Will the CAI solve our climate-policy problem and end eco-micro-management?

The CAI. Not the CIA, which may or may not be working on our climate-policy problem, who knows? It works on lots of things so it may be working on that, too. Rather, the CAI is the Trudeau government’s new “Climate Action Incentive,” which most people will continue to refer to by its less-politically palatable name, “carbon tax.” The euphemism “CAI” may make it easier to swallow but a tax by any other name will have the same incentive effects.

I wonder if the CAI (and especially the rebates that go with it) won’t solve our climate-policy problem, which is not the big problem that the planet may be overheating, but the smaller, local, Canadian problem that so far we haven’t been able to agree on a policy. That’s not necessarily a problem. One reason for a federation is to pursue different approaches to policy, possibly including no policy, both so there can be policy experimentation and to allow different parts of the country to express their uniqueness by doing policy their own way.

My hunch, though, is that the new federal program will end up winning the policy competition.

The reason is that the roughly half of Canadians who don’t live in the four provinces it applies to (Saskatchewan, Manitoba, Ontario and New Brunswick) will soon ask both themselves and their provincial politicians: “Where’s my rebate cheque?”

In Quebec, where I live, we’ve had a cap-and-trade system since 2013. It’s operated jointly by California and, until Premier Doug Ford recently withdrew his province, Ontario. To emit carbon legally, Quebec companies have needed permits that they were either given or have had to buy on the permit exchange. That they can avoid incurring the cost of permits by reducing their emission of carbon provides the financial incentive to do just that. That’s all well and good and, economic theory suggests, efficient. But ordinary citizens of Quebec, such as myself, have wanted to know: What has been in it for me? I’ve had to pay slightly higher prices for goods and services produced by companies passing along the cost of their permits. But I’ve received no tangible benefit, certainly nothing approaching the several-hundred-dollar cheque Canadians in the four “federalized CAI” provinces will now get.

In comparison to provinces running their own systems, a tax that is generously rebated is pretty attractive. I’m an economist, not a political scientist, but I wonder if the result won’t be a slow but powerful up swell in support for moving to a tax-and-rebate system in the other provinces. True, it would be motivated by nothing more than people’s grubby desire for cash but whatever the motivation it might not be a bad idea. Tax-and-rebate has been a standard recommendation of economists since pollution problems began to get serious policy consideration in the middle of the last century. You change the price of the pollutant you’re worried about but you try not to crater people’s incomes in the process.

In fact, in my reading much of the conservative reaction to the new federal plan has focused on two main concerns.

First, the possibility that the rebates are just a shiny lure to get the plan accepted and will be reduced or withdrawn once it is embedded in the policy landscape.

And second, the fact that the tax-and-rebate system is being imposed on top of an elaborate and largely incoherent web of existing regulatory and fiscal inducements to different kinds of carbon mitigation. The main rationale for cap-and-trade or tax-and-rebate is precisely that either renders detailed intervention—which is bound to be inefficient—unnecessary. But here we’re imposing an efficient mitigation strategy on top of an inefficient one.

On the first problem, conservatives could turn their minds to how to set up the rebates so they aren’t subject to erosion. The easiest way would be to turn them into actual tax rate cuts since it’s presumably harder for politicians to raise tax rates than to reduce or inflate away discretionary dollar payments. One problem with that strategy is that not all Canadians who would pay carbon taxes—which is basically everyone—also pay income taxes. In fact, a largely achieved goal of income tax policy in recent years has been to outright exempt more and more lower-income people.

On the second problem, the possibility of a new conservative strategy emerges: accept tax-and-rebate in principle and promise to improve it in practice. But use that acceptance as license to go after the enviro-industrial complex that governments have built up over the last two decades by means of regulation, protection, subsidy and tax expenditure. That it’s a green clean swamp doesn’t mean it isn’t a swamp or that rent-seeking swamp creatures don’t live there.

Many conservatives—whose ultimate goal, after all, is to conserve—have felt uncomfortable with a policy of complete opposition to any and all efforts to reduce carbon emissions. Now that the economist’s ideal of a policy that changes the price of carbon but offsets the impact on people’s income is going to exist in four provinces, from here on in the sensible strategy, and maybe a politically sellable strategy, too, may be to accept that framework and work instead toward institutionally shoring up the rebates and getting rid of the now policy-redundant web of eco-micro-management.