Carbon tax model, shunned in Canada, gets bi-partisan support in U.S.

My Clean Break column today laments the fact that Canadians didn’t give the idea of a carbon tax serious debate or consideration in the last federal election. The Liberals, under Stephane Dion, proposed a carbon tax as part of a “Green Shift” plan that would use proceeds from that tax to lower personal and income taxes. In other words, it was revenue-neutral for the government. Unfortunately, the Liberals and its leader did a poor job of communicating the plan and the Conservatives, under Prime Minister Stephen Harper, did an excellent job of scaring Canadians into rejecting it.

My disappointment comes not with the Liberals losing, it comes from the fact that the idea of a carbon tax is unlikely to be entertained on the Canadian political scene for some time now given the rough ride the Liberals got. It’s for this reason I’m someone elated that the idea is being given serious attention in the United States, and not just by Al Gore and friends. Republicans appear quite happy to entertain the idea, and so too are some of the major oil companies — Exxon Mobil included.

Now, who knows where this will go? But it’s nice to know that, in a continental context, the idea is still alive and that people are willing to compare and contrast the benefits of a carbon tax against a cap-and-trade system that many, including myself, perceive as inefficient, complex and prone to manipulation.

13 thoughts on “Carbon tax model, shunned in Canada, gets bi-partisan support in U.S.”

  1. I also prefer the carbon tax over a carbon cap and trading system. The advantages of the trading system are that it sets a guaranteed limit on future emissions (the cap) and the fact that, at least theoretically, can exploit market forces to reduce the marginal cost of abatement. However, it is exactly that latter part that I am worried about, considering irrational (stock) markets. I fear that, in practice, speculation and related mechanisms abound, we will end up will a very volitile price for emissions in a trading system, a major disincentive for strategic (energy) investments. That’s a show stopper for me.

    The tax is a price based instrument, which can be exploited by guaranteeing the price levels over longer terms (say over the next decade at least). When we guarantee the future price of emissions, companies and individuals will know what they are up against – and will be more willing to make the bigger investments in energy equipment and also do more in terms of conservation of (energy) resources. This major benefit weighs heavier for me than than the absolute limit of emissions that the cap and trade provides, especially considering the speculation disadvantage that carbon trading has. IMHO, it’s not necessary to reduce emissions through such a cap; all that’s required is to add a price on GhG emissions roughly equal to the social + environmental cost so the market has the socially optimal price signal. We also need to give more attention to other aspects of effective market functioning, such as provision of adequate information to consumers and in markets in general, clearly defining property rights etc etc that will be needed for this to work. To please the sceptics, we could start at the lower end of marginal damage estimates from the scientific work done so far, and slowly increase the cost of emissions every month or so.

    I hope you find this little rant useful 😉

    Cheers,

    Cyril

  2. I think that the problem with taxes is that the money obtained from theses ares subject to political decisions (and manipulations). This way, the GhG emitters may be ending up having no penalty at all. IMHO this is why major oil companies, support this approach instead of the cap and trade system.

  3. Carbon tax (or any tax for that matter) results in people/companies/etc. trying to ‘beat the taxman’. We see with personal income tax and we see it with corporate taxes. If a carbon tax is introduced, we will definitely see companies trying to find ways to ‘beat the carbon tax’. Wasted efforts to prevent having to pay increased taxes.

    Why not use this ‘energy’ (no pun intended) to create cleaner companies? Instead of a tax, go for a tax break. Companies pay less tax the less they pollute. If made sweet enough, companies will do whatever they can to improve their facilities and realize the tax breaks at hand. This will create more spending in the ‘clean industry’ as suppliers of products to help companies reduce their emissions will be busy.

    Maybe I’m too idealistic, but with kids (and with profit hungry corporations) you’ll get further with the carrot than you will with the stick. Not to mention the final product (kids or corporations) turn out better with positive reinforcement instead of constant penalization.

    Just a thought!

  4. Can you relay the sources for this? Pertaining to the US adoption of the new tax and the largest oil company in the world getting on board as such an early stage.

