Juno News - The facts of carbon taxes - Andrew Lawton with Dr. Ross McKitrick

00:00:00.000 One of the big issues that we know, because we've been covering it extensively, that is

00:00:08.960 going to I think and I would say I hope be one of the defining issues of the federal

00:00:13.220 election campaign is the carbon tax and really this idea not only of whether the federal

00:00:18.620 government should impose one, but more specifically whether this is an effective way to do all

00:00:23.560 of the things that governments are saying it does and we see battles going on in the

00:00:27.800 court system specifically with Ontario and Saskatchewan, but we're going to have a political battle

00:00:32.500 here and I wanted to talk about not the politics of it, but the economics of it.

00:00:37.000 Do carbon taxes work and are we actually looking at policies that are going to make the economy

00:00:42.620 or the environment for that matter better?

00:00:45.120 Very pleased to be joined by Dr. Ross McKittrick, who's an economics professor at the University

00:00:50.340 of Guelph.

00:00:51.340 Ross, thanks for coming.

00:00:52.340 Really great to talk to you.

00:00:53.340 My pleasure.

00:00:54.340 This idea that we've often been presented by politicians, specifically in Ontario years

00:00:59.020 ago, was do we go for a cap and trade or do we go for a carbon tax?

00:01:03.540 Do we put a price on carbon?

00:01:04.720 Do we do this?

00:01:05.900 And I've always been in the why do we have to do either?

00:01:08.440 I mean, why are we picking between a gun or a knife on this?

00:01:11.740 But let's talk about this because oftentimes this is a political discussion that never really

00:01:16.660 gets to the science or the economics of it, which I know must be infuriating for you.

00:01:22.900 Well, yes.

00:01:24.940 Now you can ask the question cap and trade versus carbon tax if you've got to the point

00:01:30.860 where you've decided we're going to do one or the other.

00:01:33.720 And in that case, economists by and large much prefer carbon tax to cap and trade.

00:01:39.860 The cap and trade system, it works best when emitters have a lot of flexibility in how

00:01:45.960 they would reduce emissions and a lot of options.

00:01:49.520 But in the case of carbon dioxide, there's really no way to reduce emissions except scaling

00:01:53.980 back your operations.

00:01:56.080 And so as a result, the cap and trade system, because it doesn't have that flexibility, you

00:02:01.740 get a lot of price volatility and the cost to the public goes up quite a bit.

00:02:09.300 The carbon tax approach, you still don't have much flexibility for the emitters in terms

00:02:15.180 of their abatement options because carbon dioxide, the technology just isn't there to

00:02:20.340 burn fuels and not release the carbon dioxide.

00:02:24.280 But you can manage the price volatility because you are in control of the price.

00:02:29.160 And so as a result, again, just a comparison of those two systems, carbon taxes work better

00:02:37.040 for the case of carbon dioxide.

00:02:39.620 Now getting to the larger question, and I agree with you, and if it's presented as, well,

00:02:45.160 we've decided we have to do one or the other, so we should pick, I do think, no, we can't

00:02:50.660 skip past the first question, which is why are we doing either one?

00:02:56.500 What do we expect to gain from doing this?

00:02:58.880 And are the costs worth it given what we expect to benefit from this?

00:03:05.120 And when you ask specific questions like that, most climate policy comes out looking rather

00:03:10.700 badly.

00:03:11.700 The costs usually way exceed the benefits.

00:03:13.960 So let's talk about the idea of whether we can benefit.

00:03:18.240 Because one argument that I've heard, which I think has merit, is that if you even take

00:03:22.800 the alarmist view that man-made global warming is a giant threat, that it's being caused by

00:03:28.100 greenhouse gas emissions and all of this, and we accept that it face value, you also have

00:03:32.480 to accept that Canada is such a tiny fraction of a percent of where the problem is coming

00:03:38.480 from.

00:03:38.700 So is it something that a country like Canada should do?

00:03:42.980 Because the flip side of that is that you don't want to do nothing if that, if we accept

00:03:46.380 as a premise that argument.

00:03:47.940 Yeah.

00:03:48.940 So in order to steer away from terms like alarmist and denier, I prefer to just stick with the

00:03:57.700 term mainstream.

