Juno News - Canada's inefficient and ineffective carbon tax

00:00:00.000 you're tuned in to the Andrew Lawton Show.

00:00:10.380 Let's talk about one of my biggest pet peeves,

00:00:12.680 and I suspect one that I share with a great many of you tuning in to this show,

00:00:16.880 the federal government's carbon tax,

00:00:19.160 or as it likes to call it, I believe, the Greenhouse Gas Pollution Pricing Act,

00:00:23.060 which is basically the tax on everything,

00:00:26.100 the tax on your fuel, on your gas heating at home,

00:00:28.820 the tax on anything you buy that's been produced in Canada,

00:00:32.300 on anything that's been shipped to you.

00:00:33.680 It is literally the tax on pretty much every stage of the supply chain,

00:00:38.960 and it's supposedly going to help save the world from the evil scourge that is a greenhouse gas,

00:00:44.940 but at the same time, this is also not something that I am as optimistic in,

00:00:50.040 and I know a lot of you aren't either.

00:00:52.200 Forgetting about the environmental side of the discussion here,

00:00:54.960 let's focus on the economic aspect.

00:00:57.500 A new report from the Fraser Institute says that this carbon tax that we have in Canada,

00:01:02.440 and in fact, most of the carbon taxes put in by very similar wealthy nations around the world,

00:01:07.460 don't actually economically meet the criteria necessary to say they are efficient and effective.

00:01:13.940 The report is Carbon Pricing in High-Income OECD Countries.

00:01:17.580 The author is Elmira Ali-Akbari, who's the Associate Director of Natural Resource Studies at the Fraser Institute,

00:01:24.680 and the author of this report.

00:01:26.380 Dr. Ali-Akbari, thank you very much for coming on.

00:01:28.880 Good to speak with you.

00:01:29.920 Thanks, Andrew, for having me.

00:01:32.440 So let's start off with what it was you really set out to find.

00:01:35.600 When you decided to bring together these countries around the world, what were you looking for?

00:01:39.540 So it's widely acknowledged that carbon pricing is the most efficient way to reduce greenhouse gas emissions

00:01:47.780 and address the issue of climate change.

00:01:50.780 However, some key conditions must be met for carbon pricing to be efficient,

00:01:56.600 or in other words, to be the least costly approach for reducing emissions.

00:02:01.560 The first condition is something we call revenue neutrality,

00:02:05.420 and that means that all the revenues from carbon pricing should be used to reduce other costly taxes in the system,

00:02:13.360 such as reducing personal or business income tax rates.

00:02:16.940 The second condition, which is also related to the first one,

00:02:20.780 is that governments should avoid subsidizing substitutes for carbon-emitting activities,

00:02:27.360 such as subsidizing wind and solar energy sources,

00:02:31.960 because subsidizing these substitutes will increase the cost of reducing emissions

00:02:37.600 and will defeat the whole purpose of carbon pricing,

00:02:41.220 which is allowing the market and prices to find the right substitutes.

00:02:48.160 And the third condition is that the introduction of carbon pricing

00:02:52.280 should trigger the repeal of the existing and corresponding emissions-related regulations.

00:03:00.100 We shouldn't be adding carbon pricing on top of existing regulations.

00:03:04.440 So in our recent study, we examined existing carbon pricing policies in 31 high-income OECD countries

00:03:12.840 to determine whether these existing systems meet the key conditions of a well-designed carbon pricing policy.

00:03:22.860 And we found that no country has implemented a well-designed carbon pricing policy.

00:03:29.300 More specifically, no country is using all the revenues from carbon pricing to reduce other taxes,

00:03:37.280 which help with, you know, improving economic growth.

00:03:41.200 Our study found that 74% of the carbon tax revenues collected in 14 countries on average

00:03:53.620 are simply used as general revenues for the government.

00:03:58.540 Only 14% of the carbon tax revenues, again on average, were returned to taxpayers.

00:04:06.280 And this suggests that, you know, existing carbon taxes are mainly used as a tool for governments to raise revenue

00:04:15.080 rather than a mechanism to reduce emissions in the most affordable way possible.

00:04:24.040 In addition, we found that no country that introduced carbon pricing

00:04:28.480 has eliminated the existing and corresponding GHG-related regulations.

00:04:34.780 In fact, most countries have done the opposite,

00:04:38.540 and they have introduced even new regulations following the introduction of carbon pricing.

00:04:45.760 Emission caps, clean fuel standards, renewable power mandates,

00:04:51.160 these are just some examples of these regulations that undermine the cost-effectiveness of carbon pricing policies.

