Is a Carbon Tax the Best Way to Reduce GHG Emissions?

Jennifer Winter the assistant professor of economics at the University of Calgary says YES.

Greenhouse gas (GHG) emissions—and the corresponding effects on climate—are a global problem. Canada is part of the solution.

Let’s be honest: There are real economic costs from reducing emissions, and real economic costs from failing to do so. Lowering emissions also has benefits beyond monetary ones. Our challenge—and it is a complex problem—is to balance the benefits from reducing emissions (avoiding costs from inaction) with the costs of enacting policies to cut emissions.

Whether to take action at all is primarily a moral question: Do we want to incur costs when we don’t reap all the benefits? This question is largely settled in Canada, so let’s turn to the practical. How should we address the problem of emissions?

Numerous policy approaches can reduce emissions: pricing through taxes or a cap and trade system, regulation of emissions or technology, and subsidizing non-emitting economic activity. Each of these approaches has costs and will affect different parts of the economy differently, including differential effects on households and firms.

The problem of emissions is what economists call an externality. This means that as individuals and firms, we do not bear the full cost of our actions, the costs we impose on others. The role of government policy here is to ensure firms and individuals do take into account these social costs. This means incentivizing different behaviour through prices or regulations.

What’s often lost in the debate about Canada’s targets and policy choices is the relative merits of each approach. Our goal is to have a strong economy while reducing emissions, minimizing overall economic consequences and preserving our international competitiveness; that means trade-offs. And 100 per cent emissions reductions are not necessarily desirable.

Pricing emissions in the form of a tax is the simplest and lowest-cost way to reduce emissions. Compared to other approaches, a tax means lower costs and impacts on households and businesses. This in turn means sacrificing some economic growth while preserving the incentive to reduce emissions. Other approaches such as regulatory action, which do have more certainty, introduce distortions into the choices of households and firms. This lowers overall productivity, stifles innovation and requires governments to pick winners and losers. Regulatory approaches and even cap and trade systems also have administrative costs, which are borne by firms and governments.

The Government of Canada’s (and many provinces’) main policy lever is a carbon tax. However, the politics of carbon pricing are tough, although needlessly so. Other approaches will impose unnecessary (and avoidable!) costs with an equivalent amount of emissions reductions. The only political benefit is hidden costs. Just because these costs are hidden makes them no less real.

 

Ian Urquhart the professor emeritus of political science at the University of Alberta says NO.

My answer begins with another question: Do you believe we must reduce greenhouse gas emissions significantly by 2030? If, like me, you answer “yes” to the second question, then you must answer the original question with a resounding “no.”

In the real world, outside economists’ classrooms, carbon taxes have failed miserably. I don’t dispute the economic efficiency of carbon taxes. But their efficiency is worthless if governments don’t have the political will needed to implement them at levels that significantly reduce GHG emissions. Governments don’t have that will.

Evidence that the carbon tax approach is failing is as plentiful as parkas in February in Alberta. The Organisation for Economic Co-operation and Development surveyed efforts of 42 member countries to use carbon pricing to reduce GHG emissions. They reported “today’s carbon prices, while slowly rising, are still too low to have a significant impact on curbing climate change.” Alberta’s $30 per tonne carbon tax isn’t reducing GHG emissions here. For example, it hasn’t increased public transit use. In 2017 Calgary Transit reported 101.9 million trips-an 8 per cent decline from 2014. Edmonton saw a ridership decline of 3 per cent. Meanwhile, gasoline sales in Alberta have remained flat over these years.

How high must a price on carbon be? The Intergovernmental Panel on Climate Change estimates that globally, in current US dollars, carbon prices would need to be $157 per tonne in 2030 to keep the average global temperature increase at or below 1.50C. In 2050 it would need to be US $285 per tonne.

In Canada, would a less expensive carbon tax be sufficient to honour Canada’s 2015 Paris commitment to emit 30 per cent less GHG than in 2005? No. Economists dispute Ottawa’s claim that a $50 per tonne tax by 2022 “will contribute to substantial emission reductions.” Marc Jaccard, for example, concluded that a purely carbon tax route to reach Canada’s target would require a national carbon price of $200 per tonne by 2030.

One word explains the inadequacy of carbon tax efforts: politics. It’s likely suicidal for a contender for political power to be honest with electors and tell them how high carbon taxes need to be in order to reduce GHG emissions significantly.

If carbon taxes are toxic to electoral success, what should we do? Although Alberta’s climate change ambitions are woeful, one plank of the province’s 2015 climate change plan should be emulated: eliminating coal-fired electricity and establishing a target for renewable energy production. In these initiatives the government’s environmental regulation focused on outcomes rather than the means or technologies. The province left it to utility companies to decide how those GHG emissions goals would be reached. Apply this approach to transportation, industry and buildings, and there may yet be hope to reduce our GHG emissions significantly.

