Economic policy advice for the NDP, Part VI: Climate change

The NDP has traditionally had a certain amount of credibility in its concern for environmental issues, and it can fairly fairly credited for dragging many environmental issues to to the political forefront.

But that's not the same thing as being able to come up with sensible policy prescriptions to deal with the problems it identifies. The NDP made a hopelessly confusing hash of the greenhouse gas (GHG) file in the last election (see the intemperate rants here, here and here), mainly because of its lack of understanding of environmental economics.

Firstly, there is no fundamental difference between cap-and-trade and the carbon tax. Both are schemes in which carbon is priced, and their effects are - to a first approximation - equivalent. They differ on certain second-order points - and these can be subject to differences of opinion - but the basic idea is the same. Prices go up, and quantity goes down.

The open letter to the leaders of the federal parties on the economics of climate change signed by 200+ academics during the last election made two crucial points that were almost entirely ignored in the last campaign:

Policies that impose costs on producers (big or small) affect consumers. Some voters seem to think that policies like cap and trade, which apply directly to producers, have less impact on the prices they face than carbon taxes, where the impact can be seen immediately. In fact, voters would do better to assume that all such policies would, ultimately, affect the prices they pay. Indeed, since the goal of these policies is to change what we buy, policies applied to producers must affect the prices faced by consumers if they are to meet environmental goals. The argument that a policy capable of reducing carbon emissions will only affect producers is without economic merit.

Price mechanisms can be regressive and our policy should address this. Like most taxes on goods and services that are widely consumed, carbon pricing will have a larger negative effect on lower income Canadian families than others. As we have stated, the same is true of regulation since regulation also raises costs of production and those increased costs will ultimately show up in higher prices. Thus, whatever policy is used, a complete policy should include some element of redistribution to address the impacts it will have on the least well off in our society. Not only will the costs to consumers ultimately be lower under a carbon tax or auctioned emission permits, these latter policies also have the potential to bring revenue into the government that can be used to help offset any inordinate hardship experienced among the least well-off. This is not true of regulatory approaches, or of a cap and trade system in which the allowances are allocated without charge to emitters.

See also this recent study on the point that an effective carbon-pricing policy will likely have regressive effects.

It is here that the NDP dropped the ball in the last campaign. As I said in this post from June 2008,

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.

Sadly, it never did. So here is my advice for the NDP in this debate:

• Abandon the idea that an effective climate change policy will not affect consumers, and
• Propose a sensible plan to protect low-income households. And no, promising cheap gasoline is not sensible. If you want to protect low-income families from increases in gasoline prices, give them money.

This is part of a series:

• Economic policy advice for the NDP, Part I: Inequality
• Economic policy advice for the NDP, Part II: Defending big government
• Economic policy advice for the NDP, Part III: The GST
• Economic Policy advice for the NDP, Part IV: Corporate income taxes
• Economic Policy advice for the NDP, Part V: Give money to low-income households

 

Comments

[Vladimir]

Doesn't cap and trade require the auctioning off of permits to make it effectively the same as a carbon tax? Without an auction while costs are ultimately borne by the consumer, the rents from permits accrue to the seller.

[reason]

It seems curious to me for Canadians to be worrying about this. I thought that Canada was almost certain to be a net beneficiary.

[westslope]

Most sensible advice.

[Andrew F]

Perhaps (not likely) the NDP has made the calculation that a carbon tax/cap and trade scheme is not politically feasible if consumers believe they will bear the cost.

[Andrew F]

I find it astonishing that some countries have seven times the excise taxes on fuel as we do. I suspect if we were to increase the taxation to that level, however, there would be an increase in gasoline purchases from the US, along with the potential for smuggling of fuel.

Also shocking is the rise in Turkey. I wonder what kind of political backlash was faced there.

[Bailey]

I hope that the NDP comes to their senses and takes a look at the impact that the 5 cent tax Toronto has placed on plastic bags and the reduction of number of plastic bags in garbage. From anything I've read, plastic bag use has gone down significantly (I thought I read somewhere 70% decrease). The Toronto city council is politically close/aligned to the NDP seeing as the Mayor used to be a card carrying NDP member and they didn't start a cap and trade program for plastic bags.

[Eric Gisin]

$35/tonne of CO2 will have no effect at all.

Try $300/tonne of CO2 which equals $100/tonne of crude. That works out to ~$0.12 per liter of gas. Gas prices this year already varied over $0.25 with little effect on demand. Demand destruction only occurred last year because crude reached $150.

