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The Progressive Economics Forum

Dion’s Carbon Revenues

The Liberal Green Shift aims to bring federal taxes on all fossil fuels up to $40 per ton of carbon emissions, in line with the existing federal tax on gasoline.

The Handbook provides a detailed costing of the $15.4 billion in accompanying tax cuts, tax credits and contingency funds, but no breakdown of the $15.3 billion in new carbon-tax revenues (page 41). However, it lists the proposed tax rates for various fuels (page 27). I have applied these rates to the fuel-consumption figures released earlier this month by Statistics Canada:

 

 Fuel

 4th-Year Tax

 2006

 Consumption

 Revenue

($ millions)

 Diesel

 7.0 cents / L

 26.8 billion L

 $ 1,873

 Light Fuel Oil

 11.3 cents / L

 4.1 billion L

 $  465

 Heavy Fuel Oil

 12.4 cents / L

 7.0 billion L

 $  864

 Jet Fuel

 6.2 cents / L

 6.8 billion L

 $  419

 Kerosene

 10.2 cents / L

 343 million L

 $   35

 Natural Gas

 $2.00 / gigajule

 3,421 petajoules

 $ 6,843

 Propane

 6.1 cents / L

 5.3 billion L

 $  326

 Coal

 $77.40 / Tonne

 58.3 million Tonnes

 $ 4,509

 Total

   

 $15,334

L = Litre; These figures do not multiply precisely due to rounding.

This exercise reveals an important premise. The $15.3-billion figure assumes that, in the Green Shift’s fourth year, Canadians would consume as much fossil fuel as in 2006.

A major criticism of the Liberal plan has been that it sets no caps or targets for reducing emissions. Indeed, its numbers assume that the Green Shift will not change emissions at all.

Of course, even if the $40-per-ton carbon tax would not decrease emissions, it could be useful as a means of raising revenue to invest it railways, public transit, building retrofits, renewable power and other infrastructure that would eventually decrease emissions.

Unfortunately, the Liberals have instead committed the revenues to across-the-board tax reductions. Only $400 million in contingency funds, 2.6% of Green Shift revenues, would be potentially available for other purposes.

Nevertheless, it is conceivable that some combination of rising fuel prices, a slowing economy and successful environmental policy will reduce future fossil-fuel consumption by more than 2.6%. If carbon-tax revenues consequently fell, would the Liberals rollback their tax cuts or find another revenue source?

A Note on Coal: The Green Shift reasonably proposes different tax rates for bituminous and sub-bituminous coal. However, the Statistics Canada publication cited above does not make this distinction and the relevant CANSIM table indicates that the breakdown is “Secure” (unavailable). For costing purposes, I have simply assumed that Canada uses equal amounts of bituminous and sub-bituminous coal. Natural Resources Canada figures seem to support this approximation.

UPDATE (July 9): Today’s National Post editorial observes parenthetically that Dion’s carbon tax “is only revenue-neutral if you assume, as the Green Shift accounting puzzlingly does, that the incentives in the program won’t be responded to.”

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Comments

Comment from Mark Francis
Time: June 27, 2008, 1:56 pm

I would think that the carbon tax itself gets raised before the tax cuts come down.

I wonder if a dividend model wouldn’t have been better policy?

Comment from Matt
Time: June 28, 2008, 7:06 pm

I guess that is the problem with the word “progressive” – everyone wants to claim it as their own, without it really meaning anything. I mean the Liberal Party continues to claim that it is “progressive” yet inequality and liberalization of the national economy were hallmarks of their government. And the Liberal party continues to ignore inequality and campaign on greater liberalization. So maybe they are “progressive”, but I personally do not think they are concerned about the same “progress” that Trudeau or Pearson were, they seem more concerned about the progress of a decreasing cohort of wealthy.

