Interpret new carbon tax study with caution

Recently, a group called Canadians for Clean Prosperity (CCP) released a study arguing that the vast majority of Canadian households would receive more money (in the form of carbon dividend cheques) than they would pay in carbon taxes.

The study has been subsequently used to support the federal carbon tax. However, careful review of the study concludes that the analysis is too optimistic based on a number of questionable assumptions. 

For example, the study looks at how much the federal backstop carbon tax would cost households in Saskatchewan, Alberta and Ontario under the following scheme—that the government collects carbon taxes from both businesses and households, then returns revenues from the tax directly to households in the form of carbon dividends. It concluded that households would see net benefits, in part because the carbon taxes are not just collected from households but also businesses.

To investigate the carbon cost impact to households, the study analyzed the cost in two ways: the direct cost, calculated through taxes households pay for energy use (paying the carbon tax means that households pay more per litre on gasoline or pay more per unit of natural gas to heat their home), and the indirect costs associated with non-energy consumption (for things such as transportation costs of goods).

However, these estimates are understated and do not reflect the actual costs to Canadian households.

Why?

The CCP study assumes that the new carbon tax will shift the tax burden from households towards businesses without putting businesses at a competitive disadvantage. But in reality, firms will pass on their tax costs to workers, investors and consumers, all of whom are part of the household sector.

This will result in higher prices, job losses and less investment in Canada and thereby less earnings for households.

The study acknowledges that businesses will pass along some of the costs to households in the form of higher prices, but doesn’t account for job losses, lower wages and reduced investment returns when calculating the cost impacts of the carbon tax on households.

The omission of these factors is particularly problematic given Canada’s declining investment climate and ongoing challenges facing businesses including uncertainty surrounding NAFTA, new U.S. tax reforms and issues with resource development in our country.

Moreover, the analysis is based on an assumption that the government would keep its promise of rebating revenues to households. However, there’s no guarantee this will happen in light of past government decisions.

Consider the case of B.C.’s carbon tax.

Back in 2008/09, when the province first introduced the carbon tax, the B.C. Liberal government promised revenue neutrality. And according to a recent study, initially the tax was revenue neutral. (In economic parlance, “revenue neutrality” means that when a government imposes a new tax, it lowers other taxes in proportion to the new tax, so that no new net revenue is generated for the government.)

To offset the new revenue, the government introduced new cuts to personal and business tax rates and a new tax credit for low-income earners.

However, a mere five years later, as the carbon-tax revenue increased, the government no longer provided new tax cuts that sufficiently offset the revenue generated from the carbon tax. So B.C.’s carbon tax was no longer revenue neutral in 2013/14, as the government began to include pre-existing tax credits to specific groups such as the B.C. film industry when reporting the offsetting tax cuts in the budget.

Now, 10 years after the carbon tax was introduced, revenue neutrality is no longer provincial policy in British Columbia. The current NDP government (supported by the Green Party) has discarded revenue neutrality by saying the new revenues will be used for spending initiatives. The 2017 provincial budget not only included such tax increases, it also eliminated from law the requirement for offsetting tax cuts. Simply put, B.C.’s revenue neutral carbon tax was a fleeting policy that didn’t survive under a single government. Thus, assuming governments will rebate carbon tax revenues to households is wishful thinking based on how B.C.’s carbon tax revenues have been used.  

Given that the CCP study omits some key factors and relies on problematic assumptions, the assertion that this carbon tax-and-dividend scheme would benefit nearly all households is questionable at best.