One good thing about the carbon tax

Introducing a new tax is an unconventional way to kick off an election campaign. Perhaps understanding that, the federal government declines to call its new carbon tax a tax. It calls it a fuel charge instead. Or more precisely, a “fuel charge under the Greenhouse Gas Pollution Pricing Act.”

But it’s a tax, as Conservative Leader Andrew Scheer says over and over again at different photo ops. Or doesn’t actually say but reads in those scripted presentations he keeps making about whatever latest Liberal deficiency. Can Scheer actually speak extemporaneously? Or am I a victim here of selective reporting designed to give the impression he’s unable to communicate without a teleprompter?

But never mind political style. The fuel charge is clearly a tax. If you’re a fuel-seller and you didn’t register for it by April 1, that cost you $2,000. And if you don’t pay the tax, you will suffer the same sorts of penalties, fines and ultimately imprisonment as if you fail to pay any other tax. It’s a tax.

On the other hand, it’s not your usual kind of tax. It’s a tax the government is giving back. Not in new programs but in cash, more or less. That should dampen the anger of those paying the tax. And it presumably will change the politics of the tax when people in the four provinces and two territories being hit by the tax start receiving their rebate cheques from Ottawa. And not just little cheques but cheques in the hundreds of dollars. And close enough to the election to dull the bitter taste of the higher fuel prices the tax prompted this week.

There may be good reasons to oppose this new tax-and-rebate policy. I’ll list some below. But the debate we’re embarking on—or actually renewing, since we’ve been talking about this idea since Stéphane Dion was Liberal leader—should recognize it is sound economics.

We don’t have a lot in economics, but we do have prices and the price system. Thousands of economic experiments and millennia of experience have established that people do respond to price increases. There aren’t many laws in economics but there is the law of demand—the demand curve slopes downward. If you want to reduce the consumption of something, raise its price. It almost always works. (Though yes, there are a few strange goods where it may not. When the price of potatoes fell in 19th-century Ireland, people who lived almost exclusively on potatoes used the extra money this effectively gave them to vary their diet a little by buying the occasional piece of meat. So lower potato prices led to a slight reduction in potato consumption. Or may have done. The effect is still debated.)

Any price increase has two effects—an income effect and a substitution effect. The income effect is that higher prices for anything effectively make you poorer. To continue to consume exactly what you’ve been consuming you’ll need more money. If you don’t get more money, you have to cut back on spending, so you end up buying less of the good whose price has gone up but maybe less of other things, too.

But then there’s the substitution effect. Even suppose we compensate you for the effective decline in your income, as roughly, Ottawa is trying to do with its carbon tax rebates. You will be unlikely, given the new higher price for whatever good we’re talking about, to consume exactly the same amount of it as before. More than likely, you’ll consume less of the now higher-priced good and more of other things.

This is very basic economics. It gets taught in the first couple of weeks of any introductory microeconomics course. You won’t find many economists, not even conservative ones such as myself, arguing with it. It would be like a mathematician arguing with basic arithmetic. Anyone who does argue with it—party leaders beware!—will look economically illiterate.

So it would be good if opponents of the new carbon tax focused on other possible problems with it, such as:

• Global warming isn’t that serious a problem or, if it is, it’s best adapted to, rather than resisted.
• Global warming is a global “public bad” and Canada’s carbon tax will have only minimal global effect if other countries free-ride—as people can and often do when goods or bads are technologically “public,” i.e. can be consumed even by people who don’t pay for them.
• The organization that brought us the Phoenix pay system may not be able to administer the new tax—or any tax—efficiently.
• The new tax revenues eventually inevitably will stop being rebated and will instead be merged into consolidated revenue funds to provide ever more low-net-return public programs designed to make moral statements rather than solve real problems (though that would actually increase their carbon-reducing effect as it would add a negative income effect to the planned substitution effect).
• Calculating the optimal level for the carbon tax—which in theory is the damage done at the margin by the activity being taxed—is hopelessly complicated so we’ll never ever be sure we’re getting it right.
• It might well be better for the economy to use carbon tax revenues to cut taxes on income, investment and labour rather than to give cash rebates.

I could go on. It’s certainly OK to challenge the carbon tax as a piece of public policy. It’s eminently challengeable. But best not do it by denying simple truths about the price system. Especially if, in other areas, you cast yourself as a fan of the price system.