Fraser Forum

The finance minister said what? Part 3

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This third installment in what has unfortunately become an ongoing series of blog posts examining statements by Canada’s federal Finance Minister Bill Morneau (pictured above) focuses on recent comments made during testimony before the federal finance committee on Canada’s federal carbon pricing.

There are several issues emerging from the minister’s comments, but three are worth examining in more detail.

First, as the minister implied, there’s a theoretical carbon-pricing model almost all economists and analysts agree would both price carbon and improve the economy. That model is based on several core requirements: (1) revenues from carbon pricing are recycled back to the economy through tax relief (revenue neutral) that reduces more damaging taxes such as personal and business income taxes, (2) carbon pricing replaces existing carbon-related regulations, and (3) revenues from carbon pricing cannot be used to subsidize substitutes such as wind, solar or other alternative energies for carbon-emitting activities, since the whole point of introducing the price on carbon is to allow the market to determine optimal substitutes.

However, what the minister seems unaware of (or perhaps simply ignores out of convenience) is that no province in Canada (or any jurisdiction outside of Canada) has implemented carbon pricing that meets these conditions. No jurisdiction has implemented and maintained a revenue-neutral carbon-pricing scheme. And no jurisdiction has replaced carbon regulations with carbon pricing.

In other words, the theoretical or “ideal” carbon-pricing system has never been implemented.

It’s therefore disingenuous to argue simultaneously that a theoretical model that has never been used—but is generally supported by economists—will allow jurisdictions to price carbon and improve the economy.

Second, the reason Minister Morneau, and this federal government more broadly, refuse to answer the question of how much the national carbon-pricing requirement might cost average families is because they insist it will be revenue neutral. In other words, Ottawa is telling Canadians they will not face additional new taxes from carbon pricing.

However, as already stated, no jurisdiction has introduced and maintained a revenue-neutral carbon-pricing system, including British Columbia.

B.C.’s carbon tax was revenue neutral for the first five years. However, beginning in 2013-2014, its carbon tax began generating revenues in excess of the legitimate tax offsets. Indeed, the B.C. government’s own projections indicated the carbon tax would generate almost $900 million in net revenues over a six-year period. Further, the new NDP government in B.C. has now explicitly stated the carbon tax will be a net revenue generator for the province. And both Alberta and Ontario already collect significant revenues from their carbon-pricing schemes.

Carbon pricing, as just another way for governments to collect more revenue, seems to be resonating with Canadians. According to a recent Ipsos poll, for instance, seven in 10 Ontarians think carbon taxes are simply a new tax. Clearly, Ontarians view carbon taxes as just another way for governments to extract more income from citizens, which is precisely what the finance minister is unwilling to acknowledge.

Third, Minister Morneau continues to claim that B.C.’s carbon tax has brought “significant economic gains” to the province. However, new evidence questions this claim. A new academic paper published in the Journal of Environmental Economics and Management, for instance, concludes that B.C.’s carbon tax has had significant adverse impacts on the province’s labour market, with particularly adverse effects on people who are less educated. Specifically, the paper found that B.C.’s carbon tax caused the overall unemployment rate—regardless of gender or education—to increase by 1.5 percentage points. Low-educated males suffered the most, as the policy increased the unemployment rates of this cohort by 2.4 percentage points.

The reality is that carbon-pricing policy must change dramatically to conform to, or at least better proximate, the theoretical model if advocates are to continue arguing for both carbon pricing and improved economic performance. The alternative is to recognize the reality of existing carbon-pricing policies and the likelihood that they will impose costs—perhaps significant costs—on the Canadian economy.


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