RDtNVC: Increasing energy prices without compensating with tax cuts

There were two letters in the Record yesterday related to the carbon tax plan. One asked how charging for pollution could possibly reduce it — wouldn’t companies just pass the increased cost onto customers as higher prices? The other asked, wouldn’t it be better to just force big polluters to pollute less, via regulation?

Both good questions. Comes down intuitively favoring a regulatory or “cap and trade” approach over a carbon tax, as so well articulated by Jeffery Simpson in the Globe and Mail:

They [the Green Party] bring urgency to the debate that the Conservatives lack, and they’ve got one thing right: that carbon emissions have to be assigned a price, that a tax is a defensible way to do it, and that the revenues from the tax are best recycled into lower personal and corporate income taxes.

There is another way of finding a price, through a cap-and-trade system, as proposed by the Conservatives and NDP. This targets mostly large polluters. Some of the costs are then passed to consumers. Using the tax, a method favoured by many economists, gives carbon a price certainty but doesn’t guarantee a particular emissions result; using the cap-and-trade produces a particular result but at an unknown price.

Politically, the cap-and-trade is a much easier sell, since the eventual effect on the ordinary person is indirect, whereas changes to the tax system are in the faces of consumers. The easier politics of the cap-and-trade explains in large part why Conservatives, New Democrats and U.S. politicians like it.

It’s too bad we can’t have a reasoned debate between these two approaches, instead of the slanging match and attack ads about the “carbon tax” that the Prime Minister calls “insane” and says will “screw” Canadians and “wreck the economy,” something that’s not happened in any of the countries that have thus far introduced one.

Now, I’m think of writing my own letter to the editor on this subject, and I can’t just plagiarize Jeffrey Simpson if I do that. So here’s my draft, which I’ll refine later! [I’m such a technical writer, sometimes. Just can’t resist the bulleted list!]

Something that seems to be missed in all the wild claims about the effects of a carbon tax on the economy and prices is that the regulatory or cap-and-trade system offered as an alternative will also raise energy prices — and without balancing them with an income and corporate tax cuts.

A cap-and-trade system involves only the largest polluters. Total target emission levels are set and are assigned a price. Companies who pollute the most pay the companies who emit the least. But exactly as with a carbon tax, some of those extra costs are likely to be passed on as higher prices for consumers.

The reasons the most economics and environmentalists — groups that don’t typically agree on much — favor a carbon tax over a cap-and-trade system include the following:

• By involving everyone, not just the largest polluters, the potential reduction in pollution is therefore much greater.
• With a cap-and-trade system, there’s no benefit to companies that will never reduce their emissions below the overall target, so they won’t. With a tax, the more they reduce, the more they save–and the greater the environment benefits.
• It rewards companies and individuals who are already doing well, environmentally. They get more back in income and corporate tax cuts than they pay in increased carbon taxes.
• Corporate and income tax cuts are generally stimulative to the economy, freeing up more money for investment, savings, and spending.

The truth is, the environmental policies of all the political parties–including the Conservatives–are going to increase energy prices. The question is, do you want an income tax cut to help you pay for those inevitable price increases, or not? If you do, then you should vote for one of the two parties planning to implement a carbon tax: the Green Party or the Liberals.

(2023 Postscript: These are the roots of the Conservative war on carbon taxes, but interesting that they supported cap and trade at the time. Also interesting that the Liberal plan was to reduce income taxes as compensation rather than the current “revenue neutral” approach. Finally, so sad that so many years later Canada has accomplished so little on this front.)