[Andrew F]

^I think your math is a bit off. Each liter of gasoline emits 2.32 kg of CO2 when burned. Thus, it takes 431 L of gasoline to emit 1 metric tonne of CO2. Thus, $300/tonne CO2 would be at least 69.6 cents per liter, not counting any carbon tax built into the actual extraction, refining and transportation process.

[Declan]

"But that's not the same thing as being able to come up with sensible policy prescriptions to deal with the problems it identifies."

Yeah, back in 2005, I suggested that we govern Canada by having the NDP set priorities, the Conservatives implement those priorities and the Liberals could be in charge of patronage appointments. Still seems like it might work, although with the calibre of the current crop of Conservatives, we might have to go to the Blue Liberals for implementation.

Thanks for the acknowledgment, btw.

I do wish folks like Eric, above, would draw a graph showing their view of the expected impact on emissions/demand from a carbon tax. Presumably the graph would be flat along the axis (showing 'no effect at all') until at some magic mark ($300/tonne) it suddenly becomes completely effective, leaping far above the axis. Would the impact continue to increase after the magic mark is reached, or does the graph again flatline until the next magic mark of effectiveness is reached?

[Frelep]

Is there any chance you might share your thoughts on the whole Ontario HST thing any time soon? I know you're in Quebec, but....

This blog is one of the few canadian economist blogs around and personally I want to hear what an actual educated person thinks about it all.

I have not been able to find that anywhere! I mean seriously, anywhere!

[Patrick]

Declan: I think there's pretty good evidence that demand for oil (liquid fuels in particular) is very inelastic, but eventually you hit a breaking point and people start to make big changes in the behaviour.

Supposing this is that case, then a policy aimed at significantly reducing consumption of oil is going to have to push the price above the breaking point.

[westslope]

Eric Gislan: It is nothing but a guess on my part but I concluded that noticeable "demand destruction" (sic) started to occur once oil went over US$120/barrel.

That quibble aside, it is interesting that headline oil price movement from US$10/barrel to circa US$70/barrel did not appear to have any immediately noticeable impact on consumer driving habits. Yet, I recall much hair-pulling and teeth gnashing as oil exceed US$40/barrel.

[Andrew F]

It seems that more than high prices are required to induce change--certainty about high prices seems to be key. Taxes help to provide some certainty that investments in fuel efficiency won't be wasted by future decreases in fuel prices.

[Joe Heath]

One observation on the Bailey-Eric comments: the take-home lesson from the plastic bag tax (or, mandatory pricing) in Toronto, it seems to me, is the importance of transaction costs. I've heard that 70% number too, and it seems to me (as a resident of Toronto) quite plausible. Cashiers I've spoken to say the decline is phenomenal. Most people don't care about an extra 5 cents per bag, it's the logistics of charging for bags that has the big impact. First of all, you get asked every time, "do you want to buy a bag?", which forces you to think about whether you need a bag, instead of just being automatically given one. Second, you have to figure out how many bags you need _before_ you pay, because they need to be rung up on the till. All of this makes getting a bag cumbersome, which in turn dramatically reduces consumption. Finally, any social stigma or impatience associated with bagging your own stuff (and thereby slowing down the cashier) has dissipated. So the tax has effected a huge shift in equilibrium/expectations. A carbon tax would have similar (ok, vaguely similar) effects. What's most important is that carbon show up as a cost, and that it be explicitly accounted for. It then starts to show up on the economic radar screen in a way that it never did before. This means that people have to start thinking about carbon emission, in a way that people in Toronto now have to think about plastic bags. Obviously it matters whether the tax is set at $30 or $150 a tonne, but I think the difference here would be like whether you charge 5 cents or 25 cents for a plastic bag. It's the charging itself that is the most important move.

[Andrew F]

Joe,

I disagree. For most consumers, the carbon tax will be rolled into their fuel prices, and subsequently into the products they buy. Since these things were never free, there aren't incremental transactions, just increased cost.

[Joe Heath]

Andrew,

Yeah, for a while I had a sentence in there about how pump prices weren't a good example, since gas is already taxed (but I took it out). I was thinking more about how a comprehensive carbon tax would affect decision-making at the industry level. I'm actually not that clear on how that works (i.e. how carbon taxes get implemented) -- for example, with respect to different modes of electricity generation. Is it that generators have to pay a certain tax on whatever they're burning (coal, gas, etc.), then that gets passed along? And is it only fuels that are ever targeted? What about other industrial processes that generate significant amounts of carbon, like pouring cement (see The Economist "Cement and carbon emissions" Dec 19th 2007). If you put a carbon tax on cement, that would be a better example of what I had in mind. Something tells me no one intends to do that though. I don't know though.