00:03:58.700 So if you stick with mainstream science, mainstream economics, what you would get is an estimate

00:04:05.960 that by using fossil fuels, releasing carbon dioxide emissions, you're causing social costs

00:04:12.560 on the scale right now of maybe $30 to $40 a ton.

00:04:17.180 And then, you know, we quibble about how the numbers are arrived at, but let's, but if we're

00:04:23.340 just going to go with the mainstream off-the-shelf numbers, that's what it would be.

00:04:26.060 Okay.

00:04:27.060 So at $30 to $40 a ton, then there's a moral argument for saying, okay, then the people doing

00:04:33.740 the polluting should incur that as a cost.

00:04:39.540 The economic argument though is to say, okay, you should charge up, but your emissions aren't

00:04:43.500 going to go down very much.

00:04:44.800 Like that translates into a couple of cents per liter of gas.

00:04:46.960 Yeah, it's punitive.

00:04:47.960 It's not really changing the fundamentals.

00:04:50.060 Yeah.

00:04:51.060 And also, you shouldn't layer on top of that a whole bunch of other regulations.

00:04:55.640 So the whole economic efficiency arises because you put, in this case, a carbon tax in place,

00:05:00.600 then that's all.

00:05:01.600 You don't couple it with a whole bunch of, you know, with ethanol mandates and coal phase

00:05:05.840 out and renewable energy subsidies and electric vehicle subsidies and all these other climate

00:05:12.800 policies that we've got.

00:05:15.100 It's in all of those directions where you're imposing policies that cost hundreds or thousands

00:05:20.100 of dollars per ton of abatement.

00:05:22.540 And that's where all the inefficiencies are.

00:05:25.060 So when we talk about a carbon tax, the proponents of carbon taxes in Canada, they evade this point.

00:05:34.380 They like to say, well, we have Nobel Prize winning economics on our side on behalf of

00:05:38.220 the carbon tax.

00:05:40.060 And that's not quite true.

00:05:41.220 You have solid economic arguments on behalf of carbon tax, but only if you first repeal

00:05:46.700 all those other policies.

00:05:48.660 If you keep all those policies in place, carbon tax doesn't reduce emissions very much and

00:05:53.280 it doesn't fix all those other inefficiencies.

00:05:55.460 In fact, in some ways it makes them worse.

00:05:58.100 So we're having a discussion in Canada about whether we should have a carbon tax in a regulatory

00:06:03.220 context where we know the carbon tax doesn't make any sense and doesn't accomplish anything.

00:06:08.100 And so that, as an observer of the way the policy has developed over the years, I find that

00:06:12.620 very frustrating.

00:06:13.620 That's actually a valid point because if you view this in an economic context, there

00:06:18.580 is a cost to complying with regulations.

00:06:20.680 There's a cost to paying a tax.

00:06:22.200 There's a cost of really dealing with oversight of all of these different things.

00:06:26.400 There are a lot of people though on that environmental side that would say you can't quantify that.

00:06:32.780 You can't put a price tag on that, even if you can put a price tag on it, but it's worth

00:06:37.220 it whatever it costs because it's the environment.

00:06:39.320 How do you break through that?

00:06:41.700 Whenever you do environmental policy, you have to put a price tag on the benefits and

00:06:46.020 you can argue whether it's a good number or a very uncertain number.

00:06:51.460 Because they're trying to sell, it sounds like more of a moral price tag than a monetary

00:06:55.880 one.

00:06:56.880 Yeah.

00:06:57.880 Any decision you make to either take an action or not take an action on an environmental

00:07:03.540 issue, you're either explicitly or implicitly putting a price tag on it.

00:07:07.880 So the best thing to do is be explicit about what the price tag is you're using.

00:07:13.040 So if we take the ethanol mandate for instance, that's a policy where if it even reduces emissions,

00:07:20.820 which isn't necessarily the case, but on the best case assumption, the emission reductions

00:07:27.400 from the ethanol mandate for greenhouse gases are probably around $2,000 a ton.

00:07:33.380 And so if we go back to the point of saying, well, we're not going to put a price tag on

00:07:37.820 it.

00:07:38.820 Well, sorry, you already did.

00:07:39.820 You put a price tag on it.

00:07:40.820 You said these emission reductions are worth $2,000 a ton out of people's pockets.