    Thanks either way!

  5. The carbon tax is a great idea and is a benefit for reduction. The cap and trade system is prone to failure because it relies on free market ideas to succeed. IF this economic meltdown has shown us anything its that the free market can be to easily maipulated to meet ones needs. Also regulation of a falued system will increase overtime so why not take a new system and try it. I hope as a carbon tax begins to stir debate south of the border it might open up some minds here.

    check out the PWU’s energy plan at
    abetterenergyplan.ca

  6. ……This way, the GhG emitters may be ending up having no penalty at all. IMHO this is why major oil companies, support this approach instead of the cap and trade system……

    I think it is more a case of removing uncertainty. A tax creates an environment where companies can plan, whereas trading creates extra uncertainty. In fact big oil companies have been big winners in Europes trading system, as they are experts in energy management, and have sold permits that they were given free.

    ….Carbon tax (or any tax for that matter) results in people/companies/etc. trying to ‘beat the taxman’…..

    That is a feature, not a flaw. This time you beat the taxman by promoting efficiency.

    Cap and trade is far too open to abuse, and the winners and losers are uncertain. A carbon tax on the other hand can be revenue neutral (ie no losers) and is completely technology neutral, reducing the risk of illogical subsidies. It can also be phased in over a few years, making the transition relatively painless.

  7. Tom, that would work very well if it wasn’t for one little devil: who’se going to pay for the carrots? Less tax revenue for the government through cleaner, less energy intensive companies means lower income for the government. As a result, they will have to tax the people more. This is a major social and political negative. In effect, you are suggesting a subsidy which has to paid for by the public.

    The revenue from the carbon tax , OTOH, can be recycled back into the economy via payroll tax reductions or lump sum transfers back to the people. This way, the overall tax burden on the economy does not increase much (except for the administrative and monitoring costs, which will be low because of the simple nature of the carbon tax – tax the fuel, no exceptions. Not much bureaucracy needed.)

  8. “…I think it is more a case of removing uncertainty. A tax creates an environment where companies can plan, whereas trading creates extra uncertainty…”

    It is not because market is volatile that you can’t have “certainty”. Contracts can make you buy in advance your rights to emit later. This is a basic financial tool. This is the way of working with oil, price paid for oil delivered today has been fixed as much than 2 yrs in advance.

    “…free market can be to easily maipulated …”
    This is a question of regulation and wealth distribution. My taught is that money obtained from taxes are much more prone to manipulation than the market…

  9. E. Martin, in practice basic financial tools get abused through speculation and related mechanism. Speculation – incorrectly estimating supply and/or demand, leads to extreme volatility in oil prices. Your ‘basic financial tool’ has empircally failed. Look at the mess Wall Street makes. I see no reason how a carbon trading system would have less volatility than today’s oil market. In the words of Robert Mcleod: Carbon trading, bubble hysteria”

    http://entropyproduction.blogspot.com/2008/03/carbon-trading-bubble-hysteria.html

  10. Also, the revenue from the carbon tax is not easily deferred to incorrect purposes (like overall government expense) because the revenue stream is extremely simple. Taking away money will make the balance sheet incomplete; this is much easier to monitor and regulate than the revenue streams created by the carbon trading system, with all it’s complex financing structures like banking and borrowing etc that have not shown to reduce volatility in markets anyway.

    The carbon tax is not without flaws, however. For example, if the government decides to change the tax level, that is also price volatility. However, this is why I suggest the level of tax to be contractually guaranteed for at least 10 years, preferably starting at a low level, and contractually guaranteed to increase slowly over the months.

  11. And my point is that you can’t contractually guarantee the level of price in a trading system – that would simply be an overcomplicated carbon tax system! It should come as no surprise that trading systems with ‘safety valves’ have so far not worked very well at all.

    We either fix the price, and let emissions vary (=tax) or we fix the level of emissions but let the price vary (=trading). I am convinced that the tax will prove a superious system for the reasons outlined above, but I understand why people see merit in trading systems.

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