Canada the model for what not to do with carbon pricing

Canada is being touted as a potential “international beacon” of greenhouse gas (“carbon”) pricing, as several provinces, and the Canadian federal government, have implemented it in several forms.

In a recent op-ed in The Hill, Josha Macnab and Charles Komanoff waxed rhapsodic over Canada’s climate policies, exhorting governments there to plunge ahead with even more carbon pricing, while blithely dismissing potential negative economic impacts as trivial issues that can be resolved with “smart design.” Unfortunately what they fail to explain is why we should believe future carbon pricing initiatives will be “smart” when it has been anything but that up until to now.

Canada has pretty much proven that governments have no intention of getting carbon pricing right. To make pricing efficient and economically benign requires three conditions to be met that have been consistently violated in Canada. The first key is that carbon pricing must replace regulations, not simply be imposed on top. This has never happened, ever.

Another condition is that revenue neutrality should be achieved by cutting other distortionary taxes, such as personal or corporate income taxes. This also hasn’t happened (at least, not-consistently, even in the best example — British Columbia). Lastly, the revenues should not be used to subsidize emission reduction options that the private sector has rejected, because this undermines the whole logic of letting the market respond to the carbon price. This, unfortunately, has definitely happened.

As a recent bulletin from the Fraser Institute shows, none of the jurisdictions that have enacted carbon taxes in Canada come anywhere close to meeting these three conditions.

Consider Ontario’s cap-and-trade system. Needless to say, not one climate regulation is being repealed alongside its introduction, nor are any taxes being reduced. Instead, according to the Ontario auditor general, out of the $8 billion to be collected in four years, $1.32 billion will be earmarked to subsidize residential and business electricity bills. The rest will be spent on government pet projects — transit, subsidies to renewable energy, dubious efficiency programs, etc. Ontario is zero for three in its policy design.

Or consider Alberta. Alberta’s new carbon tax is $30 per tonne. Once again, no regulations are being repealed. The tax is expected to generate almost $3.9 billion from 2017 to 2020. Some of that will be used to subsidize Alberta’s emitters, and a small portion will be given to low-income Albertans, ostensibly to ease the pain of higher power bills. The rest will be spent on government’s pet projects. Again, zero for three.

Then there’s Quebec, which has a cap-and-trade system that has brought in $330 million, but is expected to bring in $2.5 billion by 2020 (probably more, as it will have to match the escalating national price floor established by the federal government). Where does the revenue go? Free permits are given out to emitters, while the remaining revenue is to be spent on “programs to fight climate change.”

Finally, consider the much-vaunted BC carbon tax. A recent study by the Fraser Institute verifies that in this tax’s early years, it was truly revenue neutral. Personal and corporate taxes were reduced and additional tax reductions were introduced to ensure full recycling of the proceeds. But by 2014-15, only five years into the tax system, revenue neutrality was gone and the government had taken to creative bookkeeping to disguise that fact.

Subsequent to the Fraser study, the BC government has restored revenue neutrality in the overall economic sense. But a closer look at the details shows that, rather than cutting other tax rates, the government has tinkered with boutique measures targeting specific subgroups of the population through special interest tax deductions, like a children’s fitness credit, industrial property tax credits and a school property tax reduction for farmland.

Needless to say, the carbon tax was simply layered on top of other regulations, rather than replacing them.

Canada’s experience with carbon taxes does indeed serve as a beacon to the world, mostly casting light on the bait-and-switch tactics of carbon price-peddlers. While there are valid arguments for efficient and economically-benign carbon taxes, governments have shown no interest in establishing or maintaining them.

Rather, hunger for new revenues and the inevitable central planning conceit of politicians distorts carbon pricing into just another political tax-and-spend program, this time, under the undeserved halo of saving the planet.

Kenneth Green is senior director of natural resource studies at the Fraser Institute, a Canadian libertarian think tank. Ross McKitrick is a professor of economics at the University of Guelph in Ontario and a senior fellow at the Fraser Institute. 

The views expressed by contributors are their own and not the views of The Hill.