Prime Minister Justin Trudeau says Canada must fight climate change with a rising carbon tax. But several provincial premiers have attacked the federal carbon tax in court as an unconstitutional “tax grab” that will severely harm Canada’s economy. Saskatchewan has lost its case, as has Ontario.

A tax of the planned $50/tonne, with most of the revenue rebated, is unlikely to be either seriously harmful or seriously effective at this rate. But if it continues to increase, and is supplemented by policies that massively subsidize or otherwise compel greatly expanded solar and wind generation, the economy will be harmed. Premature, politically determined investments in the wrong green technologies will leave many Canadian families freezing in the dark.

The evil Dogbert mocks the current green technology:

DILBERT © Scott Adams. Used By permission of ANDREWS MCMEEL SYNDICATION. All rights reserved.

To achieve Canada’s promised 30% emissions reduction by 2030 with current technology would be enormously costly. That cost can only be raised through much higher taxes (whether on income, sales or CO2), without rebates. No country can afford to get it wrong and blow a bundle on something that doesn’t significantly reduce CO2 emissions, then raise taxes even more to try plan B and then plan C, etc.

If our government decides to invest heavily now in the currently available technology, as was done in Germany, it can lead to stratospheric electricity prices and an unreliable electricity supply. In Germany, taxes, levies, and surcharges in 2019 account for nearly 53 percent of a total household power price of 44 cents Canadian per kilowatt hour, among the highest in Europe [cleanenergywire]. In Canada, the price in Montreal is 8.2 cents, and Toronto, 15.11 cents [nrcan]. And Germany has had to build new coal plants to restore the reliability of its electricity grid when the sun doesn’t shine and the wind doesn’t blow. Any Canadian government that gives us German electricity prices will be destined for electoral  defeat.

Lower and even middle income Canadians would find it increasingly difficult to pay for the very expensive electricity to heat their homes and cook their food electrically (no more gas furnaces or stoves) and keep the lights and appliances on, as well as the very expensive gasoline to drive to work.  During Canada’s National Energy Program (1980-1985), which was much hated in Alberta, there were many Alberta bumper stickers saying “Let the Eastern Bastards Freeze in the Dark.” If our energy transition is rushed with technology that isn’t yet up to the task, many Canadians all across the country will freeze in the dark.

Is the Carbon Tax a Tax Grab?

[Note: The label “carbon tax” is misleading and confusing, as explained in my previous post, here. I encourage you to read that post as background to this one. However, as the label has now been used for years I don’t expect to change it. With these misgivings, I will continue to call it a “carbon tax”.]

Some provincial premiers have called the carbon tax just another evil “tax grab”. But every tax is an evil “grab” because it grabs our money, so the expression is meaningless rhetoric. At least initially, 90% of the Federal tax collected will be repaid (to some taxpayers) and 10% used to subsidize “green” projects, so the tax will be revenue neutral. If there is no net increase in federal tax revenues it cannot be a “tax grab” – at least not yet. However, it is too soon to tell whether, in the years to come, this tax will still be entirely rebated or, as in BC, kept by the government. If the tax is to be sufficient to subsidize electric cars, home insulation and conversions from oil and gas and other CO2 reductions the revenue will have to be retained, not rebated.

Why Economists Recommend a Carbon Tax

Economists recommend a carbon tax as being the most efficient method of determining what kinds of energy a society uses. But this recommendation is not unconditional. It comes with the requirement that the carbon tax will replace a large body of inefficient regulation: either one or the other, not both. If we have faith in a carbon tax we should let it do its job and remove the regulation. But the federal government has said nothing about removing regulation, and in fact has increased it.

For example, Canada’s pipeline project assessment process requires the regulator to determine whether the proposed project will make it more difficult for Canada to meet its Paris CO2 reduction commitments. If the pipeline can’t afford to pay the carbon tax it shouldn’t be built. But with the tax there is no valid reason also to assess its forecast emissions to decide whether the pipeline will be approved for construction. If the government doesn’t believe the carbon tax can do its job in determining whether a project’s emissions are acceptable it shouldn’t have the tax.

As another example, federal and provincial regulation makes it more difficult to construct new electricity generation other than solar or wind. But once an electricity utility has to pay the carbon tax on all of its emissions, if we believe in the efficiency of a carbon tax the utility should be permitted to build whatever type of generation it believes has the least cost. But that’s not being done.

If Canada is unwilling to use the carbon tax for its intended purpose, to replace inefficient regulation, the carbon tax may be good politics, but it is not good economics.

