Energy & Environment

Carbon Taxes: A Letter from Canada

Esso gas station in Richmond Hill, Ontario, Canada, in 2015. (Mark Blinch/Reuters)
Promises of revenue neutrality don’t survive contact with the real world.

Hey America,

It’s Canada, your friendly neighbor to the north. You might remember us — there’s a big white wall between our properties. But only in winter.

Anyway, we couldn’t help but notice you seem to be having a bit of bother over carbon taxes these days. At the risk of intruding, we thought we might offer a few neighborly observations. You see, we’ve had the same issue in our house for a few years now.

On your side of the fence, the Climate Leadership Council’s plan — recently backed by 27 Nobel Prize–winning economists and other economic luminaries — calls for a nationwide tax starting at $40 a ton on carbon dioxide emissions, on efficiency grounds. (All figures in U.S. dollars.) It vows that “the majority of American families . . . will benefit financially by receiving more in ‘carbon dividends’ than they pay in increased energy prices.” A tax that pays you sure sounds appealing! But a word of caution: If it sounds too good to be true, it probably is. Up here in Canada, we’ve been burned by the same promise.

Back in 2008, the province of British Columbia similarly proposed a carbon tax in the interests of economic efficiency and as a way to reduce greenhouse gases. The government promised that “every dollar raised will be returned to the people of B.C. in the form of lower taxes.” And for the first few years, it was true to its word. Tax revenue from the carbon tax was used to lower personal and corporate income-tax rates — and economists everywhere lauded the concept. A joint study by Duke University and the University of Ottawa declared B.C.’s plan to be “textbook policy.” Then politics happened.

After a few years, the B.C. government discovered that tiny annual cuts to personal and corporate tax rates weren’t as politically rewarding as originally thought. So, it switched to spending its carbon-tax revenues on higher-profile subsidy programs like film- and television-production tax credits. By 2013, the program ceased to be revenue neutral. And following a change in government in 2017, all carbon-tax revenue is now funneled straight into general revenues. B.C. taxpayers are thus the victims of a decade-long betrayal. Having agreed to a carbon tax based on the promise of strict revenue neutrality, they find that their so-called textbook carbon tax has become just another garden-variety government tax grab. Then again, maybe your Congress is more trustworthy than our parliaments . . .

Now our federal government is preparing to implement a similar scheme at the national level. In April, Prime Minister Justin Trudeau will impose a $14-per-ton carbon tax (now called a “price on pollution,” for branding purposes) on any province not already levying one — this includes Ontario, Saskatchewan, Manitoba, and New Brunswick. This tax rate will rise by about $7 per year until it hits $34 in 2022. To enhance voter appeal, Trudeau has unveiled a carbon-dividend system identical to that proposed by the tall foreheads at the Climate Leadership Council. Rebates of up to $450 per family are set to be distributed prior to our October 21 federal election. Nothing like a cash-payout scheme to improve a government’s reelection chances. Again, your Congress wouldn’t put politics first, would it?

The Trudeau government promises the average family will get back far more than they pay in new carbon taxes. Businesses are also subject to the carbon tax, but most large corporations have already arranged for themselves a system of rebates and exemptions totaling 80 to 90 percent of taxes paid. So how can consumers get more back than they pay while Big Business essentially gets a free pass? The answer is another one of those “gotcha” moments of economic idealism colliding with political expediency. Small and medium-sized businesses, lacking hefty lobbying budgets or a vote in the federal election, will be the ones left holding the bag for Trudeau’s carbon-tax grab. Ouch.

What’s more, according to Canada’s parliamentary budget officer, Trudeau’s proposed carbon tax could cut Canada’s economic output (GDP) by 0.5 percent by 2022 — despite all those claims of revenue neutrality and economic efficiency. But then again, no one really expects this tax to stop at $34. Reaching Canada’s Paris Agreement commitment of reducing greenhouse-gas emissions to 30 percent below 2005 levels by 2030 will likely require much higher tax rates — on the order of $135 to $205 per ton, according to a confidential government memo that was leaked to the media.

Whatever the tax rate, enthusiasts argue it’s better than the alternative. The Climate Leadership Council plan says “a sufficiently robust and gradually rising carbon tax will replace the need for various carbon regulations that are less efficient.” Here in Canada we hear the same thing all the time. Funny thing, though — while carbon taxes keep rising, nothing ever seems to happen to all those other encumbrances. We get higher taxes plus stifling environmental regulations.

The platonic perfection of an efficient, revenue-neutral carbon tax never seems to survive contact with the real world. Keep this in mind as you battle your own “textbook” outbreak.

Your neighbor and friend,

Canada, aka The Great White North

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