Carbon taxes offer economic pain for little to no environmental gain
Unilateral actions by individual countries are totally futile
Alberta premier Alison Redford has found a new love (at least she did before she withdrew her affections) — for a national carbon tax, or at least, a carbon levy scheme similar to that enacted in Alberta. According to Postmedia News, “Redford said she would like to see the federal government adopt a strategy similar to Alberta’s $15-per-tonne carbon levy on large industrial emitters that are unable to meet their greenhouse-gas reduction targets, with the cash then used to improve environmental outcomes. ‘We think that’s the right approach,’ ” the premier opined. Ms. Redford isn’t the only conservative to go for carbon-pricing schemes lately — the idea has also gained cachet among an array of retired conservative politicians and business leaders in the United States.
Alberta’s carbon levy isn’t exactly a carbon tax, but the more that national carbon taxes are discussed, especially in the U.S., the closer we are to facing their implementation. As carbon taxes have entered the discussion with regard to U.S. economic reform, Canada might soon find itself having to harmonize with an aggressive U.S. carbon tax regime. That makes this a good time to review the problems with carbon taxes, which are significant.
First there would be very little environmental benefits to unilateral greenhouse gas emission reductions by Canada, whose share of global emissions is tiny.Canada’s 2010 net greenhouse gas emissions were 692 megatons in 2010, unchanged from 2009, and accounted for only two% of global greenhouse gas emissions. Cutting that in half (which would require a very stiff carbon tax) would do almost nothing to alter the trajectory of future climate change. The tiniest growth spurt in China’s vast economy would render any emission reduction that Canada might accomplish meaningless.
But while a carbon tax would have little or no environmental benefit, it could cause plenty of pain. One study conducted by the U.S. National Association of Manufacturers, examined a $20 per ton carbon tax, and estimated it would shave 0.4% off of U.S. GDP in the near term, rising to 0.6% by 2053. If one set the tax to reduce emissions by 80% over that time frame, which some environmentalists say is necessary, they estimated eventual losses of 3.6% of U.S. GDP. At the lower end, a recent study conducted by the University of Calgary School of Public Policy estimates that an energy tax imposed on the Canadian economy at a level that would achieve an 18% improvement in energy intensity (a much more modest endeavour) would impose GDP losses up to 0.61% and a decrease in the number of firms up to 0.61% depending on how the tax is levied. Of course, how carbon tax revenues are “recycled” can influence how much (or how little) economic damage they may cause.
Carbon taxes are also regressive, that is, they harm the poor more than the better off. A study published by the U.S. National Bureau of Economic Research found that “Although wealthier households would pay more in absolute terms, as a percentage of annual income, lower income groups bear a disproportionate share of the burden [of a carbon tax]. The poorest quintile’s burden (as a share of annual income) is 3.2 times that of the wealthiest quintile’s.” A 2008 analysis of a $30.00/tonne carbon tax conducted by CUPE suggested that the poorest quintile in Canada would lose 1.7% of household income, while the top quintile would lose only 0.86%.
And as the Canadian Centre for Policy Analysis (now known as The Arthur Meighen Institute for Public Affairs) argues in Eight Arguments Against a Carbon Tax, a unilateral carbon tax would harm Canada’s economic competitiveness: “A carbon tax is a cost that all businesses will incur, either directly or indirectly.Higher production costs will reduce the competitiveness of Canadian products and services in international markets resulting in lost jobs…. The negative impact of a carbon tax will be more serious because it will reduce competitiveness, not just relative to industrializing countries like China, but to our other trading partners such as the U.S.”
Whether or not one believes that climate change is a modest, moderate or major threat, unilateral actions by individual countries — particularly small countries such as Canada — offer virtually no benefits, but considerable costs. And the idea that such actions will “lead by example” flies in the face of what is now 20 years of experience with efforts to implement global greenhouse gas control regimes. When it comes to climate policy, nobody is playing “follow the leader.” Carbon taxes, far from being the panacea that many portray them as, offer economic pain for little to no environmental gain.
Kenneth P. Green is senior director, energy and natural resources, at the Fraser Institute.