Ross McKitrick: How politicians wrecked the case for carbon taxes

The existing policy framework has destroyed the chance for carbon taxes to achieve efficiency

In his March 2 article, “The cheapest method to cut carbon,” economist Trevor Tombe presents the basic logic of emission taxes as applied to CO2. In theory, a uniform carbon price would minimize the price of emission reductions since it would prompt emitters to recognize and implement abatement options that are less expensive in the margin than make payment on tax. Letting the market find cheap abatement options underneath the guidance of the uniform prices are, theoretically, a neat method to cut emissions at the lowest possible macroeconomic cost. Traditional regulatory measures, which economists call command-and-control, cannot accomplish this.

That, at any rate, is the theory. And in theory, as Yogi Berra said, there isn’t any distinction between theory and practice, but in practice there is. The problem using the theory of carbon prices are that, in Canada, the present policy framework has destroyed the chance for taxes to attain efficiency.

The textbook theory assumes that the carbon tax is implemented rather than, this is not on top of, command-and-control. If command regulations already exist, they first have to be removed before imposing the tax. Otherwise, adding emission taxes doesn’t fix the inefficiencies, it just exacerbates them. So when the Ecofiscal Commission yet others call for carbon taxes, they are not adding to better environmental policy-making; they’re proposing to create a bad situation worse.

The existing Canadian policy framework includes a host of command-and-control regulations which have imposed co2 abatement at way over any reasonable estimate of the appropriate tax rate. The government ethanol mandate is one example. Not too long ago my colleague Doug Auld and I published a study showing that greenhouse gas reductions from corn ethanol production cost between $400 and $3,300 per tonne. Adding one more tax on fuel won’t fix that, it’ll just increase the distortion at the margin.

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A 2013 study I did for the Fraser Institute showed that Ontarians were incurring over $4 billion per year in costs associated with the Green Energy Act, the centrepiece of which was the move to phase out coal-fired power plants. The province’s underlying study showed there would be very little resulting improvement in air quality, but it has instead pointed towards the approximately 25 megatonne carbon-equivalent reduction in CO2 emissions as the main rationale. At the time of my read the switch to renewables had only led to replacing under one-third of the generating capacity lost when the Lambton and Nanticoke power plants were lost. Spending $4 billion to eliminate 8 million tonnes of emissions implies an expense of $500 per tonne. Once more, adding a carbon tax (or tradeable permits, as Queen’s Park is proposing) to the Ontario electricity grid is only going to amplify these costs without introducing any new efficiencies.

Tombe argues that the national minimum carbon price would be a good idea. A far better idea, however, would be a national maximum carbon price, and a pledge to eliminate all the regulatory abatement measures that exceed it. This would be much closer to what a carbon tax should really do.

There isn’t any credit in calling for the introduction of carbon taxes if one has not first helped in the much harder task of employed by the removal of the policies that created the conditions in which carbon taxes can’t function. I’ll believe the Ecofiscal Commission is seriously interested in improving the economic efficiency of Canada’s environmental policy framework when it starts putting just as much effort into publicly criticizing the Notley government’s plan to phase out coal in Alberta, or even the federal ban on B.C. coastal tanker traffic, or even the Quebec campaign from the Energy East pipeline, because it does into with new taxes on Canadian firms and households.

Out of nowhere, carbon pricing has become a political fad. All the government’s favourite experts and beautiful people are aboard. However the underlying theory simply does not back up the superficial claims being thrown around. Carbon pricing might help control some aspects of the expense of reducing greenhouse gas emissions, only in certain circumstances and not in the ways typically being claimed in Canada.

Ross McKitrick is a professor of economics at the University of Guelph and chair of Energy, Ecology and Prosperity at the Frontier Centre for Public Policy.