Will This New Tax Work to Change Canadians’ Behaviour?

The reason for Canada’s carbon tax is to reduce Canada’s CO2 emissions, but that is not an end in itself. The purpose of our reductions is not national but global: to reduce global CO2 emissions. This is to be done by changing Canadians’ behaviour, by reducing their consumption of fossil fuels. Will it work?

The answer depends on two questions (i) what do you mean by “work”, i.e., work to what end goal? and (ii) change behaviour from what to what?

1.   Will it Work?

Rather than using the usually vague generalizations like “it works” or “it doesn’t work” it is better to ask, specifically, “what impacts will it have in achieving its ultimate purpose”?

If by “work” you mean to encourage Canadians to use less fossil fuels, the tax will work to some degree. But not everyone will pay the tax. Some energy intensive, trade exposed (EITE) industries will get special treatment, either through exemptions from the tax or through tax rebates or a lower tax rate. However, if by “work” you mean achieve the purpose of reducing global CO2 emissions, it will not work very effectively, if at all, and may actually increase global emissions.

The only benefit of any country’s carbon tax is global emissions reduction. This requires other nations, particularly the largest emitters, also to have effective emission reduction mechanisms, otherwise our tax will impose costs on us, but any reduction we achieve will quickly be offset by others. For example, University of Manitoba Professor Vaclav Smil has estimated that if Canada shut down its oil sands entirely, China’s rate of emissions increases would offset Canada’s emissions reduction in just 17 days.

Climate change is about global climate. But the tax will impose economic burdens on Canadian individuals and industries. It remains to be seen whether Canadians, who represent only 1.6% of global CO2 emissions, will be content to bear these burdens, and if so, for how long, given the rapidly increasing emissions in the rest of the world. Canadians can’t save the planet all alone. Any Canadian government that tries to do that will become hugely unpopular, inviting a pendulum swing to another party that reverses much of the emissions reduction program. Australia and the USA are recent examples of this.

British Columbia’s CO2 Tax Model

British Columbia is presented as the great success story for a carbon tax. But is that story true?

Canada’s Ecofiscal Commission (a private advocacy group whose name sounds like, but actually isn’t a government agency) has extolled the virtues of BC’s carbon tax in the article 10 Myths about Carbon Pricing. It states that from 2009 to 2016, BC’s economy grew by 20%, while its emissions grew by only 7%. These numbers look good, until you ask what they prove. The short answer is: nothing.

We have no way of knowing what would have happened if BC had not introduced its carbon tax. Would the 20% growth in the economy have been higher without the carbon tax? If so, how much economic growth did British Columbians lose because of the tax?

The Ecofiscal Commission also claimed that the carbon tax slowed the growth of British Columbia’s CO2 emissions, lowering per-capita gasoline use by at least 7% and improving average vehicle fuel efficiency by at least 4%. How much of this lowering and improving was due to the tax? How much was due to other factors such as increases in the population density in the two major urban areas (Vancouver and Victoria), increasing numbers of people working from home, car companies selling more fuel-efficient cars as required by federal law, and improvements in public transit? All of these could result in fewer people traveling by car, and taking shorter trips in more fuel efficient cars. These numbers might have been the same without the carbon tax.

Isolating the impact of the relatively small carbon tax among the other economic forces in play is pure guesswork.

If it “Works” in BC Will it Work in Other Provinces?

The Ecofiscal Commission implies that if the carbon tax “worked” in BC it will work everywhere else in Canada. But BC is different from most other Canadian provinces. Most of the BC population is concentrated in two major metropolitan areas, requiring less transportation of people and goods than provinces with more dispersed population centres. BC’s population is centered along the Pacific coast, enjoying warmer winters and cooler summers than in most other parts of the country, thereby requiring less energy for heating and air-conditioning. BC also has abundant hydroelectric power, making fossil fuels for electricity generation less necessary, while providing some of the lowest electricity prices in the country. These lower prices mean electricity can be used in situations where (in other provinces and territories) fossil fuels are currently used.

Based on all of this, even if we assume the carbon tax is not harming BC, it is probably safe to assume that almost every other part of Canada will not do as well as BC.

2.   Change Canadians’ Behaviour from What to What?

When politicians say that this tax will change behaviour, they don’t say from what to what. That’s because they don’t really know what will happen. Consider, for example, the increase in gasoline prices due to the tax. In economic theory it should encourage greater use of public transit. But what if, like many Canadians, you live in an area where there is either no efficient public transit, or overcrowded buses and subways at rush hours? Behaviour will not change noticeably because it is too inconvenient to give up driving to work.

