At a family party in the Toronto exurbs, right on the outer edge of the 905 zone, one of my favourite cousins cornered me. "You're an economist," he said, "tell me why you think carbon taxes are a good idea."
My first thought was to sidestep the issue. "They're only a good idea," I said, "if you think global warming is a problem. If you don't think people consume too much by way of fossil fuels, then there's no need for a carbon tax."
Then I tried the economic freedom line: "A carbon tax makes fossil fuels more expensive, so people have an incentive to consume less. The great thing about them, though, is that people have a choice about how to cut their consumption."
"Think about the alternative," I said, "Do you really want a bunch of new regulations, people saying what you can and cannot do? This way there's no need for a big government bureaucracy, and people decide what's best for them."
Neither of these arguments made the slightest impression on my cousin. "I don't believe this talk about revenue neutrality," he said, "there won't be cuts to other taxes. The government will just take the money and spend it on useless things like your salary." [Note: he denies saying this.]
This was a low blow, especially coming from someone who also lives off taxpayer dollars (though I suspect, knowing my cousin, that getting this jab in might have been the whole point of the conversation). There was another, more persuasive, point he could have made: just look around you.
In the exurbs, it's possible for a single-earner family with a decent middle-class job to buy a home big enough to host a family party, with a two car garage, a garden, and a luxuriously large kitchen.
A carbon tax works because it makes commuting from the exurbs prohibitively expensive. Leaving the exurbs means not having a garage big enough to work on restoring a 1966 Mustang. It means giving up the backyard pond and the garden and the barbecue. It means taking a capital loss on a home that is no longer desirable, given the cost of getting to work.
If economists want to sell carbon taxes, we have to face up to their distributional consequences. In Toronto, there are (roughly speaking) two groups who would gain from a carbon tax.
The first group is those who cannot afford to use carbon. According to this study, the Torontonians with the smallest carbon footprint are those who live in the high rises and housing projects of East York. They have small living spaces, hence low heating costs, and take public transit. A BC-style carbon tax, which includes a refundable tax credit for low income individuals, would make these people better off.
The second group that gains from a carbon tax are those prefer a lower carbon lifestyle, and can afford to indulge their preferences. They're the people who think of their car (if they own one) as a recalcitrant, overpaid, employee, but pamper their bicycle with special botanical chain oil from Mountain Equipment Co-op. They live in Toronto's waterfront condos, or in areas like little Italy. A reduction in income or consumption taxes, financed by an increase in carbon taxes, would be a clear gain for the higher income, lower carbon demographic.
The biggest losers from a carbon tax are people like my cousins in the exurbs. The map above, taken from a paper by VandeWeghe and Kennedy, highlights the parts of Toronto with the highest per capita carbon consumption in red. These are place where people live in reasonably large houses, and commute long distances to work, generating whopping carbon footprints.
The whole purpose of a carbon tax is to discourage this type of lifestyle. But I can see why people are reluctant to give it up. Except for the commute, it's great. The streets are quiet, clean and friendly, and there's lots of green space near by. For a person who wants a garden and ample living space, the alternative housing options in the same price range are clearly less desirable: a small, unrenovated bungalow in Scarborough, say, or a downtown condo.
The most valuable lesson economics teaches is that people aren't stupid. Greg Mankiw might say that the basic case for a carbon tax is “is so straightforward as to be obvious.” Here's something else that's obvious: carbon tax hurt in the exurbs.