More reactions to the Liberals' carbon tax proposal

The Liberals have provided more detail on their carbon tax proposal (48-page pdf), and it has received generally positive reviews. The basic strategy is to take the existing gasoline tax, re-interpret it as a tax on carbon, and to extend it to other sources of greenhouse gases. As an exercise in electoral politics, introducing a carbon tax without increasing gasoline taxes is actually a pretty clever trick.

We also have a better idea of what the Liberals would do with the $15b or so in revenues that the carbon tax would generate: income tax cuts for the lower- and middle-income brackets, another point off the corporate tax, and targeted transfers for low-income households who wouldn't benefit from the income tax cuts. That's a pretty sensible list, although income tax cuts for those earning $100k/yr isn't exactly what I call a priority.

Reactions from the other two parties are continuations of their original talking points. For example, the Conservatives' theme of shrieking "Eeek! A tax!" has evolved into this. And the New Democrats are intent on showing to the world their singular inability - or refusal - to understand economics.

The standard NDP critique of the Liberal proposal takes two forms:

A) $10/kg (rising to $40/kg in four years) per tonne of CO₂ is not enough to make a significant difference in ghg emissions, and

B) The Liberal plan will impose an unacceptably large cost on consumers.

The latter point is of course the CPC's position. And the NDP can fairly make point A) - except that according to this page, emitters will have to pay at least $35 per tonne of CO₂ emissions. If an increase of $40/tonne is not enough to attain the announced policy goal, then the NDP's floor of $35/tonne is clearly too low; the appropriate price should be well north of $40/tonne. But if emitters are going to be paying significantly more under the NDP policy than they would under the Liberal plan, it makes no sense whatsoever to appeal to point B): there is no reason to think that emitters will try to pass along the costs of a carbon tax to consumers, but will not try to pass along the costs of an even more expensive carbon permit. The NDP is trying to suck and blow on this issue, but all it's doing is making unpleasantly incoherent noises. Cap-and-trade is not an indefensible policy (to a first approximation, cap-and-trade and carbon taxes are equivalent), and it will almost certainly be a part of the policy mix in the near future. But if the NDP wants to be taken seriously in this debate, it has to abandon the notion that its plan will not affect consumers, and it has to explain how it is going to protect consumers in low-income households.

My view is that a carbon tax is a good place to start, but it's not going to be the last word. If you're more concerned about hitting the emissions targets than you are about price uncertainty, then cap-and-trade is the best way to go. And it seems clear that this will be a good description of our priorities in the not-too-distant future.

But we're not there yet. Right now, there are a lot of people who are worried about the effects of climate change policy on prices and about the potential for economic dislocations; a radical cut in emissions runs the risk of generating severe economic disruptions and wiping out electoral support for climate change policy for a generation or more.

As far as revenues go, the Liberal plan amounts to rescinding the Conservatives' 2 ppt cut in the GST. Not insignificant, but not particularly profound, either. Once it's been demonstrated that a carbon tax does not mean the end of the world, then there will be less electoral opposition to climate change policies. And as we learn more about the relationships between ghg emissions and prices, we can start introducing cap-and-trade measures with more confidence.

Comments

[Matt]

It misses a point that all these proposals do.

Using the income for generally revenue is a subsidy for carbon emissions on one part of the economy, paid by another. Hence, you will not get an efficienct path toward GHG equilibrium, but a long tortuous path as you introduce instability.

What happens during a recession? The GHG income suddenly drops, but the folks whop indirectly receive carbon subsidies still expect their "check". Canada ends up with pro-cyclical swings, reinforced by the gas tax. These pro-cyclical swings are exactly the carbon wasting problem you are trying to solve.

Canada, like the USA, is trying to implement a program where 38% of the economy, the government sector, manages energy for the other 62%. The result is extreme inefficiency in the legislature, which packs on the dead weight energy losses.

[Brian]

How about redistributing the proceeds directly to the citizens. This makes sense from a philosophical perspective: emitters cause harm to citizens in the form of pollution and climate instability, and we deserve to be compensated for this.

Benefits:
- It is easier politically to impose more severe costs on emissions because voters can directly see the benefit in the form of a credit.
- It is progressive. Low income earners will easily offset their increased costs.
- It is simple and thus less prone to corruption. The government is not required to choose favourites when deciding where to distribute the revenue.

[Robert McClelland]

B) The Liberal plan will impose an unacceptably large cost on consumers.

Nice try, but the NDP wasn't referring to all consumers. Just the poorest ones. That's why they can make the two seemingly contradictory claims. Most consumers won't be affected by such a tiny hike in prices. But those just getting by will get hit the hardest and because these lowest income people pay next to no income taxes they won't get the subsidy Dion is proposing.

[Stephen Gordon]

The Liberals are offering targeted transfers to low-income households (page 32 of their handbook). The NDP is offering nothing.

[Canuck]

As Stephen had noted in an eariler post, the NDP is telling Canadians that Corporations should pay the costs associated with pollution and not consumers. I do not understand they will accomplish this without it in someway affecting consumers through higher prices. If their goal is to attack profits, this might have an impact on investment and wages. Stephen has noted many times to the world rate of return on investment. If investors cannot recieve the world rate they will not invest in Canada. So the NDP wants higher Corporate taxes and regulations which will amount to an indirect tax on Corporations over pollution. The problem isn't going to be solved by populist politics. Peoples behaviours as consumers must change, and the only way this will happen is to add the cost pollution into the purchase price. The ideal goal is consumer soverignty will shift demand toward green technologies thus further stimulating investment in industries. This cannot happen with the NDP plan.

[babooba]

Environment notwithstanding, I do like the idea of taxes that are (to a degree) avoidable though marketplace choices. I hope the electorate does see this eventually, and is able to recognize the Conservative fearmongering for what it is. This is replacing income taxes with a consumption tax. Works for me. I'd have preferred the Conservatives have left the GST alone and cut income taxes (or added more exemptions and benefits, though these are getting pretty cumbersome already). Anyway, the Cons seem to be guilty of their own wonky short sighted populism themselves.

[sustain_ability]

Just to muddy the waters (?) -

Food Shortage Flowchart

Updates: released v.02 on May 8, 2008 View v.01
This map now operates under the assumption that global warming has contributed to poor growing conditions for the better half of the past decade. This flowchart is a concerted effort to explain our current global food shortage.." (Please see the flowchart here -
http://shorthandlogic.com/2008/food-shortage-flowchart/ ).
George/Yuri
http://transitions.stumbleupon.com

[Rod Smelser]

"But if the NDP wants to be taken seriously in this debate, it has to abandon the notion that its plan will not affect consumers, and it has to explain how it is going to protect consumers in low-income households."

Is that a fact? That's what the NDP have to do, is it?

Layton has said that he and his party thought a great deal about this issue, and decided that the first step should be tradable permits for major emitters. He wants to use the revenues for expenditures and tax expenditures on energy conservation and public transit. The Liberal plans, both federally and in BC, do none of that.

BTW, is there anything the Liberals have to do, or have they already passed every conceivable test on this issue?