Summary

• Provinces across Canada have implemented some form of carbon pricing, either through carbon taxes or emission-trading schemes.
• These taxes are touted as being the most “efficient” way to control greenhouse gas emissions, yet be economically benign.
• But in the real world, Canada’s carbon taxes fall far short of the textbook ideal that would justify claims of efficiency. They fail on three key requirements.
• First, to be efficient, carbon taxes must displace regulations, not be added to them. Second, the taxes must be fully rebated in reducing distortionary taxes such as income taxes, and third, the revenues from the tax should not be used to further distort energy markets with subsidies to substitute forms of energy.
• Canada’s experience with carbon taxes shows that governments have little interest in ideal implementation. Instead, rather than simply addressing greenhouse gas emissions efficiently, they prefer to create revenue streams for pet projects and retain the ability to transfer wealth.