If it Walks and Squawks like a Carbon Tax, It is a Carbon Tax

Commentary, Environment, Adrian Vannahme

During the last federal election, the Conservatives skewered then Liberal leader Stephan Dion’s proposed carbon tax as a “tax on everything.” The Tories argued such a policy would place a significant strain on household budgets, curb economic growth, and contribute almost nothing towards the stated goal of the policy–to combat global warming.

In all this, the Conservatives were correct. Unfortunately, their alternative of a “carbon market,” some details of which were given recently, will produce all of the same negative consequences as a carbon tax, with a few additional problems on top.

Proponents of expensive greenhouse gas reduction policies have recently discovered that carbon markets or “cap and trade” policies are easier to sell than carbon taxes; that’s because they can say that only corporate “polluters” rather than ordinary consumers will pay. Though politically attractive, this line of argument is economically nonsensical.

Carbon markets operate by placing a “price” on the emission of carbon dioxide. That, of course, will make it more expensive for firms to produce whatever it is that they sell. Faced with this added production cost, firms do not simply shrug their collective shoulders and absorb the new expense in the form of lower profits.

Instead, firms will transfer a large portion of the higher costs to consumers who will have no choice but to pay the higher prices; after all, it’s not as if we can skip turning our furnaces on in -20 weather in January. Rhetoric aside, the federal government’s carbon market scheme is every bit as much a “tax on everything” as Mr. Dion’s ill-fated Green Shift proposal.

In addition to a new burden on households and a new restriction on economic growth, a carbon market creates possibilities for the development of significant market distortions, including favouritism for chosen firms and industries.

And that’s troubling. As the government doles out valuable emission credits and offsets, lobbyists will be even more sought after as companies scramble to position themselves for preferential treatment. Instead of dedicating their energy to the development of better products at lower prices, it will become rational for firms to set aside resources and manpower for the socially useless task of currying favour with the ruling political party. Certain businesses will benefit but consumers will suffer, as they will be subject to a distorted market in which prices are higher and firms are less responsive to their needs.

In advance, it is impossible to calculate precisely how great these costs of a carbon market system will be, but they will clearly be non-trivial. The market distortions caused by this hidden tax would inevitably have some negative impact on economic growth.

The “benefits,” however, are much easier to predict: none. That’s because the impact of the policy on greenhouse gas emissions would be so small that it could not reasonably be expected to have any impact whatsoever on the global warming phenomenon. The government aims, through this plan, to reduce Canada’s greenhouse gas emissions by 20 per cent over the next ten years. Since Canada emits two per cent of the world’s greenhouse gasses, this means that in 2020, global carbon emissions will be approximately 0.4 per cent lower than without this legislation.

Nobody, not even supporters of the policy argue this miniscule reduction will have any measurable impact on global temperatures. The question of whether or not global warming is a serious threat is, therefore, entirely beside the point in evaluating the wisdom of this policy. Even if one views climate change as a major problem, this costly plan would do little or nothing toward resolving it.

As with the Green Shift before it, the newest plan to combat global warming costs a lot and would do precisely nothing. As the Canadian economy struggles to recover after a deep recession, a hidden new “tax on everything” which will strain household budgets, restrict economic recovery and produce no tangible benefits is counter-productive. Environmental policy, as with all other areas of public policy, should be guided by the principle that government should only act if the benefits of a particular action are likely to exceed the costs. The carbon market scheme fails this test.