Federal carbon tax leaves us in a hole

Hey there, time traveller!
This article was published 13/03/2020 (2212 days ago), so information in it may no longer be current.

ANALYSIS is now complete by MBA students at the Asper School of Business, examining how realistic are projected reductions of greenhouse gas emissions from the current federal carbon pricing system. Frankly, it does not look good for Canada. The results also continue to paint the federal Liberals as less than honest with Canadians, in this case about emission reductions.

There are many proponents of carbon taxation in Canada. Public relations aside, calling this measure a tax is not bad, given that is exactly what it is. There are, however, important subtleties. In a public 2016 paper, Ross McKitrick, a prominent economist from the University of Guelph, made the key point that such systems are not about, or at least should not be about, setting reduction targets. Rather, they are about setting price targets, then letting the market decide what happens.

He further emphasized that it is even possible greenhouse gases emissions could increase under a carbon tax, if that is how the market responds.

Yet, despite this, the federal government still touts carbon taxation as its primary means to reduce greenhouse gases emissions for the Paris Agreement. The federal minister recently reiterated the claim that their tax is the “most efficient way to reduce pollution.” A report from late 2018, entitled “Estimated Results of the Federal Carbon Pollution Pricing System,” claimed reductions by 2022 will total 80 to 90 million tonnes. The indicated reduction is very large, but is it realistic?

As I have noted previously, the operation of a carbon tax is based on economic fundamentals. Any resulting reductions depend on two key factors: first is the absolute magnitude of the tax, for which there is already broad consensus that the current price is too low to achieve meaningful change; second, and more important, is how responsive consumers are to the tax, with consumer sensitivity characterized by the technical parameter called price elasticity of demand.

The federal Liberal government has stubbornly refused to disclose exactly how sensitive they assume consumers will be to the tax in their economic modeling. This persistent reluctance also suggests something is being deliberately hidden. At the same time, recent financial data on revenues for the federal tax over the next few years allow for presumed sensitivity values to be at least roughly estimated for the three main commodity fossil fuels, namely gasoline, diesel, and natural gas. Results from federal data can be then compared to a variety of calculated sensitivity values based on market experience, as published in literature.

So what does the analysis yield? Consumer sensitivity values implied from federal financial data are all optimistic compared to market experience across North America, within Canada, and especially in Manitoba. Depending on the fuel involved, findings range from being somewhat optimistic to being wildly and unrealistically optimistic. The latter is especially the case with gasoline.

The implications are sobering. Actual reductions are unlikely to be even close to federal claims. My own calculations based on Manitoba experience with the three main fossil fuels over the past decade suggest reductions here due to the carbon tax are likely to be less than 0.1 per cent — effectively meaningless.

In other words, the dogmatic Liberal pursuit of carbon taxes for political reasons is failing miserably, and leaving Canada with an onerous emission-reductions shortfall. The sooner we abandon carbon taxation, the better. On a positive note, two examples of policies that have already shown success in Canadian provinces are, first, continuing to decarbonize the grid, and, second, increasing electrification.

Some can reasonably ask, “But what about tax saliency?” Some academics suggest consumers are more responsive to carbon taxes than to mere changes in base fuel prices. But in Manitoba, we have been able to observe in real time that this effect has not occurred. If it had, we would already be able to see noticeable reductions in fuel consumption, but that has not happened.

Some can also reasonably ask, “But cannot revenues from a carbon tax be used to fund emission-reduction projects?” This is completely reasonable, and indeed is a positive application for a carbon tax. Except that is not what is being done; instead, money is supposedly channelled back to households. And even that claim is not true — last spring, the Canada Revenue Agency reported $1.75 billion was distributed to households as Climate Action Incentives; but Finance Canada, as part its fall economic update, reported the anticipated carbon tax collections for the year as $2.6 billion.

Thus, less than 70 per cent of collected tax was rebated, not 90 per cent as claimed, with Canadians stiffed for close to $600 million in one year alone.

On this file, we need less arrogant bravado, and less grandiose but empty claims from the federal government. More honesty and practicality are needed if we are to make progress forward.

Robert Parsons teaches sustainability economics in the MBA program at the I.H. Asper School of Business.