The facts of carbon taxes - Andrew Lawton with Dr. Ross McKitrick
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Summary
In this episode, we're joined by Ross McKittrick, an economics professor at the University of Guelph, to talk about the economics of a carbon tax and whether or not it's a good idea.
Transcript
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One of the big issues that we know, because we've been covering it extensively, that is
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going to I think and I would say I hope be one of the defining issues of the federal
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election campaign is the carbon tax and really this idea not only of whether the federal
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government should impose one, but more specifically whether this is an effective way to do all
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of the things that governments are saying it does and we see battles going on in the
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court system specifically with Ontario and Saskatchewan, but we're going to have a political battle
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here and I wanted to talk about not the politics of it, but the economics of it.
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Do carbon taxes work and are we actually looking at policies that are going to make the economy
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Very pleased to be joined by Dr. Ross McKittrick, who's an economics professor at the University
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This idea that we've often been presented by politicians, specifically in Ontario years
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ago, was do we go for a cap and trade or do we go for a carbon tax?
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And I've always been in the why do we have to do either?
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I mean, why are we picking between a gun or a knife on this?
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But let's talk about this because oftentimes this is a political discussion that never really
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gets to the science or the economics of it, which I know must be infuriating for you.
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Now you can ask the question cap and trade versus carbon tax if you've got to the point
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where you've decided we're going to do one or the other.
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And in that case, economists by and large much prefer carbon tax to cap and trade.
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The cap and trade system, it works best when emitters have a lot of flexibility in how
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they would reduce emissions and a lot of options.
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But in the case of carbon dioxide, there's really no way to reduce emissions except scaling
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And so as a result, the cap and trade system, because it doesn't have that flexibility, you
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get a lot of price volatility and the cost to the public goes up quite a bit.
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The carbon tax approach, you still don't have much flexibility for the emitters in terms
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of their abatement options because carbon dioxide, the technology just isn't there to
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But you can manage the price volatility because you are in control of the price.
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And so as a result, again, just a comparison of those two systems, carbon taxes work better
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Now getting to the larger question, and I agree with you, and if it's presented as, well,
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we've decided we have to do one or the other, so we should pick, I do think, no, we can't
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skip past the first question, which is why are we doing either one?
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And are the costs worth it given what we expect to benefit from this?
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And when you ask specific questions like that, most climate policy comes out looking rather
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So let's talk about the idea of whether we can benefit.
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Because one argument that I've heard, which I think has merit, is that if you even take
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the alarmist view that man-made global warming is a giant threat, that it's being caused by
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greenhouse gas emissions and all of this, and we accept that it face value, you also have
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to accept that Canada is such a tiny fraction of a percent of where the problem is coming
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So is it something that a country like Canada should do?
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Because the flip side of that is that you don't want to do nothing if that, if we accept
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So in order to steer away from terms like alarmist and denier, I prefer to just stick with the
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So if you stick with mainstream science, mainstream economics, what you would get is an estimate
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that by using fossil fuels, releasing carbon dioxide emissions, you're causing social costs
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on the scale right now of maybe $30 to $40 a ton.
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And then, you know, we quibble about how the numbers are arrived at, but let's, but if we're
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just going to go with the mainstream off-the-shelf numbers, that's what it would be.
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So at $30 to $40 a ton, then there's a moral argument for saying, okay, then the people doing
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The economic argument though is to say, okay, you should charge up, but your emissions aren't
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Like that translates into a couple of cents per liter of gas.
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And also, you shouldn't layer on top of that a whole bunch of other regulations.
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So the whole economic efficiency arises because you put, in this case, a carbon tax in place,
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You don't couple it with a whole bunch of, you know, with ethanol mandates and coal phase
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out and renewable energy subsidies and electric vehicle subsidies and all these other climate
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It's in all of those directions where you're imposing policies that cost hundreds or thousands
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So when we talk about a carbon tax, the proponents of carbon taxes in Canada, they evade this point.
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They like to say, well, we have Nobel Prize winning economics on our side on behalf of
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You have solid economic arguments on behalf of carbon tax, but only if you first repeal
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If you keep all those policies in place, carbon tax doesn't reduce emissions very much and
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So we're having a discussion in Canada about whether we should have a carbon tax in a regulatory
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context where we know the carbon tax doesn't make any sense and doesn't accomplish anything.
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And so that, as an observer of the way the policy has developed over the years, I find that
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That's actually a valid point because if you view this in an economic context, there
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There's a cost of really dealing with oversight of all of these different things.
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There are a lot of people though on that environmental side that would say you can't quantify that.
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You can't put a price tag on that, even if you can put a price tag on it, but it's worth
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it whatever it costs because it's the environment.
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Whenever you do environmental policy, you have to put a price tag on the benefits and
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you can argue whether it's a good number or a very uncertain number.
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Because they're trying to sell, it sounds like more of a moral price tag than a monetary
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Any decision you make to either take an action or not take an action on an environmental
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issue, you're either explicitly or implicitly putting a price tag on it.
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So the best thing to do is be explicit about what the price tag is you're using.
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So if we take the ethanol mandate for instance, that's a policy where if it even reduces emissions,
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which isn't necessarily the case, but on the best case assumption, the emission reductions
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from the ethanol mandate for greenhouse gases are probably around $2,000 a ton.
