Canada’s carbon sticker shock shouldn’t shock anyone

According to a recently revealed document, Environment Canada told Liberal government officials in 2015 that Canada would need a carbon tax of $200 to $300 per tonne of greenhouse gases emitted by 2050 to meet our commitments under the Paris treaty.

That’s a far cry from the $50 per tonne by 2022 announced last October.

But the high value shouldn’t surprise anyone. Governments like to pick an ambitious quantity target, such as the Paris commitment or the failed Kyoto target before it. But regardless of promises of cheap reductions, cutting greenhouse gas (GHG) emissions is very costly, and inevitably the government balks at the price.

Equally inevitable is the government’s next utterance—a reassurance that it can keep the costs down by mixing a low carbon price with direct regulation. But regulation inflates the cost of the overall package. It’s as if the government believes paying $300 per tonne is too much, so we’ll make it $600.

Canadians have long had to contend with a lack of honesty regarding climate policy. Reducing emissions requires reconfiguring the economy so that people pay more for some of the most essential services: mobility, lighting, heating, cooling, etc. Economists don’t claim to know the cheapest way to do the reconfiguring; instead they argue that a revenue-neutral carbon tax can lead the private sector to find the cheapest way. All other policy options—including cap-and-trade—cost more to do the same thing. But they conceal the costs and hide who is paying them, which is why politicians like them.

Meanwhile, proponents of carbon taxes engage in their own bait-and-switch. The government lies by promising an emissions reduction quantity at an impossibly low price. Carbon taxers respond by calling for regulations to be repealed and replaced by a moderate pricing instrument, but go mum over the question of the resulting emission quantities, and stay mum as regulations aren’t removed. They seek popularity with the green crowd by taking the quantity target for granted, but they don’t talk about the required carbon price. Instead they call for a smaller tax, without pointing out that they are implicitly rejecting the promise of a steep emissions cut. Such a position is only slightly less dishonest than the government’s.

An economically-valid carbon pricing policy would look like this. Estimate, as reasonably as possible, the marginal social costs of GHG emissions, then deflate this number by the marginal cost of public funds to yield the optimal carbon tax rate. Implement this in a revenue-neutral way through income tax cuts while removing existing regulations on GHGs, then let the market decide on the resulting emissions quantity.

Based on mainstream numbers, the resulting carbon price will be lower—and likely far lower—than the per-tonne costs of most GHG policies we have pursued in Canada, such as the coal phase-out, the biofuels mandate, the oilsands cap, renewables targets, car mileage standards, etc. Therefore a switch from our current mix of regulations to a proper carbon pricing regime would imply increasing GHG emissions, probably to a level very close to what we would observe in the absence of any emissions policy, and an abandonment of the Paris target. This would be the “right” outcome, based on mainstream science and economics. But it would be a radical departure from current policies.

But the failure to confront the high cost of ambitious promises is not the only problem with climate policy. At $300 per tonne it’s a safe bet that revenue-neutrality for a carbon tax is impossible. The rest of the tax base will shrink so much that other taxes would have to be raised to keep the government budget intact. This effect can be missed in some macroeconomic models that assume capital is internationally immobile. But when that assumption is relaxed, the gap between the Canadian and U.S. policy stance has a big effect on the domestic tax base. With the U.S. now in full reverse on GHG and climate policy, Canada’s aggressive Paris promises are even more untenable.