Increasing use of public transit would require massive expansion of public transit, costing billions and requiring decades to finance and build. In the meantime, the tax just becomes an additional cost of getting around.

If someone can’t take public transit to get to work for decades they will still drive their cars. Nor will they immediately trade in their gasoline powered cars and buy new electric cars. If everyone was legally required to do that by a specified deadline, the resale value of their gasoline powered cars would be zero. In addition, the explosive demand for electric cars would rapidly escalate their price and create long wait times for vehicle deliveries. However, if the development of hydrogen-powered cars and inexpensive methods of extracting hydrogen proceed as hoped, the car of the future may not be electric, but hydrogen. Then the huge subsidies for electric cars and charging stations will have been wasted.

The other major concern with escalating “green” taxes (including the carbon tax) would be at the industrial level. Canada does not operate in a bubble. Canada competes for investment with other developed and developing countries. If there is global demand in a market that Canada is priced out of because of the carbon tax, someone else will seize the opportunity. Several of the developing countries already have lower labour costs, fewer environmental regulations, lower income tax rates and no carbon tax. Over time, this cost gap can lead to an export of investment and employment in Canadian manufacturing and extractive industries (e.g. minerals and oil).

The UN Counts Countries’ Emissions Incorrectly

Developing countries like China and India typically have much higher CO2 emissions per unit of production because a higher percentage of their energy comes from coal. Therefore, if the carbon tax transfers Canadian production to China and India the planet will actually be worse off, even as Canadians are paying the carbon tax.

I am indebted to Carbon Brief, on whose work part of this blog post is based. Carbon Brief has mapped out exports and imports of CO2 globally, and examined how including them changes countries’ national CO2 emissions.

CO2 emissions are normally attributed to a country only if emitted within that country. However, if Canada stops producing certain goods and starts importing them from factories in China, with China using coal as the energy source, these higher emissions are attributed to China. Yet it is only Canadian consumers’ demand that caused the emissions. Thus, countries that have lowered their “carbon footprint” at considerable cost can be smug about their emission reductions looking good, but without necessarily doing that much good for the planet.

An estimated 22% of global CO2 emissions in 2014 (the last year for which figures are available) were from the production of goods exported to and consumed in another country. For example, even though domestic emissions in the UK fell by 27% between 1990 and 2014, once CO2 imports are added in the real number is only 11%. Similarly, a 9% increase in domestic US emissions since 1990 is actually 17% when imports are added.

China and India have both seen dramatic increases in emissions since 1990. Despite the massive expansion of exports, particularly from China, their emissions are still mostly due to domestic consumption, as they lift millions of their citizens from severe poverty. The developed countries cannot, in good conscience, demand that the struggling populations in the developing countries remain locked in poverty because now the Earth’s CO2 capacity has been used up by the most prosperous nations. Currently, developed countries emit about 1/3 of global CO2 emission, the developing countries about 2/3. In developing countries with millions living in poverty, rising emissions are likely to continue, swamping reductions in the developed countries.

Territorial emissions accounting, the current method, is causally inaccurate, but staunchly defended. For example, the UK has argued, in opposing causal emissions accounting, that it only has direct control over its home-grown emissions, so the manufacturing methods and energy choices in China are outside its control. True, but irrelevant. Consumer demand drives production to fill that demand, so take your suppliers as they are.

Denying responsibility for shifting emissions to another country is just trying to look good while doing bad – like saying “we’re not killing the planet any more, now we’ve hired others to do that for us”.

So yes, a CO2 tax can change investors’ behaviour – but not necessarily with the effects Canada might wish.

If CO2 emissions are truly killing the planet, then as our carbon tax continues to increase Canada will increasingly be hiring high-emission countries to do our killing.  The total global emissions Canadians will cause by exporting emissions will probably rise, even while the domestic emissions may appear flat or slowly decreasing. Meanwhile, a rising tax accompanied by extensive, inefficient regulation, will also  work to reduce our GNP and our average per capita income. One can only wonder for how long these laws will be politically sustainable.

Next Post: The Paris Agreement is Not What You Think it Is

How quickly can the 2015 Paris Agreement fix the widespread concern with the “climate emergency”? The short answer is: it can’t. The politicians and the media love to talk about that Agreement without having read or understood it.   Please read my next post for my analysis of this largely misunderstood international agreement.