00:07:46.940 And that is actually an extremist position in terms of what greenhouse gases do to the climate.

00:07:55.440 Nobody argues that a ton of CO2 emissions causes damages at that level.

00:08:00.380 So the idea of saying, we're not going to bother putting a price tag on it, you can't do that

00:08:12.200 because like I say, you implicitly put a price tag on it whenever you make a decision on a

00:08:16.460 policy.

00:08:16.920 So you at least need to be upfront about what that price is.

00:08:19.200 Do you think that there is going to be a point at which, and maybe we're already here, we

00:08:26.020 can leave this to the market?

00:08:27.660 Because I know that take Volvo, for example, Volvo has said that it's going to be rolling

00:08:30.780 out over the course of several years, electric vehicles only is going to be their end game.

00:08:37.900 And I know there are a lot of companies that are really, as a point of pride, putting this

00:08:41.180 moral objective, if nothing else, forward.

00:08:44.420 And does that, is that current stronger than what regulation, carbon tax, and all that

00:08:50.740 hopes to accomplish?

00:08:51.420 For typical policy settings where some kind of coordinated response is required, we don't

00:09:04.780 usually think in terms of we're going to leave it up to the market.

00:09:08.600 Because the incentives that people in the market face favor not dealing with external

00:09:18.920 costs and free riding on other people's actions.

00:09:21.480 And so we can't assume that human nature has just undergone some miraculous transformation

00:09:28.040 and companies are just going to do this out of the goodness of their heart.

00:09:32.420 I'm puzzled by Volvo's decision because ultimately, if they decide to withdraw ordinary gasoline-powered

00:09:41.160 engines from their product line and replace them with electric vehicles, what they're saying

00:09:45.840 is we're going to shut our company down.

00:09:47.480 Because people don't buy electric vehicles, even with generous subsidies, they don't like

00:09:52.420 to buy them.

00:09:52.820 No, and they may well be ahead of the curve, but that curve hasn't come yet.

00:09:56.720 So they're going to pay a price if that is a miscalculation.

00:10:00.320 Well, if they think that the market is there, then why isn't it there for all these other

00:10:06.020 companies that can't sell their cars, their electric vehicles?

00:10:10.020 And also, Volvo sells a lot of conventional gasoline-powered cars.

00:10:16.120 If they decide, well, for moral reasons, we're no longer going to sell these cars, then other

00:10:21.040 companies will happily fill the void.

00:10:22.920 So we've got two options.

00:10:24.800 We've got government doing nothing, leaving it to the market.

00:10:27.000 And you've said that is probably not going to do this.

00:10:30.500 What do you see?

00:10:31.140 And then we have the overreactions that we've talked about of cap-and-trade, aggressive

00:10:34.760 carbon tax and regulation.

00:10:36.620 Where do you think the government should be having this discussion, if at all?

00:10:39.860 Well, if it was up to me, first of all, my message to the people who are advocating for

00:10:50.780 climate policy and who've latched onto carbon taxes and they get the logic of carbon taxes,

00:10:55.920 hey, we really want to go this route.

00:10:57.120 I would just say, okay, you realize that if we do this in the economically efficient way,

00:11:03.160 our emissions are going to go up quite a bit.

00:11:05.640 Because for one thing, it means we're going to allow provinces to use coal-fired power again.

00:11:12.100 We're going to eliminate a lot of these energy efficiency rules and all these other regulations.

00:11:17.900 We get rid of all those and we replace it with a carbon tax.

00:11:20.260 And the nature of demand for energy is, we say, it's inelastic, which means people don't

00:11:28.120 change their consumption a great deal when prices go up.

00:11:31.260 Because we see that with gasoline.

00:11:33.500 If on the weekend, the price of gas goes from $1 a litre to $1.10, that's a pretty big pricing.

00:11:40.100 That's a 10% price increase, but you don't notice a 10% change in consumption.

00:11:44.180 People just pay more and keep driving.

00:11:46.320 So that's the nature of the beast for energy use, that it's not very responsive to the price.

00:11:51.780 So we can build that carbon price into the price of fuels, but it's not going to change

00:11:59.320 behavior very much.

00:12:00.320 I would like to see, if we were going to go that route, we shouldn't set it up the way

00:12:08.520 the government has with these automatic escalators so the tax goes up year after year.

