Double Blind

This post was inspired from Declan’s comment in a previous post I made. I agree with your comments and will agree that such measures will reduce carbon emissions. What is not discussed about, however, is the cost of such actions.

I will focus on the following part of the comment:

A carbon tax combined with lower corporate tax rates might lead to a general lowering of emissions per unit of economic production as well.

People that believe that carbon or greenhouse gas (GHG) emissions will cause significant net negative effects have been suggesting a “carbon tax” – i.e. for every purchase of product that will result in the emission of greenhouse gases in the environment that you will have to pay an amount. Politically the public has been finding this difficult to swallow, so the recent course of action suggested is to make the carbon tax “revenue neutral”, by reducing other forms of taxes in exchange for implementing a carbon tax.

This is foolhardy (tax rates can always change while eliminating the tax is never done in practise) because a carbon tax has an “objective” of reducing itself (via lowered GHG emissions), necessitating an increase in the tax rate to keep it revenue neutral. For example, Sweden implemented such a tax in 1991 and in 6 years it was raised nearly 50%. They are slated to increase the carbon tax again in 2007.

As an example, let’s pretend that BC collects $10 billion in income taxes for the year and we would want to implement a carbon tax worth $4 billion. We reduce the income tax to $6 billion and raise $4 billion in carbon taxes. Using 2004 GHG metrics, that translates into $60 per tonne (1,000kg or 2,200 pounds) of GHG emissions. Just for comparison, this is the amount of GHG implied in burning approximately 425 litres of gasoline (as the number also includes the GHG used in producing the gasoline). This also translates into about 14 cents per litre of gasoline. In addition, industry, agriculture and transportation would take a massive increase in their costs as they are significant contributors to the GHG profile.

This direct tax will make it more expensive for you and others to do anything relating to the consumption of gasoline, so you will see increased costs, but a corresponding decrease in consumption growth as marginal purchasers are weeded out. In addition, any suppliers in the province would be forced to raise their prices to compensate for increased costs – if they can’t sell product at the prices then they will close down and move elsewhere.

When people and industry start reducing their consumption, the amount of net revenue collected by the carbon tax will also decrease. If people reduce their carbon emissions by 20% then the revenue base will decrease by 20%. The government will look at the budget and come up with the easy solution: increase the carbon tax by 25% to offset the decreased consumption. They might increase income taxes or a combination of both, depending on whichever they deem to be the most politically acceptable option. In the event of a carbon tax increase, this will continue to reduce consumption of carbon-related items, resulting in a positive feedback loop.

This might be a victory – the intent of the carbon tax would be to drop GHG emissions and it would do that if high enough. But the carbon tax would certainly would not be in a “revenue neutral” fashion and if the carbon tax was high enough it would be very damaging. If the carbon tax is too low then past experience in countries that have implemented the carbon tax would show little change in consumption habits. The carbon tax is also indifferent to actual pollution caused by various types of fuels – low and high sulfur gasolines would cause the same GHG emissions but the low sulfur gasolines are much better for the environment.

This analogy does not apply to other consumption taxes (i.e. GST/PST) as these taxes were never designed to be “revenue neutral” – they were designed to diversify the tax base away from personal and business income taxes.

Such a carbon tax inherently cannot be revenue neutral. It will be yet another tax layered on top of income taxes, sales taxes, property taxes, excise taxes, gas taxes, liquor taxes, tolls, levies, etc. It would also be the subject of political debate in terms of how much to tax different users of GHG emissions, and who to exempt.

This entry was posted on Tuesday, October 2nd, 2007 and is filed under Best Of, Commentary. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.