00:04:59.500 I want to talk about some of the specifics you mentioned a moment ago about how the money is spent.

00:05:05.000 But before then, just getting to really the fundamental thesis of this report,

00:05:09.800 am I correct that you're not saying a carbon tax itself is a bad thing,

00:05:13.760 but just there's a right way and a wrong way to do it?

00:05:15.880 Or is it that so many of these mechanisms you think would be required for it to be better designed

00:05:21.040 are just not happening in carbon tax policies that we see around the world?

00:05:25.040 That's a really great point.

00:05:27.120 So, you know, most economists, including me,

00:05:30.000 believe that carbon pricing is the most efficient way to reduce greenhouse gas emissions.

00:05:34.480 But we believe that the way we are designing and implementing those policies are really important.

00:05:42.500 While tackling climate change is a priority,

00:05:45.720 we should really pay attention to the way that we are designing and implementing these policies.

00:05:50.940 If we have a well-designed carbon pricing policy,

00:05:54.900 we can reduce greenhouse gas emissions in an efficient and productive way.

00:06:01.440 And this is basically what our report is about.

00:06:05.100 So let's talk about how it's spent,

00:06:07.600 because I know this was a big part of the discussion in Canada

00:06:10.900 about whether the money that the government brings in through the carbon tax

00:06:14.640 had to be used for specific emission reduction programs,

00:06:18.880 or whether it could just go into general revenue.

00:06:22.080 Why does that matter?

00:06:23.160 I mean, in the sense of the effect a carbon tax would have on consumers, on industry,

00:06:28.040 it's the same.

00:06:29.140 How does it matter from an efficiency standpoint,

00:06:31.760 how the government spends the money?

00:06:34.460 So the revenue neutrality condition explicitly says that

00:06:40.240 the collected revenue from carbon tax

00:06:43.120 should be used to reduce other costly taxes in the system.

00:06:47.600 And the reason is that, and this is really important,

00:06:50.920 the reason is that, this is a bit technical, but I try to put it simple.

00:06:55.320 When we introduce a carbon tax or any other form of tax,

00:06:58.860 we create an economic inefficiency,

00:07:01.660 which results in something economists call deadweight loss.

00:07:05.520 Deadweight loss is a cost to society

00:07:08.540 resulting from an inefficient allocation of resources within a market.

00:07:14.140 So the idea is that when we are, basically, when we are having a carbon tax,

00:07:18.400 that creates some efficiency costs.

00:07:20.980 So to mitigate that efficiency costs,

00:07:23.180 we should be using revenues from carbon tax to reduce other costly taxes.

00:07:28.900 And, you know, when, for example, in Canada,

00:07:32.220 the federal government is now using its carbon tax revenues to kind of,

00:07:37.680 it's using 90% of its carbon tax revenues to recycle it back to households

00:07:42.940 through issuing lump sum rebates.

00:07:46.780 While issuing lump sum rebates, you know,

00:07:49.880 generates some economic efficiency benefits,

00:07:53.940 but the benefits would be larger, you know, if we reduce other taxes.

00:08:00.720 Many papers have shown that when we use carbon tax revenues

00:08:06.100 and recycle them back to the economy in a form of tax cuts,

00:08:10.160 that would result in greater economic efficiency

00:08:14.860 compared to a case where we just issue lump sum rebates.

00:08:20.060 So, and the intuition is also simple,

00:08:22.360 because remember those taxes, such as income taxes,

00:08:26.200 they discourage work, they discourage investment and savings.

00:08:30.680 So when we reduce those taxes,

00:08:33.160 we can help more with improving economic growth.

00:08:37.940 And that's why, you know, it's really important

00:08:40.560 that all the revenues that we are collecting from carbon pricing

00:08:45.100 should be used to reduce other taxes.

00:08:47.520 And this is not something that the federal government is currently doing.

00:08:51.900 One thing I'm curious about,

00:08:53.520 and in the list of countries against which you've compared Canada,

00:08:57.260 the 14 OECD countries that have implemented carbon taxes,

00:09:01.220 there's a huge range of what that actual tax rate is.

00:09:04.940 I think Japan was the lowest at $3 per ton of CO2 emissions,

00:09:10.260 all the way up to Sweden at, I think, 127 or so,

00:09:14.420 and Canada on the lower end at $15.

00:09:17.140 And I mean, obviously, as a Canadian taxpayer,

00:09:19.420 I just don't like tax in general.

00:09:21.080 So even if it's lower than other countries,

00:09:23.220 I would still say that there's a question of whether it's too high.

00:09:26.820 But are all of these countries comparable?