 

Jennifer Winter responds to Ian Urquhart

Dr. Urquhart’s arguments against carbon taxes are nothing new. People in favour of emissions reductions but who prefer government regulation rest their case on three main points: that carbon taxes “don’t work,” the politics are hard, and current (pricing) policies are insufficient to meet Canada’s and Alberta’s emissions-reduction targets. I address each point in turn.

To say carbon taxes “have failed miserably” is disingenuous at best and fallacious at worst. People and businesses respond to incentives; we have overwhelming evidence of this fact. Carbon taxes are an incentive-based policy, and they do “work.” The size of the incentive, of course, depends on the scale of the price. We shouldn’t expect to see large behavioural changes at $10 or $20 per tonne, but that doesn’t mean the incentive isn’t working.

Dr. Urquhart’s supposed evidence, such as flat transit ridership numbers, is wholly insufficient to claim carbon taxes have failed. What matters for evaluating a policy’s effect is not just what we currently observe, but what actions would be in the absence of the policy (business as usual). Mounting evidence from economists analysing exactly this question shows that even at small levels, carbon taxes reduce emissions relative to business as usual. Numerous independent academic studies suggest BC’s emissions are 5–15 per cent lower with the tax than without.

Turning to the politics of carbon taxes: With all due respect, Dr. Urquhart is part of the problem. Repeating the trope that politics is hard is a self-fulfilling prophecy. All policies have winners and losers, and politicians must justify those trade-offs every day. Yes, the politics of increasing costs via carbon taxes may be difficult to sell, but true leaders make tough decisions. We shouldn’t excuse politicians who shy away from their responsibility to make tough decisions or who obfuscate the true costs. For example, Saskatchewan premier Scott Moe, interviewed by the New York Times, said of Canada’s carbon tax, “This is not in any way, shape or form an effective environmental policy—it is only a policy that costs families money unnecessarily.” This statement is false—and yet remarkably similar to some of Dr. Urquhart’s arguments.

The politics can work, and it depends on how carbon taxes are designed and framed. Gordon Campbell won re-election in BC after implementing a carbon tax, and his victory is partly attributed to the carbon tax itself. Politicians have many options to mitigate the impacts of carbon taxes (rebates or lowering other taxes, to name a few) and to frame the tax in a positive way. Part of framing carbon taxes means discussing revenues, which are both a benefit and a challenge. Revenues give governments more fiscal flexibility: mitigating cost impacts on households and businesses, investing in further emissions reductions, supporting overall spending, or some combination of the three. (The appropriate use of revenue depends on political values, policy goals and a province’s fiscal state, among other factors.) The challenge is that those revenues come from explicit and transparent cost increases to businesses and households. But that very transparency is also a benefit: It’s easy to determine how much revenue is raised from a carbon tax and, correspondingly, how it is spent.

The transparency of carbon taxes also allows us to identify exemptions from pricing, special treatment and other policy gaps. These details are important for ensuring fairness in policy implementation.

We face the choice between explicit emissions pricing or opaque and more costly regulations. Businesses are already complaining about the prevalence and overlap of regulation—do we really need to add more when a much simpler approach is available to us? Carbon taxes, with a clearly defined and increasing price schedule, provide certainty to businesses and households. Let’s stop talking about the costliness of carbon taxes relative to no action, and start discussing how carbon taxes compare to alternative policies.

Finally, let’s discuss targets and our ability to meet them given current policies. Canada’s and Alberta’s existing carbon taxes are insufficiently stringent to meet our emissions reduction targets; no one disputes that. Meeting those targets requires more stringency, regardless of the policy choice. An increasing carbon tax will meet that goal while minimizing negative effects on the economy. There may be a role for complementary policies where emissions are difficult to price, but our primary policy lever should be a carbon tax.

Targets also have the problem of being artificial political goals. We run the risk of going down the path of emissions reductions at any cost, instead of emissions reductions where the benefits exceed the costs. Environment and Climate Change Canada has estimates of the monetary value of damages from climate change, or the benefits from avoided emissions (called the Social Cost of Carbon, or SCC). Current carbon prices are in line with the SCC, and central estimates between now and 2050 are much lower than the required price increases needed to meet Canada’s targets. Increased stringency is a political and moral question independent of the policy tool used.

Smart policy design will enable Canada to reduce emissions while minimizing economic impacts. A carbon tax is the way to do that. The world won’t end with a steadily increasing carbon tax in Canada or Alberta, even one that goes above $50 per tonne post-2023. It’s time to be practical, listen to the evidence and use the best tool in our toolbox.

We run the risk of going down the path of emissions reductions at any cost, instead of emissions reductions where the benefits exceed the costs.

