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Given the uncertainties and experiences in other regions, carbon taxation in Canada is currently far too risky

The Damage from a Canadian Carbon Tax



In the lead-up to international climate change summits and the 2015 Canadian federal election, various policy analysts have been trying to make the case for a national carbon tax in Canada. The Canada 2020 think tank has released such a study entitled "The case for a carbon tax in Canada." While one welcomes the debate on such an important topic, a number of statements made in this report require further discussion and -- in some cases -- corrections.
For example, the Canada 2020 report claims it is a "myth" that "carbon taxes are unpopular":
"In Canada and the US, 'tax' is often considered a four-letter word, such that it is politically toxic to consider increases in the rate of any tax. Some consider carbon taxes to be especially divisive, since they are highly salient and are aimed at tackling climate change, which is not a goal universally considered important. Indeed, one [sic] the political lessons drawn from Stephane Dion's failed election campaign in 2008 seems to be that support for a carbon tax renders a candidate unelectable. Of course, anecdotal evidence is a poor basis for important decisions, and at any rate, points both ways: Gordon Campbell was re-elected in British Columbia following his introduction of a carbon tax Polling results are perhaps more useful. The polling firm Environics has tracked stated support for carbon taxes in annual public opinion surveys since at least 2008, and finds that carbon taxes are supported by the strong majority of Canadians. Support is not limited to individuals either. Carbon taxes have been supported in a number of open letters from industry associations to government. For example, in 2010, the Canadian Council of Chief Executives wrote that 'governments at all levels should commit to a national approach to GHG reductions and carbon pricing.' This sentiment is echoed by 13 out of 14 industry associations in Canada surveyed for a report by Sustainable Prosperity. A national carbon tax even receives strong support from major oil and gas companies in Canada, who see it -- like others -- as the most efficient solution to reducing greenhouse gas emissions."
The claim that carbon taxes are not unpopular would come as news to Australians who voted for Tony Abbott's Liberal Party as they defeated an incumbent government over precisely this issue. Similarly, recent federal and provincial byelections have clearly shown voters prefer the non-climate alarmist candidates, and specifically rejected the alternative candidates who were openly advocating for formal carbon taxation. In the United States, the GOP victories in both houses of Congress during the 2014 mid-term elections demonstrated that voters south of the border were also rejecting climate alarmism, and by extension -- carbon taxation. Stefan Dion's decisive loss for the Liberal Party during the 2008 Canadian federal election also proves the point that carbon taxation is politically unpopular.

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In 2009, Gordon Campbell was indeed re-elected in British Columbia for the provincial Liberal Party after his government brought in a carbon tax in mid-2008, but to understand this victory one must examine the political alternatives that voters had. There was the far left New Democratic Party (NDP), which would have raised tax rates across the board, and the Green Party -- whose very goal is to phase out fossil fuels entirely via massive carbon taxation. Thus, BC voters in 2009 chose the lowest taxation possible since no true right-of-center option existed. Hardly evidence that carbon taxation is not politically unpopular. Shift forward to the 2013 provincial election in BC. The NDP ran on a platform of "planning to broaden the scope of the carbon tax." They lost, despite the public's widespread dissatisfaction with a tired and corrupt Liberal Party government and their dubious leader. Even the polling data cited in this Canada 2020 report doesn't really support the broad claims being made. When I recently looked at the Environics survey results in detail, it became abundantly clear that Canadians don't really care about climate change, and they most certainly don't carry strong support for carbon taxation -- including and especially in British Columbia. As for support by industry groups, this is to be expected for several reasons. Most importantly, it is a public relations stunt based on political correctness. In addition, these industry groups would simply pass the carbon tax on to consumers, and thus, they could care less about many of the downstream impacts. For the fossil fuel industries, support for a carbon tax is seen by the industry as a means of generating higher profits by way of mitigating opposition to resource development. We see this in Alberta. The province has been struggling for years to gain the social license that would facilitate further oil sands development and the construction of pipelines to export markets (e.g., Keystone XL, Northern Gateway, Energy East, and the Trans Mountain expansion project). The spin being played in the mainstream media is that opposition to these pipelines is driven in large part by the refusal of the Albertan and Canadian governments to substantially reduce greenhouse gas emissions. The convenient answer being put forward by the activists is that if the industry and governments support a broad and meaningful carbon tax, social license for the pipelines and corresponding oil sands development will be obtained. To the industry, this is now commonly -- but incorrectly -- seen as the cost of doing business. In other words, the carbon tax costs to the affected industries will be far outweighed by the economic benefits arising from the social license for pipeline construction and oil sands development in return. This is misguided and dangerous thinking by the fossil fuels industry. It reminds one of the "First they came..." poem made famous about the Nazis in World War II. Many carbon tax proponents have the stated goal of eliminating fossil fuel use in the near future, requiring the stranding of oil, gas, and coal assets. If the oil industry opens the carbon taxation door, it may not like what will come rushing through it. The opponents will not stop, and first the carbon tax will be modest, then it will be raised rapidly via a range of slippery slope arguments to a point at which further fossil fuel production in the jurisdiction becomes uneconomical. If provinces like Alberta and Saskatchewan think they can generate as much wealth from renewable energy as they can from fossil fuels, keep dreaming. Make no mistake about it: carbon taxation is the primary Trojan Horse on the way to asset stranding. As difficult as it may appear, the only option is for oil-producing jurisdictions to fight carbon taxation. If they lack the will to fight, they will ultimately lose the wealth they could have received for their non-renewable resources. The Canada 2020 report goes on to argue it is a myth that carbon taxation is regressive. This, too, must be vigorously disputed. On its face, carbon taxation is indeed regressive for the simple reason that lower income individuals and families generally spend a greater percentage of their income on energy than do those in higher income brackets. The response by carbon tax proponents is to make the tax revenue neutral -- thereby shifting wealth from higher to lower income brackets in an attempt to offset some (or all) of the carbon tax costs for the low income groups. Such wealth redistribution solutions are imperfect. There is wide variability in spending on carbon-based energy sources within lower to middle income groups, and it is not clear how redistributive carbon tax refunds can reliably account for this. Thus, some members of the low to middle income groups may see net benefits under a revenue neutral carbon tax regime, whereas other members of the same group may see a net loss. This potential lack of fairness can result in carbon taxation remaining regressive for some lower income groups.

