After Stephen Harper’s recent announcement of a general election, Canadians will be heading to the polls on October 14th, 2008. With the environment likely to be a top issue amongst Canadians, the parties will no doubt debate their policies, trying to position their’s as the correct choice for Canada. I thought I would use this as an opportunity to write a series of articles on the choices we have, and what the major political parties are offering. Today’s article looks at carbon taxes.
Years ago, Arthur Pigou, proposed taxing actions that had a negative effect on society to accurately reflect the cost to society. Cigarette and alcohol taxes are useful examples of ‘Pigovian taxes’, as the base price of these products do not take into account the negative effects of smoking or drinking, which take the form of a lower level of health for the general population and thus increased costs for healthcare.
The rapid rise in man-made carbon dioxide emissions can be can be looked at as a market failure. Unlike, solid waste, or liquid discharges, greenhouse gas emissions in Canada have never had a financial cost associated with them. Disposing of solid waste incurs waste removal and dumping fees, while liquid discharges usually require extensive, anf often expensive, treatment before they can be released. Meanwhile, greenhouse gas emissions have been enjoying a free ride, silenty and steadily increasing the amount of carbon dioxide in our atmosphere. The result of this has been that the cost of an activity (e.g. driving) did not truly reflect the cost to our society. For example, a typical car running for 15,000km a year will emit more than 2 tonnes of carbon dioxide into the air, ultimately causing problems and costs to be incurred by future generations through global warming.
Most economists would argue that if we are going to have any chance of reducing the amount of carbon dioxide that we emit to the atmosphere, then we have to impose some sort of cost on emitting carbon dioxide. A carbon tax is one possible way of doing this.
Polluters of carbon dioxide would see an instant cost associated with their actions. As the tax increases, the cost to the polluter increases to the point where they will save money by investing in carbon reducing technologies. It’s a classic application of the Polluter Pays Principle. Carbon taxes are not a new idea, having been in use in Sweden since 1991. More recently, British Columbia introduced a tax of $10 per tonne of CO2 that became effective on July 1st, 2008. This BC tax will rise at $5 per year until it reaches $30 per tonne in 2012.
The cost of paying these taxes or implementing carbon reduction technologies will ultimately be passed through to the final user; that is average Canadians. Opponents of carbon taxes love to make a lot of noise about how Canadians don’t need to be taxed more, especially through one that would be hidden and disguised in the price we pay for goods and services. And this is true, we don’t. But a carbon tax doesn’t mean we have to be taxed more. We can design it to be revenue neutral.
Governments would have a new source of revenue from carbon dioxide polluters, and could use this extra income to reduce income taxes, as well as those on our investments. We would have more disposable income to spend, which would need to be spent on rising prices associated with the carbon tax, especially on our energy bills. However, we live in a free market and this gives us two unique opportunities.
Firstly, we could change our behaviour, and secondly, we are free to choose who we purchase our goods and services from. Those companies that are more efficient at reducing their carbon emissions will have fewer costs that they need to pass through to the final consumer, and purchasing those products or services over their less efficient competitors will represent a net cost saving to us.
Let’s use driving as an example. We have two driver’s, A and B. Both drivers earn the same amount of money and pay the same amount of tax. Before the introduction of the carbon tax, they both spend $1,000 a year on gas, and buy their gas from the same gas station. A carbon tax is introduced, causing the price of gas to go from $1 a litre to $1.25 a litre at their local pumps. The government gives everybody a $200 tax rebate to cover the cost of this increase.
Driver A doesn’t change his habits. He now spends an extra $250 a year on gas, slightly more than the $200 rebate he was given.
Driver B does change. She bikes to work one day a week, and uses 20% less gas. Because of the price rise, she actually spends the exact same amount on gas as he did before, but has been given $200 by the government to pay for it, which she can now put in the bank. On top of that, Driver B notices that a competing gas supplier has been able to reduce its carbon dioxide emissions more efficiently than his normal one, and that their gas has only gone up to $1.15 a litre. By changing her behaviour and rewarding companies who reduce carbon dioxide emissions effectively, Driver B can save over $300. She is also likely to consider buying a more fuel efficient vehicle when next purchasing one, saving her even more money.
Carbon taxes don’t have to increase the overall tax burden on a country, they just represent a 21st century shift in taxation to punish negative behaviour, and reward positive changes in peoples behaviour. Ensuring revenue neutrality requires that we have independent auditing of the system, a task well suited for the Auditor General.
The advantages of a carbon tax system is that is easy to introduce, and simple to enforce. It can be applied at all levels of our society, from large industrial emitters to individual Canadians. A forward plan for increasing the carbon tax gives individuals and businesses some element of cost certainty, enabling them to take this into account when making longer term purchases (e.g. truck vs. electric car).
The downside is that a carbon tax does not guarantee a reduction in emissions. The polluter still has the right to continue to emit carbon dioxide, albeit at a cost. A carbon tax has no legal requirement to reduce carbon dioxide emissions, only an economic reason to do so.
The ideal result of a carbon tax, is that we reduce the amount of carbon we emit. And if we don’t, then it raises additional revenue for the government to pay the inevitable costs of global warming. Emitting carbon dioxide isn’t free; we just haven’t been paying the bill.
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http://rel” rel=”nofollow”> Курьер After Stephen Harper’s recent announcement of a general election, Canadians will be heading to the polls on October 14th, 2008…..