Debunking Ecofiscal’s “Carbon Pricing Myths”

Contributed by Robert Lyman © 2019

Robert Lyman is an Ottawa energy policy consultant, former public servant of 27 years and a diplomat for 10 years prior to that.   Read his recent publication: “Transition to Reality: The Propsects for Rapid Global Decarbonization.”

A group of economists known as the Ecofiscal Commission has recently published a report that claims to debunk 10 myths about carbon pricing in Canada.  Robert Lyman reviews their claims in this post, stating their ‘myths’ first, then his rebuttal.

Myth #1: Carbon Pricing is a new, untested idea.

Fact:

Carbon pricing is another version of an old, frequently-failed idea. Economists have been advocating the use of market-based mechanisms as theoretically more efficient ways to achieve public policy objectives since the early part of the twentieth century. The basic idea is that governments should attempt to calculate the difference between the social and private costs of people’s buying decisions, and impose a “social premium” in the form of an extra cost, on consumers not otherwise reflected in competitive market prices. The idea has rarely been successful in practice because of difficulties in calculating accurately the value of the “social premium”, and because the public has long been deeply skeptical that governments were not going to use the taxes as a way to scoop funds for other political purposes. Carbon taxes were analyzed and rejected by Natural Resources Canada in the early 1990’s. Actual experience in jurisdictions around the world with the use of revenues raised by carbon taxes justifies the public’s skepticism.

Myth #2: Only very high carbon taxes are effective

FACT:

The effectiveness of any tax used as a price premium depends on the price elasticity of demand for the product being taxed. In the case of carbon taxes, the primary targets are oil products, natural gas and coal. Oil products used in transportation are notoriously inelastic (i.e. unresponsive to price increases) and coal used for electricity generation is essentially insulated from market pressures by the system of electricity regulation in Canada.

This, however, misses the real point. The announced goal of Canadian climate policy is to reduce national emissions by 30% from 2010 levels by 2030 and then to go on reducing them to perhaps 50% from 2010 levels by 2050. That would mean a massive and costly transformation of the Canadian economy, the sharp reduction in transportation use and in resource industry activity, with devastating consequences for consumers and for provinces like Alberta, Saskatchewan and Newfoundland and Labrador. Emissions reductions of that magnitude will not be achieved at low or moderate carbon tax levels. The taxes would need to be high enough to shut down entire industries.

Myth #3: Carbon pricing will cost Canadian families

FACT:

It will cost families, so a carbon rebate or ‘dividend’ is offered to ease the financial pain. This is a case of bait and switch. By including a consumer rebate to a carbon tax measure, the government is trying to argue that it is achieving a social justice objective. If this were such a great idea, why has it not used the same approach with sales taxes or corporate income taxes i.e. raises the tax and then rebate the money to consumers, or better yet, just lower everyone’s income taxes? Anyone who thinks that this approach will catch on had better not hold their breath waiting for it.

The provinces are taking different approaches to how they will tax and how they will rebate, if at all, which makes this subject very complicated. In some cases, only 70% or less of the emission sources will be taxed. In others, special exemptions, often politically motivated, will be given. There will be plenty of room for game playing as to who qualifies for a rebate and by how much. Finally, governments can be sure to keep ever high percentages of the revenues as the carbon tax rates go into the stratosphere.

What cannot be denied is that the target groups – oil, natural gas, and coal producers and consumers – will be worse off by far; that is the whole point of the tax.

Myth #4: Carbon Pricing Hurts Jobs

FACT:

It does. All taxes impose what economists call a “deadweight loss” on the economy, as they take revenues from those that would have received them under free market conditions and reallocate them elsewhere. In the case of carbon taxes, they will disproportionately affect all fossil-fuel intensive parts of the Canadian economy  (like petroleum and mining, petrochemicals, metals fabrication, cement, aluminum and steel production) and transportation costs in the economy, which of course are incurred by all. These are costs that will not be incurred by firms in competing jurisdictions and especially in the United States. Given the high degree of economic integration between Canada and the United States, it is abundantly clear that the competitiveness of Canadian firms, and their ability to attract investment in future, will suffer.

Some international context would be useful here. The rates used in carbon tax regimes vary widely from a low equivalent to US $1 per ton in Mexico and Poland to a high of US $139 per ton in Sweden. Within western Europe, the rates range widely as well, with one group using rates of US $9 per ton or less, and most others with rates in the range of US $16 to $29 per ton. In Canada, there is a combination of emissions trading and carbon dioxide taxes within a federal government policy framework that requires prices to be at least Cdn $20 (US $15) per ton in 2019 rising to Cdn $50 (US $38) per ton by 2022. In China, the average rate is about US $2 per ton. Imagine Canadian firms, with a carbon tax on their backs, trying to compete with Chinese firms.