00:09:29.280 I mean, does Canada, with its industry that's heavily resource-focused,

00:09:33.240 have a place and have an ability to compare it with the economies

00:09:36.980 and greenhouse gas emissions plans in Sweden, Japan, and so on,

00:09:41.420 where they don't have that resource sector as strongly as we do?

00:09:44.700 So we cannot directly compare those taxes among countries due to some reason,

00:09:50.180 because there are differences in those programs.

00:09:52.940 For instance, in terms of, in some countries,

00:09:55.780 some sectors get compensation,

00:09:58.040 or some sectors get exempted from paying carbon taxes.

00:10:01.440 Or in some countries,

00:10:02.880 we see that the taxes apply to all the emissions basically generated in the country,

00:10:10.680 whereas in some other countries, it's only a share of emission,

00:10:14.120 a portion of emission, not the whole, basically, emissions generated.

00:10:20.120 So because of those differences within countries,

00:10:23.520 we cannot really directly compare those carbon taxes between countries.

00:10:29.640 So I guess the big question is, I mean,

00:10:33.380 are we talking about tweaks that could be made to Canada's carbon tax

00:10:38.700 in order to bring it alignment with what you're saying?

00:10:40.800 Or would it really have to go back to the drawing board

00:10:43.080 and start from scratch to qualify as being an effective and efficient plan?

00:10:48.280 Yeah, I think we can make some tweaks or reforms, you know,

00:10:52.220 to make it basically a well-designed carbon pricing policy.

00:10:55.980 Another main issue in Canada is that the federal carbon tax

00:11:01.180 is accompanied by so many other regulatory measures.

00:11:06.400 For example, we have a regulation,

00:11:08.480 and all those regulations have the same target or objective,

00:11:12.440 and that's actually the issue.

00:11:14.560 For example, we have a regulation to phase out coal-fired power plants by 2030.

00:11:20.100 We have a regulation on methane emissions in the oil and gas sector.

00:11:24.980 We have an ethanol regulation to reduce greenhouse gas emissions

00:11:30.800 in the transportation sector.

00:11:33.040 The federal government has also, you know,

00:11:35.520 proposed this sweeping regulation called clean fuel estender

00:11:39.620 to decarbonize fuel use in the country.

00:11:44.300 So all these regulations that have the same objective,

00:11:48.320 they have the same target.

00:11:49.640 When we accompany those regulations with the federal carbon tax,

00:11:54.780 all those regulations are going to increase the cost of reducing emissions

00:12:01.160 without generating any significant marginal benefit.

00:12:07.440 So that's one of the main issues with federal government's carbon tax.

00:12:12.600 The other issue is, as I discussed,

00:12:15.780 is that the way the federal government is recycling its carbon tax revenues

00:12:21.780 is not ideal.

00:12:23.340 This is not what economists have in mind.

00:12:25.760 The federal government should be using carbon tax revenues

00:12:29.360 to reduce other costly taxes,

00:12:32.000 such as personal or business income tax rates.

00:12:35.700 Again, this is not happening in Canada.

00:12:38.180 And we have also seen that the federal government

00:12:40.160 is now using 10% of its carbon tax revenues

00:12:47.160 to basically pursue some environmental goals

00:12:52.460 because that 10% goes to small and medium-sized companies

00:12:58.900 and some other organizations such as schools and hospitals

00:13:04.140 for their energy efficiency programs,

00:13:07.900 meaning that the government is kind of using that revenue

00:13:11.560 to pursue some environmental goals.

00:13:15.180 And this is not something that we should be doing.

00:13:18.760 Again, we should be having a well-designed carbon pricing policy

00:13:25.220 so that we can deliver emission reductions in an efficient way.

00:13:31.880 The report from the Fraser Institute,

00:13:34.040 Carbon Pricing in High-Income OECD Countries,

00:13:37.260 and you can check that out online.

00:13:39.540 We'll have a link in the description box.

00:13:41.600 The author of the report, Dr. Elmira Aliakbari,

00:13:44.400 Associate Director of Natural Resources for the Fraser Institute,

00:13:47.380 joins me on the line now.

00:13:49.120 Dr. Aliakbari, thank you very much for coming on today.

00:13:51.700 Great to speak with you.

00:13:53.680 Thanks for having me.

00:13:55.320 Thanks for listening to The Andrew Lawton Show.

00:13:57.480 Support the program by donating to True North

00:13:59.440 at www.tnc.news.

Juno News - October 23, 2020

Canada's inefficient and ineffective carbon tax

Episode Stats

Summary

Transcript