The tax hike shell game

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More transparency is the fairest way to implement the government’s environmental plans

The federal government under Prime Minister Trudeau has announced its first major, headline-grabbing, piece of environmental policy: a national carbon tax floor to increase from $10 per tonne of CO2 emissions to $50 per tonne between 2018 and 2022.

The reason this is to be seen as a price floor — or minimum — is because it is exactly that: a target that provinces will have to meet with their own carbon taxes or policy equivalents beginning in 2018.

Most Canadians already live in provinces with some form of carbon pricing regime already in the policy mix.

In British Columbia, for example, it is set at $30 per tonne, and has been for several years without any hint of economic calamity. The newly-announced federal price floor, however, will begin to have an impact on other provinces in the near future depending on the relative levels their own currently-existing carbon pricing policies.

What landed as a bombshell in some provinces — Premier Brad Wall of Saskatchewan continues to rail aggressively against the new price floor from Ottawa — receded somewhat in prominence upon further analysis.

First of all, starting at $10 per tonne was a much lower price level than had been reportedly considered by the government. Even at its peak in 2022 at $50 per tonne, it will not be nearly enough to meet the government’s emission reduction obligations under the Paris Accord. The government admits this, and promises further regulation to achieve the emission reductions to which it has committed itself.

This is where the politics, unfortunately, meet the policy. The carbon tax is being set at a middling level — high enough to likely help bring down emissions but not nearly high enough to bring them down as much as we say we need to, and as much as we have promised the world we would. The rest is to be done by “regulation” that is, forcing industries one by one to reduce their emissions. The trouble with such industry-specific regulations is that they are among the costliest and least transparent ways in which we can achieve our environmental objectives.

That the government can even announce a carbon tax, and that several provinces are already implementing one, is testament to the growing consensus that they represent the most market-oriented and efficient way to reduce our carbon footprint.

By the government’s own reckoning, a national carbon tax would have to be set at something closer to $200 per tonne to, on its own, meet our emission reduction targets under the Paris Accord. So why won’t the government ratchet the tax up to that level? Because, as a visible tax, it would be politically unpopular, rather as the GST is today.

This is one of the many places where voters and economists diverge: for a tax to be fair, efficient, transparent and effective, it has to be visible. But that same necessity for transparency and visibility makes a tax politically challenging to implement.

Better, politicians figure, to achieve the policy objectives of a tax —– in this case, reduced emissions — through regulation so that the cost is not visible to the taxpayer or consumer. But that does not make the cost any less real. In fact, it makes the cost much higher, and much less transparent.

Consider our own industry. Estimates of the impact of a carbon tax even at $50 per tonne are relatively modest: likely somewhere in the two per cent ballpark in terms of the upward pressure it would exert on new vehicle prices.

Similarly, at the pump, the increase is pegged a little more than 2 cents per liter for every $10 per tonne of a carbon price. So, fully implemented, the federal price floor would add about 11 cents per litre to pump prices. This is not nothing, but is also pretty much within the bounds of monthly pump price volatility as it exists today.

Regulation, on the other hand, will have a massive impact on our industry and the prices paid by our customers.

The ever-tightening fuel economy regulations for new cars will add, by the time they are fully implemented, by some estimates thousands of dollars to the price of a new vehicle in Canada.

But, buried in the sticker price and ignored by the consumer, price hikes coming through regulation are politically much more palatable than more “tax,” despite the fact they are less effective and less transparent.

If we accept that climate change is a problem that requires action, then in order to have an impact policies will also have to exact a price. Best that the price be visible and transparent so that it may be fully debated.

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