Myth #5: Big polluters are getting a break

FACT:

Many do get breaks. This is the rhetorical equivalent of “sucking and blowing at the same time”. The Ecofiscal Commission claims that large emitters will pay dearly, but then says they will be subsidized to reduce emissions. Does this mean that punishing large emitters with high taxes is not enough or that these companies are not smart enough to figure out how to make efficiency improvements without applying to a government program for subsidies so that they choose the right one?

Again, the magnitude of the emissions reductions sought by 2030 and beyond are much, much higher than can be accomplished by efficiency improvements. The effect will be to shut down whole segments of the economy, especially in resource-intensive regions.

Myth #6: Carbon Pricing is a Cash Grab

FACT:

It is. The experience of British Columbia has already borne this out, as have studies of carbon pricing regimes around the world. In other jurisdictions, initial statements of intention to fully or partially recycle such revenues often have not borne out in practice. The Institute of Climate Economics (14CE) is a think tank based in Paris, France funded by the French Development Agency and Morocco’s Caisse de Depot et Gestion. In October, 2017, it published the results of a study of the use of carbon dioxide pricing in the 40 countries in the world in which they then existed. The Institute found that, on a global scale, only 29% of the revenues raised were recycled into the economy in the form of tax exemptions. Thirty-four per cent were used to subsidize programs that would reduce GHG emissions. The largest share, 37%, were allocated to the general budget.

In other words, of course it’s a cash grab. The only question is how high a percentage of the revenues raised will be used to serve a wide range of politicians’ favourite projects.

Myth #7: People cannot change their behaviours in response to carbon pricing

FACT:

If hundreds of similar measures aren’t working yet, why will this one work? The real issue is why, if carbon taxes are such a great idea and so effective in reducing emissions, federal and provincial governments are continuing to use every other program, subsidy, and regulation in the book and a dozen more every year in addition to carbon taxes. In Canada’s most recent reports to the United Nations Framework on Climate Change, Environment and Climate Change Canada listed over 300 existing federal programs and other measures designed to reduce greenhouse gas emissions. Natural Resources Canada’s website recently listed an addition 280 more programs and measures implemented by provincial and territorial governments. No one is keeping track of all the programs and measures being taken by municipal governments anxious to get into the game.

Myth #8: There is no point to carbon pricing if governments rebate the revenues.

FACT:

Rebates are a distraction intended to fool Canadians by putting back into their left pocket a portion of the money removed from the right pocket and surreptitiously harming Canadian businesses in order to appear generous to the “middle class”. The statement would have been accurate if it had ended after the word “pricing”.

Myth #9: We can use other, better policies to reduce our emissions.

FACT:

Governments are already throwing everything but the kitchen sink at this issue. The record of government action to date speaks for itself. Since 1992, when Canadian governments first began setting emission reduction targets, not one has been met. We are clearly on track to miss the 2020 target as well. It would take a miracle, or the worst recessions since the Great Depression, for Canada to make the 2030 target, and it gets worse after that. It is long past time to recast our objectives.

Myth #10: There is no need to reduce Canada’s emissions

FACT:

Canada is not the problem. The ‘myth’ statement is premised on the view that what Canada does or does not do to reduce emissions will affect global emissions trends. There is not one shred of evidence to support this contention.

According to the BP Statistical Review of World Energy 2018, global GHG emissions from fuel combustion in 2017 totaled 33.4 billion tons. Canada accounted for 1.6% of this total.

The IPCC has developed a mathematical model with which it attempts to measure the impact on average global temperatures by 2100 of emissions reductions made before that time. If one accepts the premises and methodology that underlies this model, the full implementation of commitments made prior to the Paris Agreement, including the sustained implementation of those commitments to 2100, would reduce average global temperatures by about 0.017 degrees from their present path, according to analysis done by Bjorn Lomborg.[1] The IPCC has estimated, however, that avoiding the 1.5 degree increase in temperatures would require that global emissions decline by at least 40 to 50% by 2030 and reach “net zero” by 2050. The actual emissions trends currently are dominated by the continued growth in emissions from developing (non-OECD) countries that now represent 63% of global emissions. In practical terms, there is a near zero likelihood that the goals suggested by the IPCC will be met. Any action taken by Canada to reduce emissions will thus have either a negligible or nil effect on average global temperatures.

The “bottom line” is that there is no need for Canada to reduce its emissions to the point at which it severely harms Canadians’ economy and standard of living. Indeed, present climate policies, with their dire implications for western Canada, pose a threat to national unity far more serious than anything that has occurred since the debates over Quebec secession in the 1980’s and 1990’s. Those considerations surely outweigh the benefits of making symbolic gestures that will have no real effect on global emissions or climate trends.

READ: The Alarming Scope of Future Carbon Taxes in Canada

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Related:

Our rebuttal to Ecofiscal’s previous work “Let Them Eat Carbon”

Video:

READ:

85 peer-reviewed papers show that carbon dioxide has little to nominal effect on climate change.

[1] Lomborg, Bjorn. Impact of Current Climate Proposals. Global Policy: Vol. 7, Issue 1, November 9, 2015