Carbon taxes, distribution, and politics
In his rabble.ca column, Duncan Cameron raises some concerns about carbon taxes:
When Liberal leader, StÃ©phane Dion, floated the carbon tax idea in Toronto recently, Layton responded that such a tax would cause severe problems for poor and low income Canadians. May and Suzuki both support a carbon tax, and think its impact on the poor can be remedied through new tax credits.
Layton is right: a carbon tax would reduce income for all people, and would hurt those with the least income the most. Worse a revenue-neutral carbon tax â€” supported by May and Suzuki, as well as Dion â€” by denying governments additional revenues, would force governments to re-allocate existing spending in order to fund cleaner energy initiatives.
The best argument for a carbon tax is that governments could invest the additional money to make the economy green. Restructuring transportation systems, retrofitting buildings to conserve energy, and redistributing income from rich to poor in order to share the costs according to ability to pay, these ideas have been raised by Layton, and additional tax revenues are necessary to make them happen.
… May, Suzuki and Dion say there is no reason to worry about introducing a new carbon tax that will accentuate growing income inequality, because it can be fixed later with income tax credits.
But, if we have not made an effort to redistribute revenue from rich to poor over the last 25 years, indeed have done the opposite, why are we now to believe that bringing in a carbon tax will suddenly transform corporate Canada, and the wealthy into practicing social democrats?
Company shareholders, and the wealthy want more income not less. The people with economic power in this country understand the threat of global warming, and see it as a profit-making opportunity. The cost of going green is to be passed on to consumers just like every other business cost. People at the bottom will just have to do without, as has always been the case.
For its academic and think tank proponents, the carbon tax is part of the microeconomic market utopia idealized by believers in efficient markets. If only we could each pay the real cost of emitting green house gas, proportionate to our use of carbon, through a dedicated carbon tax, we would have an incentive to reduce our use of carbon, in proportion to our consumption of carbon. “If only” indeed.
For a real world perspective we need macroeconomics. When the price of fuel goes up, most people consume the same amount for a considerable time. Unfortunately, the higher price reduces the amount of discretionary income available across the country to households, and businesses. This slows the economy.
What is needed is to tax the gain away from the fuel providers, and, first, compensate those distressed by the fuel increases; and, second invest in ways to reduce fuel consumption. But that requires a plan, such as the NDP under Layton has put forward, and big business do not like it when governments do their planning for them. Dion understands this, and goes along with business. It is not as clear that May and Suzuki do understand it.
Duncan is right that a carbon tax will be regressive. But what matters is what we do with the revenues. In BC, for the first year about one-third of the revenues will go to each of low income tax credits, personal income tax cuts and corporate income tax cuts. The result is that the regime as a whole ends up being slightly redistributive primarily because low income folks get more back in credits than they will pay in tax. This changes over the years so that the system becomes on balance regressive by 2010. Toby Sanger and I have done the math on this and are presenting our (preliminary) findings next week at the Canadian Economics Association meetings.
The key point is that if one-third or more of the carbon tax revenues go back to low income households then we effectively deal with the problem of regressivity in the carbon tax. But at the same time, a carbon tax will make it more expensive on the margin to consume fossil fuels, and people can respond to those higher prices by changing their behaviour. If anything, the BC carbon tax should be higher, as at 2.4 cents per litre the impact on behaviour is going to be teensy weensy.
I would abandon revenue neutrality beyond the low income credits and use the remaining funds to expand public transit and lower fares, subsidize energy efficiency retrofits for low income folks and renters, and accelerate the diffusion of greener technologies in general. PIT and CIT cuts are well down my list of priorities, and it seems to me that the whole package of revenue neutrality is reflective of elite perceptions that the public hates taxes, so the only way a carbon tax could be sold is with offsetting other taxes. At this point E. May goes on about the economic benefits of these other tax cuts, a point for which I am deeply skeptical.
Where Duncan and I differ is on where to next. His argument is concerned more with the politics of how a carbon tax plays out rather than the economics. I have trouble endorsing Layton’s position, which is essentially the same as Harper’s position (yes, federal politics has gotten that weird), in favour of cap-and-trade instead of a carbon tax. While cap-and-trade sounds nice (set emissions targets then let the market determine the price) the devil is in the myriad details of implementation, and a lot of it looks nightmarish from an administrative point of view.
That said, I could see a role for cap-and-trade system to complement a carbon tax, but not replace it. The type of cap-and-trade system under development under the Western Climate Initiative, for example, is only looking at large industrial emitters, meaning a large share of GHG emissions will not be covered, and even then the coverage may be spotty due to the negotiation process. And if permits under the system are given away rather than auctioned, the government loses its ability to offset regressive impacts when costs are passed along to consumers. Indeed, my spies tell me that the NDP plans to give permits away which could lead to the costs being passed along to consumers anyway but windfall profits for recipient companies, which is what happened in the EU trading system.
In other words, the same politics that Duncan is critical of for a carbon tax also apply to cap and trade. To be clear, Duncan does not come out endorsing cap and trade, leaving one other stylized option, regulation. There is certainly some scope for regulations as part of the package of solutions, but I’d be wary of attempts by governments to impose technologies on industry from up on high. But regulations that raise the bar for energy efficiency could indeed press the market towards greater innovation. More importantly, however, regulation will impose costs on industry that will also get passed on to consumers via higher prices, and like cap-and-trade without an auction of permits, will not provide the revenue to governments to offset regressive distributional impacts.
Any way you slice it, emitting GHGs is going to get a whole lot more expensive over time. But that is a good thing so long as we address distribution at the same time. In the same vein we need to get some policy gears moving to offset the adverse distributional impacts of the existing market-driven jump in prices at the pump. An excess profits tax on oil and gas companies (call it the anti-gouging tax), redistributed to low and middle-income earners (perhaps through the GST credit, as was the case with the 2001 federal home heating rebate), would be a much better platform for Jack Layton or Stephane Dion to be standing on.
UPDATE: Eric de Place at Sightline says I overstated on WCI:
You write: â€œThe type of cap-and-trade system under development under the Western Climate Initiative, for example, is only looking at large industrial emittersâ€¦â€
But thatâ€™s not strictly true. So far, WCI has said that it will include electricity (generators and importers), stationary combustion sources (meaning industrial plants), and residential and commercial natural gas. In addition, theyâ€™re still holding the door open for coverage of transportation fuels, which is by far the largest source of emissions in the region. Admittedly, theyâ€™re being a bit cryptic about transportation, but in their latest draft they went so far as to say something on the order of â€œmost WCI partners have a strong interest in including transportation fuels under the cap.â€ Thatâ€™s consistent with what my sources tell me is going on behind closed doors. Anyway, you can read all about it here: http://www.westernclimateinitiative.org/ewebeditpro/items/O104F17390.PDF.