The Carbon Tax: An Idea Whose Time Has Come

Sep 25, 2013

Few think of Canada as a superpower in any sense of the term, but there is one area of national strength where Canada outranks most countries in the world: energy abundance. Canada has within its borders the third largest proven oil reserves in the world (170.2 billion barrels) and exports nearly 3 million barrels per day to its southern neighbor under favorable terms stipulated by NAFTA.

Canadian ambitions to be an “energy superpower,” as Prime Minister Stephen Harper has put it, would have been naïve just a few years ago. Recent trends in technology, however, have enabled increased energy production, thereby changing the outlook for Canada-U.S energy cooperation. The International Energy Agency reported that North American oil production would grow by 4 million barrels over the next six years and would account for half of global output. The IEA also projected that because of new extractive technologies, the United States will be the largest oil producer in the world by 2020, and that North America will be a net exporter of oil by 2030.

As this oil rush begins across North America, both Canada and the United States must enact environmental policies to mitigate the negative effects of increased oil production. The debate in both Washington and Ottawa so far has focused almost exclusively on the Keystone XL Pipeline with certain partisans arguing for the economic benefits of the pipeline and others against the environmental degradation it may cause. While this debate is necessary, it should move beyond the confines of a single pipeline to a policy option likely to increase both revenue and mitigate greenhouse gases: a carbon tax.

 A carbon tax penalizes greenhouse gas emitters by requiring payment for pollution. The logic behind such a tax is to change behavior—in this case nudging consumers and businesses to move towards renewable sources—while simultaneously raising revenue. If coupled with reductions in corporate or personal income taxes, which are considered by economists to be more inefficient taxes, it would also stimulate economic activity. Such a scenario would be “close to [the] economic ideal, as The Economist put it.

 Though conservatives and many progressives instinctively balk at the mention of a new tax, the case of British Columbia’s carbon tax highlights the success of such an environmental policy. BC introduced a carbon tax at $10 per ton of carbon in 2008; the penalty rose by $5 per ton each year afterwards, before stabilizing at $30. Since its introduction, fuel consumption per head in BC has dropped by 4.5 percent—more than in Canada’s other provinces. Greenhouse gas emissions dropped 9.9 percent from 2008 to 2010 in BC, while the rest of Canada saw a more modest 4.6 percent reduction. What’s more, the province’s economy grew faster than the rest of Canada’s over the same period at 1.78 percent, while the rest of Canada’s was 1.64 percent. The increased revenue to the treasury allowed the province to reduce corporate taxes as well as the income tax rates on the two lowest brackets, thus mitigating the more adverse effects lower-income taxpayers would face.

In a hypothetical North American carbon tax that included the United States and Canada, tax credits and cuts could likewise reduce hardships faced by working-class citizens.

While the policy has wide backing—from N. Greg Mankiw on the right to Jeffrey Sachs on the left—the politics of the carbon tax are difficult. Canada’s Liberal Party suffered a large defeat at the polls in 2008 because the ruling Conservatives effectively branded the Liberal “Green Shift” as a “job-killing carbon tax.” Australia’s Labor Government instituted a carbon tax in 2011, though its unpopularity led to the downfall of Prime Minister Kevin Rudd and the recent victory of the conservative opposition party. In Washington, a carbon tax proposal briefly surfaced during the fiscal cliff negotiations in the fall of 2012. The tax failed to gain momentum despite a Congressional Research Service report concluding that a $20 per ton carbon tax would generate $144 billion by 2020 and potentially cut the debt in half over a decade (the size of the debt reduction would depend on the increase in the deficit).

Of course, none of this makes a carbon tax politically palatable. A well-planned, gradually introduced carbon tax offset with reduced income taxes would still contain the word “tax.” Publics recoil at new taxation, regardless of the efficiency or benefits they bring. Backers of a carbon tax could thus reintroduce such proposals as a “carbon penalty” or “carbon fee” to build public support and allay the ferocity of opposition. Since the Harper government has linked Canada’s environmental policy to that of the Obama administration, the United States would have to take the public lead on a joint grand energy strategy; the Canadian government would almost surely follow.

As oil output increases and North America inches towards possible energy self-sufficiency in the future, greenhouse gas emissions will continue to rise if left unchecked. Earlier this year, the concentration of carbon dioxide in the atmosphere reached 400 parts per million for the first time in 5 million years. During the first 17 weeks of 2013, CO2 levels rose faster than at any point since recordkeeping began in 1958. Finding a solution to the greatest environmental challenge in generations will be long and difficult. There are no perfect solutions and each requires both widespread public support and political will.

After all the other policy options have been exhausted, both governments may end up at the carbon tax by default. For the sake of our environmental future, let’s hope we get there sooner.

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