A well-intentioned article in the Vancouver Sun seeks to explain carbon taxes and cap-and-trade systems. A worthy objective, but the article really aims to pigeonhole various alternatives in terms of political parties. It ends up taking a far-too-simplified view that goes something like this:
The debate is being played out in British Columbia, where the Liberal government and New Democratic Party opposition are fighting over the two main solutions that are based on financial incentives. The Liberals have implemented a carbon tax that is applied at the pump and the NDP are proposing a cap-and-trade system, which targets industrial polluters.
The situation is mirrored at the federal level, with the Liberals are trying to persuade voters to accept a national carbon tax applied at the refineries. The Liberals claim their tax will raise $15 billion over four years while the NDP is pushing a nationwide cap-and-trade system. Meanwhile, the Conservatives are hoping a technological solution of carbon capture and storage will solve the problem.
If only it was that straightforward, Canadians might be able to better engage the climate debate. But it is not. The author makes these out to be mutually exclusive options, when all are likely to figure into the picture, and political parties have reflected this by endorsing variations of the above. So isolating alternatives and framing them as “Party A supports this” and “Party B supports that” is not helpful, and only risks sowing misinformation in the public mind. It is also misleading to think that carbon capture and storage (CCS) is an alternative to a carbon tax or cap-and-trade; the latter are both forms of carbon pricing that will, so the argument goes, create the economic incentives for CCS to be implemented.
Federally, it is clear that Conservatives want nothing to do with a carbon tax. They do not seem to want to do much of anything, but you could put a tentative check in their box for CCS, and they have made noises about a national cap-and-trade system, although with little to show for it. Ultimately, there will likely be some US national system emerging after 2009, and Canada will participate in it. It may or may not be modelled on the Western Climate Initiative currently under negotiation, and how politics shapes the final result is far from clear – there are enough caveats with cap-and-trade that we may not like how it looks at the end of the day.
The federal Liberals have endorsed a carbon tax, playing up the “tax shift” language (“tax the bad things like pollution, not the good things like income”), which works well in a campaign, but is based on some dubious economics (lowering personal and corporate income taxes is not likely to have much, if any, impact on economic growth). But the Green Shift document also endorses a cap-and-trade model. It is not clear if they support CCS, but I’m betting a big yes, as most of the modeling that gets us near our targets relies on CCS coming on stream at some point in the future.
The federal NDP have more clearly staked out cap-and-trade, alongside the Conservatives. The NDP would auction permits, a really important aspect of a good system, but would not reallocate any of those revenues to households, who will end up paying higher prices as industry passes along the cost increases. I’d also like some clarification on the penalties for not meeting the cap. If their auction price of $35 per tonne also applied to excess emissions, it is effecively a carbon tax, and one that is lower than the proposed $40 a tonne under the Liberals (the “cap” in cap-and-trade does not mean companies will actually meet that cap if the cost of paying the penalty is less than the cost of complying).
Federally, much of this is political posturing in anticipation of the next election, and who will carry the “green vote”. In BC, there is a similar dynamic with the next election in May 2009, but here we have a government who is moving ahead on a major climate action plan, so the politics are playing out more aggressively. Well, perhaps that is just because it is BC, but anyway …
In BC, the governing Liberals have become well-known for their carbon tax, which came in on July 1. But they are also advocating a cap-and-trade system for large industrial emitters, and are collaborating on this on a regional basis through the Western Climate Initiative, which at last count had seven US states plus BC, Manitoba, Quebec and Ontario. The are also very much interested in technological solutions (any new coal power plant in BC must implement CCS), and their green plan has various incentives for energy efficiency, plans for a carbon neutral public sector, regulations and standards, and essentially all of the low-hanging fruit in regards to GHG mitigation.
The BC opposition NDP have honed their critique of the government around the carbon tax with a populist “axe-the-tax” campaign. But according to their Framework for Real Climate Action, they really want to “fix the tax”, arguing that it should be “at source”, and focussed on “big polluters”. They also want a cap-and-trade system, CCS, and tougher regulations on industry. So in actual policy rather than media soundbites, the NDP plan has all of the same elements as the Liberals’ plan.
I have been frustrated that the NDP continues to play the carbon tax as not applying to industry. This is just plain wrong. I have tried to correct them on it and have seen no change in their communications. Similarly, I find arguments that the tax should be applied “at source” disingenous as the tax is applied at the wholesale level on fossil fuels. The carbon tax has a broad base, covering 70% of domestic GHG emissions – there are a few outstanding issues such as process emissions in the aluminum and cement industries (as I understand it these are going to be included either through the tax or a cap-and-trade system) and from emissions from landfills and pipelines (which will be covered by regulations).
The NDP approach would exempt the household sector from the tax. It would not cover fuel used for transportation or for home heating, in effect meaning one-third of emissions would not be covered by the tax. It is not clear how the NDP would address emissions from the household (i.e. voting) sector. On the other hand, the NDP goes beyond the Liberals by proposing that the tax be applied to international aviation and shipping, and it is not entirely clear whether they would support it being applied to exports. These exemptions have a certain logic too them, in that the Liberals are concerned about imbalances with regard to trade if BC taxed these areas and others did not.
Because the NDP have so poorly handled this issue, my criticisms of them have been interpreted as a wholesale endorsement of the Liberals. One obnoxious comment that I had to delete went so far as saying I should run for the Liberals, as if I had absolved them for all of their sins by supporting the carbon tax. I’m trying to stick to policy analysis and I resent being painted by these “with us or against us” brushes. The Liberals’ plan is not perfect, far from it, but it does represent a meaningful first step. I congratulate them on that but think it is time to start pressing for the next steps.
I support the carbon tax because it is relatively well-designed — it flows more money back to low income families than they pay in tax; it is an important signal to other jurisdictions; and it has a broad base. I would do away with the revenue neutrality, aiming half the revenues into a refundable green tax credit with fairly broad coverage (more like the Old Age Security or Child Tax Benefit model than the GST credit upon which the current green credit is based), and would use the remaining funds for major transit expansion, transition programs for workers and energy efficiency improvements for low- to middle-income families.
Is the tax large enough? No; it should eventually be much, much higher. The idea is that it gets phased in over time. But the NDP cannot have it both ways, saying that it is ineffective and also that it is a horrible burden on people. There is a statistical relationship between price and consumption. The behavioural response is very inelastic in the short term, but less so over the long run. So the carbon tax, at prevailing levels is more than nothing but is small enough to be considered symbolic – perhaps a promissary note for the future. Ultimately, facing high marginal costs for activities that threaten life on the planet seem sensible to me, as long as a good credit system is in place. Over the medium term, I am more partial to some form of household carbon accounts (quotas or “rationing”).
No matter what approach you take – carbon tax, cap-and-trade or regulation – there are going to be regressive indirect price effects because industry will pass along those costs (even if direct costs for personal transportation and home heating are exempted, as in the BC NDP approach). In neither the federal nor the BC NDP approaches is there clarity on how these regressive impacts will be addressed. And by going “axe-the-tax” the BC NDP is pandering to the anti-tax sentiments out there that do us no favours as people who want social justice.
- Absolving our Carbon Sins: the Case of the Pacific Carbon Trust (April 2nd, 2013)
- Carbon bubbles and fossil fuel divestment (March 26th, 2013)
- GHG Cap & Trade (January 21st, 2013)
- What’s next for BC’s carbon tax? (January 14th, 2013)
- Marc’s Letter from 2040 (December 14th, 2012)