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And so if we go back to the point of saying, well, we're not going to put a price tag on
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You said these emission reductions are worth $2,000 a ton out of people's pockets.
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And that is actually an extremist position in terms of what greenhouse gases do to the climate.
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Nobody argues that a ton of CO2 emissions causes damages at that level.
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So the idea of saying, we're not going to bother putting a price tag on it, you can't do that
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because like I say, you implicitly put a price tag on it whenever you make a decision on a
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So you at least need to be upfront about what that price is.
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Do you think that there is going to be a point at which, and maybe we're already here, we
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Because I know that take Volvo, for example, Volvo has said that it's going to be rolling
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out over the course of several years, electric vehicles only is going to be their end game.
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And I know there are a lot of companies that are really, as a point of pride, putting this
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And does that, is that current stronger than what regulation, carbon tax, and all that
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For typical policy settings where some kind of coordinated response is required, we don't
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usually think in terms of we're going to leave it up to the market.
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Because the incentives that people in the market face favor not dealing with external
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costs and free riding on other people's actions.
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And so we can't assume that human nature has just undergone some miraculous transformation
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and companies are just going to do this out of the goodness of their heart.
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I'm puzzled by Volvo's decision because ultimately, if they decide to withdraw ordinary gasoline-powered
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engines from their product line and replace them with electric vehicles, what they're saying
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Because people don't buy electric vehicles, even with generous subsidies, they don't like
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No, and they may well be ahead of the curve, but that curve hasn't come yet.
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So they're going to pay a price if that is a miscalculation.
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Well, if they think that the market is there, then why isn't it there for all these other
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companies that can't sell their cars, their electric vehicles?
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And also, Volvo sells a lot of conventional gasoline-powered cars.
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If they decide, well, for moral reasons, we're no longer going to sell these cars, then other
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We've got government doing nothing, leaving it to the market.
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And you've said that is probably not going to do this.
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And then we have the overreactions that we've talked about of cap-and-trade, aggressive
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Where do you think the government should be having this discussion, if at all?
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Well, if it was up to me, first of all, my message to the people who are advocating for
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climate policy and who've latched onto carbon taxes and they get the logic of carbon taxes,
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I would just say, okay, you realize that if we do this in the economically efficient way,
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Because for one thing, it means we're going to allow provinces to use coal-fired power again.
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We're going to eliminate a lot of these energy efficiency rules and all these other regulations.
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We get rid of all those and we replace it with a carbon tax.
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And the nature of demand for energy is, we say, it's inelastic, which means people don't
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change their consumption a great deal when prices go up.
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If on the weekend, the price of gas goes from $1 a litre to $1.10, that's a pretty big pricing.
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That's a 10% price increase, but you don't notice a 10% change in consumption.
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So that's the nature of the beast for energy use, that it's not very responsive to the price.
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So we can build that carbon price into the price of fuels, but it's not going to change
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I would like to see, if we were going to go that route, we shouldn't set it up the way
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the government has with these automatic escalators so the tax goes up year after year.
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The price is supposed to reflect what we understand about the social cost of the emissions.
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And that just doesn't go up with the passage of time.
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That has to reflect current knowledge and scientific understanding in it.
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The one other issue I would point to, though, is coming back to the limited options that
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We don't have technology that can scrub CO2 out of a smokestack and put it in a form for
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But sulfur and particulates, especially, it can be extracted from the smoke and put into
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And in the case of sulfur, it even becomes a usable product that the company can sell.
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And that means we can keep using energy, keep increasing our energy consumption while we're
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I think we should be really striving to come up with an equivalent technology for CO2.
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And I've only been able to find a tiny bit of information about people working on this.
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But the idea, if you could, at a low cost, pull the CO2 out of the smokestack and render
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And if you could do that for, say, $5 a ton, this whole issue would be over.
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We'd just put these in place on smokestacks, tailpipes if it can fit on a car.
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But otherwise, all these issues would disappear.
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So that's the way the market could play a role in this, is if the market comes up with
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But even then, it would be more, it sounds like it would be more profitable for the
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government to bankroll development of that than to do all of these other things.
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Yeah, and there's a debate about this among economists, but let's say you put in a carbon
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In principle, that would then create the market incentive for someone to come up with this
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Now, if the scrubber ends up costing $100 a ton to operate, then it's not going to be adopted
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But if someone did come up with this low cost scrubber, they're going to cash in on it.
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But then some economists would argue, well, the benefits of that go far beyond just
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So there's a case for the government trying to subsidize some of the knowledge formation
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Oddly, I just don't see a whole lot of research going on on that topic.
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Maybe people have looked at it and just decided it's still too hard.
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But that's kind of the end point in all of this, that we've done an amazing job in Ontario
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and other parts of the Western world cleaning up smokestacks, like getting rid of all the
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old dirty soot and particulates and sulfur and all the smog-causing compounds.
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So we can run coal-fired power plants and have very few emissions coming out of them, mostly
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And so if there's a scrubber that could deal with the CO2 at a low cost, then really the
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Well, you heard it from future Environment Minister Ross McKittrick first.
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Ross McKittrick, Professor of Economics at the University of Guelph and also Senior Fellow