Carbon taxes are job killers

Another supposed carbon tax myth -- at least according to the Canada 2020 report -- is that they are job-killers:
"Indeed, when carbon taxes have been discussed in recent House of Commons debates, they are almost always referred to as 'job-killing.' Yet, there is very little evidence that supports the idea that carbon taxes harm employment -- in fact the available evidence suggests the opposite. A useful recent analysis is based on the UK's Climate Change Levy (CCL), which is a tax on industrial fuel use that raises prices of energy by an average of about 15 percent. The study finds that the CCL reduced energy intensity in manufacturing plants by about 18 percent, but that there was no measurable effect on employment, total factor productivity, or plant exit. A similar study examines the impact of the European Union's Emission Trading System on German manufacturing firms, and finds the policy reduced emissions intensity by about 20 percent but had no identifiable effect on employment, gross output, or exports. Preliminary evidence from British Columbia likewise suggests that overall employment in that province increased as a result of the carbon tax."
On the contrary, Australia's unemployment rate spiked upwards immediately following implementation of its carbon tax. The effect was striking. After remaining approximately constant for the two-year period before the carbon tax was brought in, Australia's unemployment rate suddenly began a rapid rise coinciding with the carbon tax -- and the rate continued to rise right up to when the carbon tax was finally repealed this summer. Since the UK brought in its Climate Change Act, its economy is going backwards. So is that of Denmark. Among the G7 nations, greater carbon dioxide emissions reductions correlate with lower economic growth, and this extends to other economic groups around the globe. Nations with lower electricity prices have higher rates of economic growth, and reducing greenhouse gas emissions only drives up energy costs -- thereby harming the economy. As for British Columbia, since it brought in its carbon tax during 2008, its real per capita GDP, primary household income, and household disposable income have all underperformed the national average after outperforming the rest of the country before carbon tax implementation. Other economic indicators suffering in BC during the post-carbon tax regime include the rising levels of inflation, lower household saving rates, and the highest average consumer debt in Canada. The unemployment rate has risen in BC almost three-and-a-half times faster than the Canadian average since the carbon tax began, and BC's employment rate has declined almost twice as fast as the rest of the nation. All this evidence appears to support concerns that carbon taxes are job killers. The costs of carbon taxation are immense. As the Canada 2020 report notes, an "analysis for the National Roundtable on the Environment and Economy suggests that reducing greenhouse gas emissions by 70 percent by 2050 would require a carbon price between $200 and $350/t carbon dioxide." According to Environment Canada, "Canada's total greenhouse gas emissions in 2012 were 699 megatonnes (Mt) of carbon dioxide equivalent." At this emission level, a $350/t carbon tax would cost Canadians an astonishing $245 billion per year. The Canada 2020 report proposes an alternative:
"One potential choice for the level of carbon tax would be the social cost of carbon (SCC) as calculated by Environment Canada and counterparts at the US Environmental Protection Agency. The SCC is a measure of the present and future damage associated with emissions of greenhouse gases. Although there are significant uncertainties associated with the calculation of the SCC, it reflects our best current understanding of the external costs associated with activities that generate greenhouse gas emissions. By setting a carbon tax at the level of the SCC, Canada could cost effectively internalize the external costs associated with its greenhouse gas emissions. The current best estimate for the social cost of carbon is about $40/t CO2, and this value increases over time in real terms to about double that value by mid-century."
There is little chance the social cost of carbon has been accurately estimated. We lack the analytical tools and predictive capacity to reliably estimate the costs and benefits -- yes, there will be benefits -- of any anthropogenic climate change. The problems in this field start at the basic level: we cannot even reliably predict the climate (witness the nearly two-decade long pause in global warming), nevermind the complex suite of socio-economic and political impacts. These types of attempted predictions are a classic example of modeling hubris, and are of no practical value. We may as well consult a crystal ball instead. To base far-reaching economic policies on such unreliable projections is pure folly. The science isn't settled, and we should act -- or not act -- accordingly.


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Sierra Rayne -- Bio and Archives

Sierra Rayne holds a Ph.D. in Chemistry and writes regularly on environment, energy, and national security topics. He can be found on Twitter at @srayne_ca


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