The carbon tax conundrum

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Jack Layton, leader of the very green federal NDP, is under attack by Green Party leader, Elizabeth May, and environmentalist, David Suzuki, for not supporting a new carbon tax regime to help reduce green house gas emissions in Canada. When Liberal leader, Stéphane Dion, floated the carbon tax idea in Toronto recently, Layton responded that such a tax would cause severe problems for poor and low income Canadians. May and Suzuki both support a carbon tax, and think its impact on the poor can be remedied through new tax credits.

Layton is right: a carbon tax would reduce income for all people, and would hurt those with the least income the most. Worse a revenue-neutral carbon tax — supported by May and Suzuki, as well as Dion — by denying governments additional revenues, would force governments to re-allocate existing spending in order to fund cleaner energy initiatives.

The best argument for a carbon tax is that governments could invest the additional money to make the economy green. Restructuring transportation systems, retrofitting buildings to conserve energy, and redistributing income from rich to poor in order to share the costs according to ability to pay, these ideas have been raised by Layton, and additional tax revenues are necessary to make them happen.

Canada already has a federal carbon tax. It is called an excise tax and is paid at the rate of 10 cents a litre on gasoline, and four per cent on diesel fuel. There is no such tax on fuels for home, office or industrial use, and the idea of widening the excise tax to include other fuels was advanced by a government advisory committee in 1998, and has been suggested again by two members of the committee in a report published by a new market friendly think tank (initially chaired by an Alcan executive). The study refers to tax credits for low-income people, but does make them a condition of extending the tax to heating fuels.

The ability of our economy to produce income gains for the wealthy, and take income away from the poor is not in doubt. The recent census only confirms what the Canadian Centre for Policy Alternatives (CCPA) growing gap project has been documenting: for the last 25 years, low-income people have been losing ground.

May, Suzuki and Dion say there is no reason to worry about introducing a new carbon tax that will accentuate growing income inequality, because it can be fixed later with income tax credits.

But, if we have not made an effort to redistribute revenue from rich to poor over the last 25 years, indeed have done the opposite, why are we now to believe that bringing in a carbon tax will suddenly transform corporate Canada, and the wealthy into practicing social democrats?

Company shareholders, and the wealthy want more income not less. The people with economic power in this country understand the threat of global warming, and see it as a profit-making opportunity. The cost of going green is to be passed on to consumers just like every other business cost. People at the bottom will just have to do without, as has always been the case.

For its academic and think tank proponents, the carbon tax is part of the microeconomic market utopia idealized by believers in efficient markets. If only we could each pay the real cost of emitting green house gas, proportionate to our use of carbon, through a dedicated carbon tax, we would have an incentive to reduce our use of carbon, in proportion to our consumption of carbon. "If only" indeed.

For a real world perspective we need macroeconomics. When the price of fuel goes up, most people consume the same amount for a considerable time. Unfortunately, the higher price reduces the amount of discretionary income available across the country to households, and businesses. This slows the economy.

What is needed is to tax the gain away from the fuel providers, and, first, compensate those distressed by the fuel increases; and, second invest in ways to reduce fuel consumption. But that requires a plan, such as the NDP under Layton has put forward, and big business do not like it when governments do their planning for them. Dion understands this, and goes along with business. It is not as clear that May and Suzuki do understand it.

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