Putting a Price on Carbon

If Canada is to obtain a “clean energy future,” it needs to adopt a harmonized carbon tax.

Federal, provincial, and territorial energy ministers concluded their annual meeting last week by proclaiming a shared vision of Canada as a “global leader in secure and sustainable energy.” Energy conservation, the “transition to a lower-carbon economy,” and technological innovation are among the objectives for future intergovernmental collaboration.

That’s the good news. Worrisome and just as important, though, is what was not said. In particular, there was no acknowledgement of the profound tension between the development of Canada’s fossil-fuel resources – especially its tar sands – and its renewable-energy sources.

It is not enough to pronounce a “clean-energy future” for Canada; federal and provincial governments must make it a reality through well-designed policies. It is particularly concerning that carbon pricing – which is arguably the most critical of those policies – is not even mentioned in the ministerial communiqué. Without a meaningful price on carbon emissions, Canadian governments’ efforts to promote conservation, reductions in greenhouse-gas emissions, and investments in clean-energy technologies will be (at best) unnecessarily costly and (at worst) ineffective.

Just four years ago, carbon pricing was all the rage. The federal government, and many provincial governments, committed to cap and trade. B.C. and Quebec adopted carbon taxes. Even the business community called on Canadian governments to send a clear carbon-price signal.

However, with the onset of a global recession, Canadians’ attention turned from climate change to the economy. The federal Liberals’ proposal for a revenue-neutral carbon tax crashed and burned in the 2008 election. Across the border, the U.S. Congress failed to pass cap-and-trade legislation.

The Canadian government, which previously advocated cap and trade, now espouses an old-fashioned – and much more costly – strategy of command-and-control regulation, though with no schedule for the roll out of the industry-specific standards necessary to meet its own targets. Provincial governments and U.S. states are now waffling or delaying their commitments to the Western Climate Initiative’s cap-and-trade program.

While electoral pressure on politicians to act on climate change may have subsided, the threats that climate change poses to Canada’s future prosperity have not. Nor has the reality of what it will take to transition from our current economy, which is predicated on the exploitation of unsustainable fossil fuels, to a more sustainable future reliant on renewable energy. Perhaps it is time for Canada, like Australia and the European Union, to revisit carbon taxes.

Carbon taxes have several advantages over the other instrument for carbon pricing, cap and trade. For one thing, they can be readily applied to both small and large sources, whereas, to date, cap and trade has only been applied to large industrial sources. The costs of a carbon tax are transparent, which facilitates accountability with respect to government revenues and the design of measures to shield low-income consumers. Carbon taxes are simple to adopt and administer. B.C.’s tax was put in place in a matter of months, backed by 50-page legislation. In contrast, the failed Waxman-Markey bill in the United States weighed in at 1,500 pages, not including the thousands of pages of additional regulations that would have taken years to devise.

Conventional wisdom is that carbon taxes are “good policy” but “bad politics,” because the costs of cap and trade are indirect and thus less visible to voters than those associated with a carbon tax. However, that perceived advantage has been called into question by recent experience. In the U.S., greenhouse-gas-intensive industries that expected to be hit the hardest under a cap-and-trade regime did not hesitate to bring those costs to light. Cap and trade was quickly rebranded as “cap and tax” by its opponents. The lesson is that where there are costs, political opposition is sure to emerge.

Unfortunately, political support associated with the benefits of a carbon tax is not so automatic. For the most part, Canadians who will benefit from new clean-energy jobs do not yet know who they are. And most beneficiaries of greenhouse-gas reductions are not yet born, let alone of voting age. That said, carbon taxes offer some near-term economic, and thus political, advantages that may have been underestimated.

In particular, carbon taxes bring in government revenues that can be deployed for various purposes: investing in clean-energy infrastructure and (politically popular) job creation; stimulating the economy by cutting other, less efficient, taxes; and reducing government deficits at a time when traditional revenue sources are not delivering. The last of these probably accounts for the “public benefit surcharges” on electricity that some two-dozen U.S. states have quietly adopted in recent years. It has arguably also contributed to the survival of the B.C. carbon tax (and several long-established European carbon taxes), the revenues from which are essential to avoiding increases in other taxes.

The B.C. carbon tax certainly had a rocky start in 2008, but it has survived against the odds and, indeed, has been increased three times with little fanfare. The opposition NDP now admits that it was misguided in campaigning to “axe the tax.” The only problem with the B.C. tax is that it is unique within North America, and it is thus vulnerable to challenge over the longer term for being “out of line” with the taxes of other jurisdictions.

If federal and provincial energy ministers really want to make Canada a clean-energy superpower, they should collaborate in adopting harmonized carbon taxes.

Origin
Source: the Mark