It’s time to implement a national gas tax
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Hey there, time traveller!
This article was published 24/08/2016 (2285 days ago), so information in it may no longer be current.
According to opinion polls, Canadians are accepting the idea that humans are changing the climate. While our readiness to undertake major lifestyle changes remains uncertain, the political rhetoric is also warming. The provincial premiers and the prime minister tout their favourite magic-bullet remedies for climate change.
Government has four general approaches to reduce greenhouse-gas emissions: regulation/guidance, infrastructure spending to encourage lower-emission lifestyles, technology and carbon pricing. A fifth option is to accept the inevitability of global warming and adapt. This policy is emerging as the dominant response to climate change, whether by design or by accident.
First, the easiest policy to understand is regulation. The Environmental Protection Agency in the United States has mandated a mileage of 54.5 miles per gallon for light-duty vehicles by 2025. In Canada, labels such as EnerGuide on appliances offer information to consumers, and while these are mandatory, government does not set a standard — yet. This is an only incremental and gradual approach to the problem.
Regulation requires standard-setting, testing and enforcement. Given the array of energy-using products on the market, this is a massive task both to initiate and to maintain. Relying on this approach alone is not an effective way to move consumers and industry quickly toward energy efficiency and reduced emissions.
Second, planners promote infrastructure investment in things such as bicycle lanes and rapid transit as a way to reduce emissions. However, without aggressive limits on sprawl and programs to increase urban densities close to interchanges, transit has limited short-term potential to make worthwhile contributions to reductions.
Third, some, such as Brad Wall, the premier of Saskatchewan, advocate chemical/biological/physical technologies. These range from carbon capture and storage (sequestration) directed to select large emitters to elaborate plans involving massive reforestation or ocean storage of CO2. However, targeted technical solutions offer limited impact on greenhouse-gas mitigation nationally and large-scale fixes require massive investment in technologies that remain in the realm of science fiction.
Carbon pricing, the fourth policy option for mitigating emissions, comes in two variants. First is emissions trading or “cap and trade,” proposed by Manitoba, Ontario and Quebec. This plan involves the creation of greenhouse-gas emission “rights” that are sold by efficient firms and purchased by inefficient firms.
Cap-and-trade schemes are technically complex to design and manage. A key requirement, and one that none of the three provinces meets, is that sufficient numbers of polluting entities must exist to support a market for emissions trading.
In Manitoba, the top 10 emitters include a fertilizer plant, two municipally owned landfills, a paper mill and a smelting operation. There is no common denominator and it will be impossible to develop an emissions market within the province. Manitoba, Ontario, and Quebec have stated they will co-ordinate their plans and that is an improvement. However, that will not produce enough representation within the major polluting sectors to support an emissions trading market.
The second type of carbon pricing is a direct tax on gasoline and other fossil fuels. Such a tax adds the social cost of using fossil fuel to the retail price, creating an incentive for users to move to more efficient, less polluting transportation and manufacturing technologies.
This policy is administratively simple, since gas taxes have long served as an important public revenue source. The defect with a gas tax is its regressivity (low-income users pay proportionately more) and the potential for inducing a recession if the tax is too high. Industry argues a gas tax will be a jobs killer and retail taxes are an anathema for politicians, especially in Manitoba. Consumers just may accept such a tax if revenues flow directly to research and development in renewable energy and/or enable the reduction of other taxes.
On balance, a gas tax is probably the policy of choice. While oil prices are recovering, they remain very low. The time is right to implement such a tax with minimal financial disruption to businesses and households.
Our current low gas prices and very easy credit have paced rapid car sales with trucks at the fore. Consumers and producers can be lulled into complacency by current low market prices for energy. We need a more robust response than the tepid and timid policies on the table. Last year was the hottest year on record for the planet and 2016 is set to be even warmer. The “disconnect” between the evidence of global warming and low gas prices presents an opportunity to introduce a national fossil-fuel tax.
If introduced gradually over the next five years, with meaningful increases, such a tax regime will create the predictability needed to manage the transition to a more energy efficient economy. Furthermore, should the Democrats win the U.S. presidential election, as is likely, Canada may have a continental partner, which could then truly make a difference.
Gregory Mason is an associate professor of economics at the University of Manitoba and a senior consultant at PRA Inc. His views are his own.
Updated on Wednesday, August 24, 2016 6:16 AM CDT: Adds photo