There are many countries designing their approach to address climate change. A carbon tax is one of the options. Canada has had much controversy over its carbon tax. For example, there has been recent opposition to the federal government’s carbon pricing scheme by the provinces of Saskatchewan, Ontario, Manitoba and New Brunswick. Brendan Boyd and Trevor Tombe write on the Policy Options website that a climate policy that is revenue-neutral, avoids rigid targets and provides predictable increases may never be popular, but could fly politically.
Carbon taxes can be both good policy and good politics
A carbon tax, according to most economists, is the most efficient way to reduce emissions. But is it politically feasible? The conventional wisdom is that it is political suicide at worst and a heavy lift at best. Recent opposition to the federal government’s carbon pricing scheme by the provinces of Saskatchewan, Ontario, Manitoba and New Brunswick, as well as conservative opposition parties at the federal level and in Alberta, would seem to confirm this.
In general, opponents of a carbon tax have been loath to provide alternative ways to reduce emissions. However, the approach favoured by the previous federal Conservative government was to regulate individual sectors of the economy. Such regulations could take the form of energy efficiency rules, mandates over the machinery or technology that businesses have to adopt or directives about which light bulbs households are allowed to buy. In general, this strategy creates higher costs than a broadly applied tax because firms and households have less flexibility over how (and how much) they lower emissions.
Still, regulations are more politically viable than a tax because their costs are not as visible to consumers and voters. Even cap-and-trade programs, another form of carbon pricing, make the costs less visible to the public by embedding the carbon price higher up the supply chain.
But not all carbon taxes are created equal. As we’ve seen in British Columbia, the way they are designed and communicated can, at the very least, increase their political acceptability. There are three areas where a carbon tax could be both good policy and good politics. Instead of rejecting carbon taxes in principle, opponents of current policy should instead propose to improve them.
First, a carbon tax need not be a tax grab. It is meant to change behaviour, not raise revenue. Other taxes can be lowered to keep the overall tax burden unchanged. There are economic and political arguments for this shift. Taxes on income can discourage employment and investment, things we want more of, while taxes on carbon discourage emissions, something we want less of. We can use carbon taxes to reduce income taxes — a lot. For perspective, a carbon tax on fuel use of $50 per tonne in Saskatchewan generates close to $800 million per year — enough to completely eliminate the corporate income tax system or cut personal income taxes by a third. A shift of taxes will make reducing emissions cheaper because the distortions to employment and investment created by income taxation will be lessened. This opportunity is missed if emissions are reduced through regulation or if carbon revenues are spent elsewhere.
In his book on the politics of carbon pricing, Barry Rabe suggests that policy-makers should consider how revenue use contributes to the expansion or shrinking of public support for the policy. Recent polling by Abacus Data for Canada’s Ecofiscal Commission found that more than one in four Canadians rank giving money back in the form of dividend payments or tax cuts as their top choice — a higher share than for any other option for allocating the revenue. And among those who say carbon pricing is a bad idea, nearly two-thirds report they would be more supportive of the idea if the money were given back to citizens — again, the most-chosen option.
Polling from Angus Reid after the federal government’s rebate program was announced in October 2018 suggests that the program increased public support for the federal carbon pricing policy somewhat. But the rebate program is complex, and it is hard to communicate how the economic incentive to reduce emissions is still effective if people also receive a cheque. It is easier for politicians to convey that the policy is not a tax grab if other taxes are reduced.
Another benefit to using the revenue to decrease other taxes is that this approach can improve the durability of the carbon tax, making it less likely to be eliminated in the future. In an article analyzing the politics of the BC carbon tax, Kathryn Harrison points out that eliminating it would potentially require either higher personal and corporate income taxes or cuts to services and spending. Neither of these options will be politically attractive to future governments, increasing the resiliency of the policy.
Second, carbon taxes can be good politics by allowing governments to avoid setting emissions targets. Setting targets may seem attractive politically, because targets frequently garner accolades from environmental interests. But they quickly come back to haunt governments if it becomes clear that the targets were not well thought out and will be tough to meet.
Estimating a jurisdiction’s future GHG emissions levels is difficult. Brendan Boyd’s research on provincial climate policy found that Alberta, Ontario and Manitoba set targets only to receive scathing reports from their provincial auditors general for failing to provide a solid plan or adequately project emission reductions. This led to sustained criticism from opposition parties as well as business and environmental interests. It is smarter to avoid setting targets.
There are also economic arguments in favour of pricing over target setting. Using a tax to establish a price on carbon means that the exact level of GHG emissions reductions will be unknown, unlike with a cap-and-trade program. This is economically efficient because if the price is set to the estimated environmental cost of emissions (the “social cost of carbon”), the market will determine not only where to reduce but how much.
Setting a price rather than a target also allows Canada’s small and open economy to better respond to developments beyond our control. A boom in Canada’s GDP or a rise in the international price of oil, for example, will push Canada’s emissions higher. According to Environment and Climate Change Canada’s latest projections, if oil prices reach $116 per barrel by 2030 and GDP growth rates are high, emissions will be 133 million tonnes per year higher than if oil prices are $37 per barrel and GDP growth rates are low. Pricing carbon through a tax accommodates such developments.
Despite the economic and political advantages, most governments that have established carbon taxes have also set targets, opting for short term political benefits. In the future, governments should focus their energy on developing a pricing instrument that can reduce emissions rather than setting and defending ill-defined and unpredictable targets.
The final way in which carbon pricing may be good politics is by allowing the government to clearly signal future policy, which can affect behaviour today without the pain of immediately high carbon prices.
Opponents on both sides of the political spectrum have argued that most carbon taxes established or under consideration in North America are too low to change people’s behaviour. Opponents on the left indicate that the tax will have to be higher to make a real dent in emissions. Ironically, opponents on the right agree but use this point to suggest that proponents have a surreptitious plan to raise the tax in the future.
Laying out a schedule of incremental increases is both economically efficient and politically viable. It is economically efficient because it creates a gradual, predictable and transparent scaling up that allows individuals and businesses time to adjust and plan for the future. And since making adjustments to decrease emissions is costly, a plan to commit to future increases in carbon prices creates a stronger incentive to adopt new technology and equipment while the tax is lower. Scheduled increases are politically advantageous because, as Rabe notes in his book, starting with a small tax but being transparent about how much it will increase and when acknowledges the impact on citizens’ lifestyle and pocketbooks, instead of denying or ignoring it. Openness about the costs to come can mitigate the political backlash.
Recently, uncertainty about how high the tax will rise has been exploited by political opponents to stoke fears about soaring costs to consumers and economic disaster. Despite this, a schedule of increases has not been consistently embraced by politicians in North America. And when it has been, the benefits of this approach have not been properly communicated to the public.
The single greatest political challenge for carbon taxes is their visibility. But the political risks of carbon taxes need not be a show-stopper. The GST, after all, will never be popular, but it is accepted. Similarly, a climate policy that is revenue-neutral, avoids rigid emission targets and provides a predictable schedule of increases may never be popular, but it is economically efficient and could be politically acceptable.