[Andrew F]

I think carbon taxes are generally charged at the most concentrated level of the distribution chain. For gasoline/diesel/jet fuel, this is probably the refinery level (based on barrels input). They can claim back for any exports. For natural gas, you'd probably collect from distributors. Of course, there are substantial emissions involved in extraction, so oil and gas firms would also be taxed.

Concrete could be taxed. I don't think the Liberals mentioned it in the Green Shift but it may well have been tacked onto the implementing legislation. Again, it would not be difficult to collect it given the small number of concrete firms in Canada.

Of course, none of these firms would get out of their industries to avoid the tax. They would certainly change their business to pay as little tax as possible, which is exactly the goal.

[westslope]

Joe Heath,

Those are some interesting ideas. Plastic bags were once given away at zero cost per bag to all askers. Now the stores intensively manage plastic bag distribution by charging a tiny per bag user fee. As you suggest, it is likely the transaction costs of purchasing bags and the heightened awareness that push consumers to reduce plastic bag consumption.

I have often wondered if Canadian doctors and hospitals should provide detailed receipts to patients even if the patient is not directly charged and bears no direct financial burden.

Your approach offers an explanation as to why most Canadians did not perceive the former manufacturing sales tax as a problem.

Would breaking out the excise or carbon taxes on the fossil fuel bill lead to greater efficiencies and even more fuel conservation?

[Andrew F]

The GST doesn't accomplish that goal. I don't see what a broken-out carbon tax would do. Whether the price is built in or not, presumably the price signal is the same. The only issue is the political outrage (which is why GST should have been included in sticker price when introduced).

[Phillip Huggan]

"Concrete could be taxed."

Yes concrete construction is a major CO2 emittor. Umm, is a little late to be having these deabtes. Rather than villify a policy and then steal it (as opposed to winning a majority copying it), the carbon tax was an attempt by then denier CPC braintrust to kneecap permanently green jobs and environmentalism. Of course it didn't work given such a vital file, but it did kill the carbon tax concept.
My main beef with NDP enviro-policy is they port their cap-and-trade revenues to R+D, but our country probably doesn't have enough research park capacity to immediately spend it. A Trust or giving revenue to greener industry would obvious ways to fix this. There villification of carbon tax didn't earn them any green/green-job friends.

Canada's curved cement architect, in Wpg, doesn't have the ability to train international architect and build market share. Same for the Cgy companies that make low-footprint concrete forms and spray in building insulation. They don't have oil-sands federal tax breaks (nor the $60B in past federal welfare), so are now almost two years behind the curve in annexing Asia construction market share. We also missed 1st mover advantage over USA. At least Russia can copy any heavy industry improvements we eventually make, same footprint.
Most of my time is now devoted to fixing Earth (I'm irrelevant but microcosm of University enrollment patterns I'm sure), since our establishment and government isn't.

[Phillip Huggan]

...surprising to me, the NDP budget looked like the only one of the five Parties that had a chance at coming close to a balanced budget.

[Joe Heath]

>I have often wondered if Canadian doctors and hospitals should provide detailed receipts to patients even if the
>patient is not directly charged and bears no direct financial burden.

I had the same thought a long time ago. It turns out the administrative expenses involved in doing this are prohibitive. In fact, NOT having to keep track of everything that goes in and out of the hospital (each aspirin tablet, each roll of gauze, each time a porter wheels someone down the hall, etc.) is one of the major sources of savings in the Canadian vs. U.S. health care system.

[Andrew F]

^ Perhaps instead of actually producing invoices, maybe a list of costing could be produced to give people an idea of how much they are costing the government for certain procedures. Is this the goal of invoicing? Or is it to ensure there is no fradulant billing?

[tom s]

Congratulations on a fine series of posts. I do hope it gets attention within the NDP. I'll certainly be passing it on to my local riding association.

[Stephen Gordon]

Thanks, Tom. And thanks especially for understanding the spirit in which they were written.

[Bailey]

It looks like Darrell Dexter, the NDP Premier of Nova Scotia doesn't read your site, as they just lowered the price of electricity in NS.

http://thechronicleherald.ca/Front/1142015.html

[Stephen Gordon]

*sigh*