Philip Cross: The Ecofailure of the Ecofiscal Commission

Posted by: privatefinancetips in BLOG, Money Invested Mar 27, 2016

Fifteen months ago, the Ecofiscal Commission was launched, with some of Canada’s most renowned self-appointed commissioners which makes it their goal to reduce carbon emissions by developing a more effective tax system. By either of those two criteria, the project might be rechristened the EcoFailure Commission, since it has not made any progress on either.

How can I refer to it as a failure, when governments across the nation are poised to impose taxes on carbon, the widely used tool of commission chair Christopher Ragan and the merry gang of Ecofiscalists? First, the commission has abysmally failed to convince governments to offset higher carbon taxes with low income taxes, which has left us with tax grabs rather than a more effective tax system. Second, it has didn’t convince ordinary Canadians of the need to change their behaviour, without which carbon taxes won’t be high enough to change anything, especially when oil costs are collapsing and auto and gasoline sales are soaring. Third, the commission has ignored technological innovation, the real long-term method to increase energy efficiency, because of its single-minded devotion to controlling carbon emissions by trying out the cost system.

To reduce petroleum demand within this country would require either taxes that raise prices well above their 2014 highs or a recession in incomes such that Canadians couldn’t manage to consume at current rates. Gasoline prices today in many parts of the country are 30 to 40 cents a litre below their 2014 highs so, by itself, a carbon tax would need to boost prices by well in addition to that to reduce consumption (barring a recession). There is no government in Canada publicly considering a gasoline tax of 50 to 60 cents a litre. That would be political suicide.

The current carbon tax of a few cents a litre being proposed in Alberta, Ontario and Quebec, and already in effect in B.C., would be the modern equivalents from the papal indulgences issued during medieval times: a token paid to appease the conscience to have committed a sinful activity. To the degree that carbon taxes mislead people into thinking they’re alleviating an issue while still burning non-renewable fuels, they might worsen their desired outcome.

The Ecofiscal Commission doesn’t even hint in the tax increase that eventually is going to be necessary to meet its carbon ambitions. It trumpets studies that make believe you measure the responsiveness of emissions to carbon taxes, and we be aware of future emissions targets Canada is committed to achieving. However the commission will not meld the two to generate even a rough estimate of what it’ll cost you Canadian customers to hit the carbon target. This silence probably reflects the needed tax increase would be enormous, taking the whole idea of a carbon tax from the table immediately. There is much that is disingenuous about a Trojan Horse plan that aims to first get everyone onside with the idea of a carbon tax, simply to then slowly reveal the magnitude that will be required.

The Ecofiscal Commission doesn’t even hint in the tax increase that eventually is going to be necessary to meet its carbon ambitions

The real work the commission should be undertaking is the heroic task of convincing Canadians they have to accept sharply higher energy taxes to fundamentally alter their behaviour. Instead, the EcoFailure brain trust simply provides a convenient intellectual cover governments to engage in a tax grab that does nothing to address the long-run trend of rising fuel consumption. Convincing Ontario Premier Kathleen Wynne to raise taxes is child’s play, not a signature achievement.

Governments no longer even make believe you be designing a more efficient tax system, unlike the way in which B.C. did when it offset higher carbon taxes with low income taxes. Instead, cash-strapped governments in Alberta, Ontario and Quebec are simply raising carbon taxes without any offsetting cuts. And let’s be clear: Revenue neutrality means an equal decrease in other taxes, no equal hike in spending on the environment, as Rachel Notley’s government claimed in Alberta’s budget. Only within the warped realm of NDP accounting is a tax hike combined with more spending “revenue neutral.” Instead of being outraged that governments are so brazenly distorting its ideas, the EcoFailure Commission meekly watches in silence, lacking the courage of its own convictions the tax system ought to be designed more efficiently.

The timidity of governments in raising carbon taxes could also reflect the truth that they are fully aware the only real solution will come from technology (just like the means to fix traffic jam is driverless vehicles, not the street tolls Ragan advocates). However, as Steve Johnson noted in the book Where Good Ideas Originate from: The Natural Good reputation for Innovation, we lack a good theory of how innovation occurs.

Johnson argues that, contrary to assumptions, innovation may not be primarily driven by profit or high costs. Instead, innovations are likely to come in clusters as well as in areas researchers already are focusing on (“the adjacent possible” – extensions of the items innovators are already focusing on – not “lightning bolt” ideas without warning). This really is encouraging as there is lots of work actively happening in lessening greenhouse gas emissions, including inside the oil industry. Until such innovations occur, governments should drop the pretense that carbon taxes are about anything except raising their own revenues.

Philip Cross is the former chief economic analyst at Statistics Canada.