But I think it has to be highlighted that a carbon tax is not “progressive”, it is regressive. I know this blog has been mildly supportive of the BC carbon tax because it includes tax credits for lower income individuals. However, without these kinds of measures it is a flat tax that is regressive. And when political parties make this particular regressive tax a “revenue neutral” tax they do a very dangerous thing. What happens if there is “success” on the carbon front, as this article points out? Is the government going increase taxes again or are they going to cut services? Nothing in the Liberal plan reassures me that the Liberals, with a history through the 90s and 2000s of cutting social spending, are going to ensure that the government continues to fund programs in the face of shrinking revenues.

If we do take the carbon tax route, which I am not convinced of personally, then our government has to do two things: first ensure that the tax does not penalize the poor disproportionately with a regressive tax without some measures taken to mitigate this concern. Second, refuse the revenue neutral route and use the increase revenues for “green” investments. Thus we are not tossing away government revenues and we are using the tax to provide incentives as well as a disincentive.

The revenue neutral route of the Liberals and the Greens is a regressive policy direction both for the environment and the economy.

Comment from catherine
Time: June 30, 2008, 3:15 am

“If carbon-tax revenues consequently fell, would the Liberals rollback their tax cuts or find another revenue source?”

The Green Shift document says that the carbon tax would be in conjuction with caps and Dion has said that he would also work towards implemented a cap and trade system. One might expect a cap and trade to take about two to three years to set up, so this could be up and running by year four. That would generate additional revenues. Import tariffs are another source of revenue.

As to non-partisan and truly progressive, perhaps someone will write a column here comparing how an average family of four with a total income of $40,000 would fare under the NDP, Liberal and Green Party proposals in the first couple years. Since the Liberal and Green Party use a tax, this is fairly straightforward. This is more difficult for the NDP plan, but one can take a few models of carbon price versus emission reductions to get several possible scenarios to compare to the other plans.

If, as this post suggests, it is possible that even $40 per ton would not cause any reduction in emissions, then the NDP plan would correspond to a price a lot higher than that. Someone should figure out how this would affect low-income Canadians.

Comment from catherine
Time: June 30, 2008, 1:55 pm

Matt, any carbon pricing is regressive. A good plan will find some balance between helping lower-income people pay the inevitable increased costs, providing funding to help with conservation (such as retrofits), providing green infrastructure (such as public transportation) and stimulating research and development of sustainable alternatives.

All three parties have retrofits/conservation, infrastructure and incentives for developing green technologies in their plans, so to critique one plan over another, you need to get into the details of what the proportions are for the four components, compared to what you think an ideal ratio is. The NDP plan looks weak on the first component (undoing the regressiveness of cap and trade) but perhaps this part is outside of their cap and trade description — just as some of the Liberal green incentives are outside of their revenue neutral tax shift (funded by government surpluses).

Comment from Dave T
Time: July 3, 2008, 2:54 pm

Erin, you suggest the Green Shift “numbers assume that the Green Shift will not change emissions at all” because it “assumes that, in the Green Shift’s fourth year, Canadians would consume as much fossil fuel as in 2006.” However, consumption could still be down four years out from the baseline, business-as-usual projection.

Matt and Catharine, isn’t it a bit dishonest to suggest that carbon taxes are, somehow inherently, “regressive.” I could make the same claim about income taxes, because conceivably I could design an income tax that taxes people at a rate that is inversely proportional to income. Instrument design is what matters. Any tax can be progressive or regressive. Carbon taxes are not inherently regressive; it all depends on design.

It’s also worth noting, as Catherine does, that other proposals are going to cost Canadians too. Whether it’s Harper’s “regulation” or Layton’s cap-and-trade, costs will be passed on to consumers. At least with a carbon tax, we know we will have revenues that we can use for progressive redistribution or green investments. We might not have any depending on the cap-and-trade design, and we certainly won’t have any with regulation.

Comment from catherine
Time: July 4, 2008, 7:27 am

Dave T, I mean regressive as a stand alone tax (or price set by cap and trade). I don’t think the Green Shift is regressive because it both taxes carbon and moves income tax and tax credits around. Unless someone can point me to a part of the NDP plan I missed, I do think the NDP cap and trade is regressive because it does not move income tax and tax credits around, except for credits targetted to retrofits/alternatives.

