordinate actions taken by households and firms –  can significantly increase the cost of meeting emissions reduction targets.  Here in California, we see significant differences in marginal abatement costs across disconnected climate change policies and programs. This tells us that we could be achieving the same carbon emissions reductions at less cost if we relied more heavily on harmonized market-based mechanisms.

Another key cost consideration for any Canadians preparing to jump the carbon tax ship is that a carbon tax or cap-and-trade program– unlike mandates, subsidies, or  tax breaks – generate government revenues.  These revenues can be used to finance reductions in the marginal rates of existing distortionary taxes (see British Columbia for proof of concept). Alternatively, tax revenues can be used to fund other climate policy initiatives (such as investments in clean technology development) that can expand future opportunities for climate change mitigation while meeting other social objectives.

The upshot is not that carbon pricing is the silver bullet. Multiple market failures and distortions contribute to the global climate change problem.  Complimentary measures such as clean technology subsidies and mandates have a role to play in moving the climate change mitigation ball forward. But carbon pricing is the essential catalyst for coordinating today’s most cost-effective abatement and supporting tomorrow’s most promising abatement options.

Canada has a good thing going in British Columbia. Some other Canadian provinces are preparing to follow suit. With global enthusiasm for action on climate change picking up post-Paris, the value of demonstrating well-designed climate change policy is high. Here’s to hoping that Canada’s good thing keeps on going.

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7 Responses to Canada’s Got a Good Thing Going

  1. Pingback: Canada’s Got a Good Thing Going - Berkeley-Haas Insights

  2. Joel Darmstadter says:

    And while on the subject of shared values among Canadians, let’s not forget the record on asylum seekers. By now, Canada will have taken — or be firmly committed to taking — some 50000 refugees compared to our 2000. That works out to some 1400 migrants per million Canadian residents compared to 7 persons per million in the US case. These are numbers that may satisfy certain American presidential aspirants and many state governors. They do little to stir national pride.

  3. Paco D'Exponere says:

    Thank you for the discussion.

    Implementing a Pigouvian tax can provide a two-stage efficiency improvement. The tax moves the private cost of behavior closer to the social cost while using proceeds to reduce a socially destructive tax. When applying the proceeds to alternate use, policy makers may lose the opportunity to address a destructive tax. Certainly any application of the proceeds should follow a rigorous economic analysis. We must resist the temptation to wave our hands and spend the money on pet projects. But thus is the nature of political reality.

    Speaking of political reality, I worry when an economist states that a market-based policy is not a “silver bullet”. Too often I have seen economists go out of their way to point out market failures, as if anti-market types must be appeased. A market-based solutions, be it cap and trade or carbon tax, provides the best opportunity to address an environmental goal is the most efficient possible manner. Unfortunately, a market solution is the last tool California regulators use. Market failure may exist, meaning that a market price for carbon will not efficiently drive behavior in all cases. But comments on market failure seem to allow regulators an excuse to dismiss markets altogether.

    If regulators are serious about achieving our long term climate goals, the most efficient solutions must come first, not last.

  4. sidabma says:

    Go B.C. Canada Go!
    Somebody has to lead this charge. You are it.

  5. Canada’s pursuit of a national carbon tax is definitely welcome. A market-based mechanism such as a carbon tax will not eliminate the need for renewable energy mandates, tax incentives, and clean technology programs. A carbon tax, however, can greatly lessen the need for such mandates, incentives, and programs and hence the elimination of a significant cost to the society at large. No place is this more true than in the developing countries and particularly the oil producing countries where due to endemic issues involving the institutional framework the cost and effectiveness of energy efficiency policies and programs far exceeds the cost of the same programs and policies in other countries. While adding this cost saving benefit to a series of co-benefits countries can reap from the application of a carbon tax, one must still ask as to what a national carbon tax can do to Canada’s oil sands projects and an economy significantly reliant on the energy industry.

  6. 42apples says:

    I would push back against the notion of BC being a model for an effective carbon tax. They seem to do a better job with the revenue than California’s slush fund for (beginning construction of) high speed rail, but it is not an effective price signal. It’s not enough to keep the tax in place: a carbon tax needs to rise every year and BC’s has been frozen, so it won’t be effective in guiding long-term investment. Also as in California, British Columbia is already fairly low carbon.

    And British Columbia is one of the best models for carbon pricing in a friendly territory. I don’t think there is much of a chance of an effective carbon price in places where it will actually make a difference. Progress will be more of a result of haphazard mandates and subsidies that may help speed up technological breakthroughs. Economists will have to settle for helping decide between the 5th and 6th best policy alternatives, or just recommending we do nothing.

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