Contributed by Robert Lyman © 2018
Robert Lyman is an Ottawa energy policy consultant, former public servant of 27 years and a diplomat for 10 years prior to that.
A few weeks ago, a group calling itself Canadians for Clean Prosperity released a report containing an analysis of the benefits they claimed would result if the federal government were to return all the revenues from carbon taxes to the individuals and households in the provinces from which the taxes were collected. Their analysis did not explain very clearly how revenues taken out of taxpayers’ collective right pockets could somehow become much larger when they were redeposited in taxpayers’ left pockets. It was only when one read the background papers that one discovered that the proposal entailed transferring the revenues collected from taxes on Canadian businesses, and especially taxes on businesses in energy-intensive industries, to individuals and households that the source of the largesse became evident. Destroying Canada’s energy economy and its most important industries is not the route to prosperity.
The Canadian media, as is unfortunately typical, failed to delve into the details of the Clean Prosperity proposal, and generally thought that it was a political winner for the governing Liberals. This is not the first time that the Canadian media has failed to inform Canadians about the pitfalls of carbon taxes.
Will Governments Refund the Tax Revenue to Citizens?
Let us examine the claim that Governments will return all the revenues they receive from carbon taxes to the public, either through refunds directly to taxpayers or reduced rates of other generally applied taxes like personal income taxes or sales taxes. The British Columbia government claimed that it would do that when it introduced carbon taxes, but it only took two years for it to decide to use the revenues to subsidize new programs and pet projects. In fact, no government in Canada that has introduced carbon taxes (or cap-and-trade carbon permit pricing with the same effect on consumers) has ever returned all the revenues to taxpayers.
In fact, the experience in all jurisdictions that have implemented carbon pricing regimes (carbon taxes or Emissions Trading Systems) is that full recycling of the resulting revenues is the exception rather than the rule.
The Institute for Climate Economics (I4CE) is a think tank based in Paris that is funded by the French Caisse de Depots, the French Development Agency and Morocco’s Caisse de Depots et Gestion. In October 2017, it published an article summarizing the results of its study of the use of carbon prices in the world. The article, entitled Global panorama of carbon prices in 2017, can be found here:
The I4CE article contains some interesting information using data for fiscal year 2013-2014.
- More than 60% of the revenues received by governments from carbon pricing went to members of the European Union.
- On the global scale, only 29% of revenues were recycled into the economy in the form of tax exemptions.
- 34% of the revenues were used to subsidize projects that would reduce GHG emissions.
- 37%, the largest share, were allocated to the general budget.
So, the record clearly shows that politicians and treasury officials, when provided with a windfall of revenues from a carbon tax, are very unlikely to return all of it to the citizens directly. Instead, as should be no surprise to those who study public administration (or human nature), they spend it on their preferred causes, groups and industries.
What Can Canadian Taxpayers Expect in Future?
The discussion of carbon taxes and their impact on taxpayers has so far also focused exclusively on the relatively low carbon taxes that have been introduced to date. These are generally in the range of $15 to $30 per tonne of carbon dioxide. It has ignored the effects of the much higher carbon taxes that will inevitably come if governments are to have any hope of attaining the extremely stringent carbon dioxide emission reduction targets that they have set.
The federal government’s carbon tax schedule extends to the end of 2022, rising to $50 per tonne in that year. That is just the beginning. The government’s goal is to reduce Canada’s carbon dioxide emissions by 30% from 2005 levels by 2030 and by at least 50% from 2005 levels by 2050. That means a reduction from 704 megatonnes (Mt) in 2016 to 512 Mt in 2030 and 366 Mt by 2050. To get anywhere near those targets would require much, much higher carbon taxes. Environmental organizations are already calling for carbon taxes in the range of $200 to $300 per tonne, or higher.
To help people understand this, I have prepared an analysis of what the increasing carbon tax rates would mean in terms of higher taxes on gasoline and higher revenues to governments from taxes on all carbon fuels.
The following background information will help readers to understand what follows:
- The Canadian federal government establishes the general policy framework governing carbon dioxide taxation and pricing (i.e. permit pricing) in Canada; under the current framework, the federal governments sets the minimum rates that must apply each year, but it encourages the provincial governments to decide which system they will use and allows them to use the funds received, on the condition that they comply with the federal regime.
- Both carbon taxes and cap-and-trade permit systems are very complex. There are different rules governing which industries and firms are covered, which are exempt, and how rates will change.
- Under a “pure” carbon tax system, the tax on a specific fuel depends on its carbon content; coal has the highest carbon content and natural gas the lowest among the major fuels, with motor gasoline slightly less than diesel fuel.
- Canada’s carbon dioxide emissions in 2016 (the most recent year for which data is published by Environment and Climate Change Canada) were 704 megatonnes (Mt).
- Since 2005, Canada’s emissions have declined at the annual average rate of 2.5 Mt. The National Energy Board, it its 2016 Energy Outlook report, projected Canada’s emissions would continue declining at a gradual rate to 2040.
The following table shows what would happen to carbon tax rates per tonne of CO2 and per litre of gasoline and the revenues that would accrue to the federal and provincial governments under a scenario in which carbon dioxide emissions continued to fall at their current rate (i.e. falling from 704 Mt in 2016 to 669 Mt in 2030). To make the projections more conservative, I have further assumed that governments will grant tax exemptions to 20% of Canadian industrial emission sources based on concerns about international competitive effects.
CARBON TAX RATES AND REVENUES TO CANADIAN GOVERNMENTS (2030)
Tax per Litre(cents)
The revenues to governments would be considerably higher if no exemptions were given to industry.
Compare the revenue projections from carbon taxes under this scenario with the most recent data on actual revenues received by the federal government from different taxes, as set out in Table 2.
CANADIAN FEDERAL GOVERNMENT TAX REVENUES BY SOURCE – 2016 ($Billions)
|Income Taxes||Corporate Taxes||Social Security||Consumption||Other|
From this analysis, it is easy to see how the revenues from carbon taxes could easily become one of the largest sources of revenues to the government, making it even less likely that politicians would forego the opportunity to make use of this revenue windfall to spend on favoured causes and constituencies. Carbon taxes will almost certainly become a large and harmful burden on the Canadian economy.
Read our rebuttal report to the “Carbon Dividend” proposal.