00:12:12.700 That defies logic.

00:12:15.020 The price is supposed to reflect what we understand about the social cost of the emissions.

00:12:21.540 And that just doesn't go up with the passage of time.

00:12:24.100 That has to reflect current knowledge and scientific understanding in it.

00:12:27.560 And it should be set up that way.

00:12:30.320 The one other issue I would point to, though, is coming back to the limited options that

00:12:37.120 firms have to reduce emissions.

00:12:38.380 We don't have technology that can scrub CO2 out of a smokestack and put it in a form for

00:12:44.820 disposal.

00:12:46.080 We do that with sulfur particulates, NOx.

00:12:49.260 Well, NOx is dealt with a bit differently.

00:12:50.880 But sulfur and particulates, especially, it can be extracted from the smoke and put into

00:12:56.680 a form for disposal.

00:12:59.060 And in the case of sulfur, it even becomes a usable product that the company can sell.

00:13:03.460 And so the technology is there.

00:13:06.840 And that means we can keep using energy, keep increasing our energy consumption while we're

00:13:11.460 seeing emissions of these things go down.

00:13:13.380 I think we should be really striving to come up with an equivalent technology for CO2.

00:13:20.100 And I've only been able to find a tiny bit of information about people working on this.

00:13:26.980 There's a lab in the States working on this.

00:13:28.960 But the idea, if you could, at a low cost, pull the CO2 out of the smokestack and render

00:13:35.560 it into some solid form for disposal.

00:13:38.180 And if you could do that for, say, $5 a ton, this whole issue would be over.

00:13:43.940 I mean, we'd be done.

00:13:44.900 We'd just put these in place on smokestacks, tailpipes if it can fit on a car. 0.53

00:13:50.400 But otherwise, all these issues would disappear.

00:13:53.740 So that's the way the market could play a role in this, is if the market comes up with

00:13:56.940 that solution.

00:13:58.060 Right.

00:13:58.380 But even then, it would be more, it sounds like it would be more profitable for the

00:14:01.240 government to bankroll development of that than to do all of these other things.

00:14:05.140 Yeah, and there's a debate about this among economists, but let's say you put in a carbon

00:14:09.660 tax of $10 or $20 a ton.

00:14:12.580 In principle, that would then create the market incentive for someone to come up with this

00:14:16.680 low cost scrubber.

00:14:17.560 Now, if the scrubber ends up costing $100 a ton to operate, then it's not going to be adopted

00:14:22.220 at that price.

00:14:23.280 But if someone did come up with this low cost scrubber, they're going to cash in on it.

00:14:30.900 But then some economists would argue, well, the benefits of that go far beyond just

00:14:35.140 what the inventor would actually earn.

00:14:37.220 So there's a case for the government trying to subsidize some of the knowledge formation

00:14:41.980 on a public good ground.

00:14:44.820 And I think that's a legitimate argument.

00:14:47.740 Oddly, I just don't see a whole lot of research going on on that topic.

00:14:52.040 Maybe people have looked at it and just decided it's still too hard.

00:14:55.400 We don't know how we're going to do it.

00:14:56.440 But that's kind of the end point in all of this, that we've done an amazing job in Ontario

00:15:05.160 and other parts of the Western world cleaning up smokestacks, like getting rid of all the

00:15:11.600 old dirty soot and particulates and sulfur and all the smog-causing compounds.

00:15:16.780 So we can run coal-fired power plants and have very few emissions coming out of them, mostly

00:15:22.820 just steam coming out of them.

00:15:25.240 But there's CO2 that's coming out.

00:15:28.160 And so if there's a scrubber that could deal with the CO2 at a low cost, then really the

00:15:35.900 whole climate issue would be gone.

00:15:38.340 Wonderful.

00:15:38.860 Well, you heard it from future Environment Minister Ross McKittrick first.

00:15:41.380 Ross McKittrick, Professor of Economics at the University of Guelph and also Senior Fellow

00:15:45.840 at the Fraser Institute.

00:15:46.660 Thank you very much.

00:15:47.600 My pleasure.

00:15:48.040 Thanks, Andrew.

Juno News - April 14, 2019

The facts of carbon taxes - Andrew Lawton with Dr. Ross McKitrick

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