A carbon tax leads to actions and reactions

I’m an economist, so let’s start by assuming some stuff. First, we want less carbon dioxide. Second, governments need money for things like schools, hospitals, and roads. Third, governments raise money from taxes. They tax work through income taxes; they tax consumption through sales taxes; they can tax anything they want. Fourth, when governments tax things, it is less fun to do those things.

Working for a wage is less nice if the government takes a third of it, so maybe I work less; buying a bottle of wine is less nice if there is a 100-percent tax on it, so maybe I drink less.

Now, we can work backwards. We want to emit less carbon, and if things are taxed, we don’t do them as much. So, taxing emissions of greenhouse gases means fewer emissions. In addition, the government will have revenue from these taxes, which it can spend elsewhere.

A natural idea is to reduce tax rates on things that we really don’t want to discourage, like work. So, moving to taxing carbon emissions and reducing income taxes is simply acknowledging that we collectively want to discourage the emission of carbon dioxide and that we’d rather not discourage work.

However, there are many reasons to hate carbon taxes. Let’s consider a few. First, taxing carbon raises the price of fuel, which in turn raises the cost of living, especially for lower-income and nonurban families. This is easily undone by compensating these households for the increased price of fuel, for example by writing them a cheque. We can’t write such a cheque to every family—we’d run out of carbon-tax revenue.

But we can compensate a good chunk of them. We already give tax credits based on income status, such as the Canada child tax benefit, and we already give tax credits based on geography, such as the northern allowance. We even give refundable tax credits, such as the GST credit, to those who pay no income tax. Thus, those who argue that taxing emissions raises the cost of living for certain vulnerable groups could instead argue for big tax credits to a big group of families.

Second, taxing emissions legitimates emissions. If we set a price for emitting carbon dioxide, people will feel that it is “okay” to emit as long as they pay the price. Wouldn’t it be better to make emissions illegal and, by extension, immoral? Perhaps an anti-emissions campaign might work, like the highly successful antilittering campaigns of the 1970s.

Unfortunately, this is hard to implement, hard to coordinate internationally, and unnecessary. If we really don’t like carbon emissions, then we should really tax them a lot. A very high tax rate could greatly discourage these emissions. Thus, those who argue that carbon taxes legitimate carbon emissions could instead argue that what we need is a higher rate of carbon tax.

Third, some people and firms will try to evade a carbon tax and emit without paying. Have you ever been seduced by the sweet sound of “Pay in cash, no GST”? Of course, people try to avoid taxes, and the higher the tax rates the more they try to avoid. That doesn’t make it right, but it does mean that carbon taxes might not be fully effective and would have to be accompanied by some form of monitoring and punishments for cheaters.

Fourth, rich families may not adjust their behaviour at all. Who’d notice a few extra dollars to fuel up the Escalade? In contrast, low-income families may turn down the heat and get out of cars (if they have them). Is it really fair to make low-income people do all the work here? We can take the sting out of the unfairness in just the same way we can take the sting out of the increase in the cost of living: by writing people cheques. Think of this as rich people paying poor people to do the adjustment for them.

Fifth, some have argued that “cap and trade” (selling coupons to polluters) is better than taxes since businesses, rather than consumers, pay. Unfortunately, this difference is mostly illusory: businesses sell their stuff to people, and if their costs go up, the prices they charge go up. Because the atmosphere doesn’t care where greenhouse gases come from, we should probably put a price on all emissions, whether they come from businesses or from people.

Sixth, Canada is small, and British Columbia is even smaller. Can we possibly have an effect on global greenhouse-gas levels? Sadly, we cannot. However, there is potential for Canadians to lead by example. We have not been doing this up to now—in fact, we have been doing the opposite (think oil sands). But if we get moving and show that it can be done, it is easier for others to get moving. Schwarzenegger, Obama, and McCain are watching.

If you believe either that the world isn’t warming or that it is warming but decreasing emissions won’t change that, then maybe you think we needn’t bother discouraging emissions through taxation. However, with big chunks of ice dislodging from the major icecaps every day, it gets harder and harder to believe the first. And with the doomful scenarios that most climate scientists take for granted for the next century, we’d better hope that the second isn’t true.

Krishna Pendakur is a Professor   of Economics at Simon Fraser University, and codirector of Metropolis British Columbia (MBC), Center of Excellence for Research on Immigration and Diversity.