Editor’s note: On February 19, British Columbia’s outgoing Finance Minister presented a budget that included “North America’s first full-fledged carbon tax.” But not everyone is convinced of the tax’s equity and effectiveness. This article by economist Marjorie Griffin Cohen was originally published on January 22.
It seems the federal government will not act quickly on the call for a carbon tax recently issued by the National Round Table on the Environment and the Economy. But in British Columbia a carbon tax is expected to be a major feature of Finance Minister Carole Taylor’s budget on February 19. Strong support for this policy has come from 70 academic economists from across the province, who urged Taylor to implement this tax as a way of cutting CO2 emissions. Can 70 economists be wrong?
I sense they might be, and if I am correct, this means that the public policy tools that might actually reduce greenhouse gas emissions will be ignored while the debate swirls around a policy that is likely to be both ineffective and highly unequal in its effects.
The 70 economists and a raft of environmentalists supporting a carbon tax are desperate for quick action and they seem to recognize that anything that smacks of a big tax will not be politically palatable. So, they are recommending an incremental tax that begins small and ratchets up over time.
Does a slow incremental tax actually work? The short answer is no, and there is evidence to suggest that this would be the worst way to implement a carbon tax. According to the most recent report of the Intergovernmental Report on Climate Change (IPCC), the European experience with carbon taxes shows that it sometimes has a beneficial impact initially, but that this effect does not last. That is, people get used to paying the higher prices and go right back to doing what they normally do. What is more, it takes a really big tax initially to bring forward any change in consumer behaviour. But even this may bring about very marginal effects on spending habits.
Norway is usually cited as the best example of a country that has benefited hugely from a carbon tax. But a report by Annegrete Bruvoll of Statistics Norway contradicts this assertion: “Despite considerable taxes and price increases for some fuel-types, the carbon tax effect has been modest.”
It appears that the relatively high carbon tax that has been in effect since 1991 (about the highest carbon tax in the world) has contributed to only 2 percent of the total reductions in CO2 emissions. It has not been more effective because of “extensive tax exemptions and relatively inelastic demand in the sector in which the tax is actually implemented.” What this means is that Norwegians did not change their consumption habits very much when the price increased.
But even if for some reason Canadians were more likely, despite all odds, to be more responsive to a new tax than Norwegians, could the tax be fair? The 70 BC economists and the government seem to think it could be if the tax was “revenue neutral.”
But revenue neutrality, no matter how reasonable the term sounds, does not make a tax fair. And there is lots of ambiguity too. Does the term mean revenue neutrality for governments, for the population as a whole, or for individuals? If it is for individuals, which would appear to be the fairest, the logic of the tax is obliterated. With no total tax change altogether for individuals, the reduction in one tax will offset the increase in the carbon tax.
If this tax means revenue neutrality for people in general or for the government, those least able to afford a tax increase will be disproportionately affected by the tax. Any tax on consumers, particularly for an essential resource such as energy, will be a “flat tax,” meaning that all will pay the same amount. Because this will take a larger portion of the income of poor people, it will be a regressive tax. The well off will be able to buy their way out of any responsibility and continue to buy Hummers and 5000 sq. ft. homes.
In BC, the Finance Minister is putting a different twist on the notion of “revenue neutral,” by saying that spending on environmental programs could make the tax “revenue neutral.” Spending on programs that would lessen environmental degradation (extensive and inexpensive public transportation and affordable city housing to name the most obvious) is a really good idea. But it isn’t as though governments could not afford to do that already. They have been awash in money, carry huge budget surpluses and routinely hand back large tax breaks, mainly to the rich.
So if not a carbon tax, what?
The idea that the environment should be included in calculations of costs is a good one. And, frankly, I would like to see heavy emitters, like the oil and mining companies, paying the correct price for the use of a public resource. But that is a different issue from placing a tax on consumers to get them to change their behaviour.
Regulation has been an important tool in environmental cleanup endeavours in the past, although “market solutions” have gained lots more favour as policy tools recently. In order to eliminate the massive pollution of rivers that characterized early modern industry, governments did not introduce taxes or elaborate toxic substance trading schemes. Rather they simply prohibited the dumping of toxic substances into rivers. Industry quickly found other ways to dispose of their fouling waste. Placing firm limits on emitters should come back in fashion. And, if we really want to reduce total carbon emissions we might even consider carbon rationing.
If governments want an excuse for a new consumption tax, a tax to reduce carbon emissions is a really handy excuse. But this “market solution” to a market problem is not likely to work. The worst of all would be a tax that did little or nothing to reduce carbon emissions, but imposed a disproportionate tax burden on low-income people.