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The Progressive Economics Forum

More on carbon taxes

Gwyn Morgan, retired founding CEO of EnCana Corp., makes some interesting points about the BC carbon tax in this Globe article. But he also misses the point by focusing his analogy on transportation, as many of us do because it is most what we relate to. While transportation is characterized by highly inelastic responses, the economic equation changes at much lower levels of the tax for other technologies. At a recent workshop I attended an natural gas industry person figured that carbon capture and sequestration becomes cost-effective at somewhere around $50 per tonne. Anyway, I like where he ends the piece, a press for a mix of hard caps and penalties (though couched in softer language) for emissions above the cap.

Over the past five years, the average Canadian retail price of gasoline, adjusted for inflation, has increased by about 30 cents (Canadian) a litre. B.C.’s new carbon tax starts off at 2 cents a litre, increasing to 7 cents in 2012. Comparison of these figures would say that OPEC’s price increases should do a lot more than the carbon tax to reduce consumption. This was further demonstrated to motorists here on Vancouver Island when an oil-market-driven 6-cent increase in pump prices came the same week as the carbon ax proposal from Victoria.

Speaking of taxes, it’s useful to remember that the pump price of gasoline in B.C. already includes provincial taxes of 15 cents and federal taxes of about 15 cents a litre. For motorists in Greater Vancouver, there is an additional “transportation tax” of 6 cents. This means most B.C. motorists were paying pump taxes of 36 cents a litre before the new carbon tax. Once the hoopla surrounding the announcement is over, will consumers change their behaviour because of a few extra pennies?

History tells us they won’t. The carbon tax rises to 7 per cent of current prices over four years. In the past five years, the average inflation-adjusted retail price of gasoline in Canada went up 40 per cent, and gasoline consumption rose in every province.

… Adding a lot more cost would not only be politically unpalatable, but further burdens those that have no near-term alternative; such as those rural folks or public institutions such as hospitals, schools and businesses. It also makes virtually everything more expensive to produce, further hampering the global economic competitiveness of Canadian manufacturers. The key is not to make all consumption more expensive, but rather making consumption above a set level significantly more expensive. This creates an incentive to avoid the higher cost entirely by using less.

Industrial emitters who pay a tax that kicks in when emissions intensity exceeds a set target have a big incentive to find ways to avoid it through technological and operational efficiencies. If the tax is on all their emissions, the economics of investing in incremental improvements are much less compelling.

When it comes to individual consumers, adapting the concept of taxing consumption beyond a target level is more challenging. In some European countries, an energy efficiency tax is levied on vehicles based upon the amount by which they exceed fuel usage standards. There are also incentives for home energy efficiency. We need thoughtful measures that will yield results, rather than embracing an approach that both history and common sense tells us is destined to fail.

He says tax but is really talking more like some form of penalties for excess emissions. A tiered pricing approach is implied. And just when I was leaning towards carbon tax … but such a system could be consistent with a carbon tax, too. We need a creative mix of complementary approaches. One thing about Morgan’s is that it would press emitters to implement the low-hanging fruit reductions due to the cap. In the same workshop earlier this week, there were a number of industry folks with different views on whether carbon tax or cap-and-trade was the best approach. One of the other economists speculated that it was the industries that saw potential profits that wanted cap-and-trade (they know of easy emissions reductions and would be able to sell their excess as established by the cap).

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