Comment from Rod Smelser
Time: July 4, 2008, 8:40 am

There’s nothing at all dishonest about calling a per litre fuel tax regressive, as everyone knows. It is regressive whether one calls is an “excise tax”, or a “road tax”, or a “transit levy”, or a “carbon tax”. It may be justified on the basis that it’s a form of user fee, which is the justification used in the case of the road tax, but it’s still regressive.

Comment from Erin Weir
Time: July 9, 2008, 12:29 pm

Thanks for the comments.

Catherine, if a cap-and-trade system were implemented in addition to the Green Shift, it could generate auction revenue to the extent that large emitters would be willing to pay more than $40 per ton. Conversely, to the extent that the cap would reduce fossil-fuel consumption, it would also reduce carbon-tax revenues.

The Green Shift is far too vague about carbon tariffs to count them as a further revenue source. However, the logical approach to border measures would combine a carbon import tariff with a carbon export rebate. The most recent available figures indicate that annual Canadian imports generate 88 megatons of emissions abroad while annual Canadian exports generate 267 megatons here. Therefore, the import tariff would raise less revenue than the export rebate would cost.

I salute the Liberal plan for leaving the door open to cap-and-trade and border measures. However, neither of these approaches would likely solve the revenue problem.

Dave, I agree that holding fuel consumption at current levels would be a meaningful improvement compared to Canada’s recent record of increasing fuel consumption. However, if that is the goal, then Dion should say so rather than claiming that “emissions will decrease” on the Handbook’s first page. Also, it seems to me that skyrocketing fuel prices may already have changed the “business-as-usual projection.”

Comment from Observant
Time: July 13, 2008, 9:19 pm

Ironically, if Canada was reasonably on target to achieve it’s 2012 Kyoto targets we would not be needing a Carbon Tax. Unfortunately, Canada is still 30% GHG in excess, and Dion admits in his Green Shift (page 16) that he does not expect Canada to meet our 2012 Kyoto targets. Also we now have the Liberal-inspired Rodriguez “Kyoto Protocol Implementation Act which mandates that Canada must meet it’s 2012 Kyoto targets. The only resolution of this impasse is to heavily purchase Kyoto Carbon Credits. Presumably, monies collected through the Carbon Tax can be used for this purpose.

To put it all into a global perspective, Canada generates ~2.3% of the world’s GHGs … and if we could eliminate our current 30% GHG excess over our Kyoto targets, that would only reduce total global GHGs by ~0.7% .. hardly worth bothering about considering that China, India, Russia, others not constrained by Kyoto are increasing their GHG emission by more than all of Canada’s GHGs.

Saving the planet with our wallets is like sending money aid to African dictatorships … useless.

Comment from Mark Crawford
Time: July 31, 2008, 12:07 pm

This is a good observation. If the Liberals win the election, and the carbon tax actually succeeds in modifying behaviour, there will be a reduction in revenue. The Liberals will likely not be able to follow through on all of the tax cuts, and the Tories (and in all likelihood the NDP) will jump on them for lying and be saying “I told you so”

That is why on my blog I suggested that carbon taxes above a floor price for oil and gas be substituted for excise taxes on fuel–and that government be prepared for a reduction in revenues. THis could be made up for by some modest increases in income tax, for example!

Comment from Ron in Regina
Time: August 14, 2008, 2:21 pm

Is anyone able to find any reference anywhere with respect to just what
percentage of the money collected by this “Green Shift” (if it ever comes into
existence) will be utilized to administer this thing??? I’ve looked and just can’t
find this answer.

I’m also trying to find a list as to who these “700 worst polluters” are that
are mentioned with respect to this “Green Shift” wealth distribution plan. Has
anyone been able to find the answer to either of these questions???

Comment from Erin Weir
Time: August 15, 2008, 7:23 am

As far as I can tell, the Green Shift does not explicitly budget any money for administration.

I believe that the 700 polluters are the same Large Final Emitters that would be covered by proposed cap-and-trade systems.

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