Carbon tax proponent misses mark—several times

In reply to my last column on carbon taxes, Michael Bernstein from Canadians for Clean Prosperity argues that while the federal government’s carbon tax can be improved, it should not, contrary to my view, be rejected. His defence of the tax, however, misses on several important points.

First, he claims that there’s a lack of evidence that carbon taxes are economically damaging, pointing to British Columbia, which since implementing a carbon tax in 2008 has enjoyed high GDP growth relative to other provinces. This is a fine anecdote but a poor argument. A comparable claim is that because a tennis ball suspended on a string does not fall to the ground, there’s a lack of evidence for gravity.

Just as physics tells us a priori that gravity acts on the tennis ball, economics tells us a priori that taxing economic production—which the carbon tax does, to the extent economic production results in carbon emissions—reduces it.

The tennis ball’s failure to fall to the ground shows that other factors besides gravity also affect the ball’s movements. Similarly, B.C.’s GDP growth does not show that carbon taxes are economically benign, but that other factors also affect GDP growth. Indeed, reports from the Parliamentary Budget Officer last year, in 2019 and earlier, all point to the federal carbon tax cutting GDP; the only question is by how much.

Second, Mr. Bernstein suggests the social cost of carbon might be higher than the federal government’s assumption of $50 per tonne. It’s true that if Ottawa has vastly underestimated the environmental harm of carbon emissions, its high carbon tax rate would make more sense. But there’s good evidence that the Trudeau government’s $50 social cost assumption is actually an overestimate. In fact, properly calculated, the social cost could actually be close to $0.

Third, he argues that unless the carbon tax is accompanied by other policies to reduce emissions, the federal government will miss its climate targets including its net-zero emissions pledge. But climate targets are irrelevant in determining whether a carbon tax is good policy.

As a basic principle of economics (and of common sense), an action is worthwhile if the benefits exceed the costs—and not otherwise. If to reach some climate target, the government must set the carbon tax rate higher than the optimal level or impose other more expensive policies—in other words, reduce emissions even when the economic costs exceed the environmental benefits—then missing the targets would make sense.

Certainly improving the carbon tax design, as Mr. Bernstein suggests, to make it less economically damaging, is a fine idea. But if the question is whether to support or oppose current federal policy, which materially deviates from the economic logic of how a carbon tax might sensibly be applied and causes unnecessary economic harm, then Canadians should oppose it.