Ian Urquhart responds to Jennifer Winter

When Dr. Winter appeared before a Senate committee just over two years ago she noted how important it is for academics to offer “accessible lay-language explanations of the policies and consequences” when discussing carbon pricing. It’s very good to see that she is participating in a forum like this one.

Dr. Winter begins by implying that Canada has committed to join the global challenge to reduce greenhouse gas emissions. I’m less confident of this commitment. Rhetorically and symbolically, Canada has called for reducing greenhouse gas emissions for more than a generation. But substantively, as Canada’s Environment Commissioner and provincial auditors general reported nearly a year ago, our country hasn’t met any of its international GHG reduction commitments. There’s a good reason why the consortium that created the Climate Action Tracker website ranks Canada’s actions to date as “highly insufficient.” It’s because Canada has never walked its GHG emissions reduction talk.

But assume Dr. Winter is correct. Canada is committed to address the threats posed by global warming. Is carbon pricing an effective tool to address those threats? Here Dr. Winter writes: “Pricing emissions in the form of a tax is the simplest and lowest-cost way to lower emissions.”

This statement omits two crucial points. First, if a carbon tax is going to reduce emissions, it must be high enough to change behaviour; it must be dear enough to reduce fossil fuel use. Québec’s 2007 carbon tax of $3 per tonne of CO2 exemplifies how carbon pricing may check the economist’s “cost-effective” box but fail to reduce GHG emissions at all. In their comment on Québec’s tax, economists Jaccard, Hein and Vass suggest that none of their disciplinary colleagues should regard this cost-effective tax to be effective in reducing GHG emissions.

Some carbon tax enthusiasts might be tempted to point to British Columbia as a case where GHG emissions were reduced through a carbon levy (as Alberta prefers to call this tax). Here I have to concede a little ground. BC introduced an escalating carbon tax in 2008; the tax went from $10 per tonne in 2008 to $30 per tonne in 2012. It remained there until April 2018, when the Horgan government increased it to $35 per tonne.

According to the latest national inventory of GHG emissions, BC emissions in 2016 were 60.1 million tonnes. This was 2.8 million tonnes—or 4 per cent—lower than BC emissions were in 2008, the year the tax was introduced. There is certainly a correlation between the introduction of BC’s escalating tax in 2008 and a decline in GHG emissions. But this tax, and other measures, only reduced BC’s emissions marginally. If marginal progress was BC’s ambition, then the tax looks successful.

But was it effective in reducing GHG emissions significantly? Hardly. Most importantly, despite the carbon tax, BC is unable to fulfill its 2020 ambition. That province’s legislation stipulated that, by 2020, BC’s emissions would be 33 per cent below 2007 levels. That goal, like all federal targets to date, is now in the dustbin.

BC’s marginal success leads to my second point. If carbon pricing is crucial for Canada to be “part of the solution,” carbon taxes must do more than reduce emissions by marginal amounts. They must deliver on Canada’s international commitment. At the 2015 Paris climate conference, the Trudeau Liberal government embraced the 2030 greenhouse gas emissions reduction goal set by the Harper administration. The Liberals committed to reduce emissions to 30 per cent below 2005 levels in what, as of today, is just over a decade’s time. That goal amounts to a 27 per cent reduction from 2016 emissions levels (this gap reminds us emphatically of how little this country has done on the emissions reduction front).

It’s on this second point where I find Dr. Winter’s argument especially frustrating. Since the professor advocates carbon pricing, I expected her opening position to say how high carbon taxes need to be to fulfill Canada’s international obligation. Or where carbon pricing had produced the significant greenhouse gas emissions the scientific community regards as essential. Those discussions aren’t offered.

Dr. Winter said before the Senate in 2017: “So, based on even $50 a tonne, it’s unlikely that it will be sufficient to change behaviour enough to meet Canada’s emissions targets.” If not $50 a tonne, then how much a tonne? If the tough politics of carbon pricing are really, in her words, “needlessly so,” I would urge carbon tax advocates to estimate how high an effective GHG-emissions-reducing carbon tax must be.

All of this brings me back to the essence of my initial position. If we’re serious about making a positive contribution to meeting the existential challenge global warming poses to people in Canada and abroad, we shouldn’t be putting most of our eggs in the carbon tax basket. We should look instead to emulate the regulatory measures—prohibiting coal-fired electricity generation, tightening vehicle emissions standards/requiring automakers to produce a certain percentage of low/zero-emission vehicles—that we know produce real reductions in carbon dioxide emissions. We should appreciate the enduring truth in what the Harvard Business School’s Michael Porter said decades ago. Strict, goal-focused environmental regulations that leave the choice of means to business and other actors can stimulate innovation; they can be good for the environment and the economy alike.

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