When Tax Opportunity Knocks...

It looks like the respite from falling oil prices for consumers at the pump has finally attracted the attention of government.  Ontario Premier Kathleen Wynne has been reported as saying Ontario will unveil a carbon-pricing scheme this spring.  While the idea of a carbon tax in Ontario has been on the agenda since at least 2008, the price of a barrel of oil has not been below 50 dollars since 2004-05 making the burden of a carbon tax on consumers (and voters) a major reason for delaying implementation.

Of course if one wants to reduce carbon emissions, a carbon tax is the way to go as any student of public finance will tell you.  If you want more of something, subsidize it.  If you want less, tax it.  In  this case, a tax on carbon should reduce emissions...and raise revenue for the government also. Of course, this also begs the inconvenient question of why the previous high gasoline prices on their own did not do more to discourage consumption and substantially reduce emissions. 

The Ontario Premier's sudden move to finally make good on Ontario's promise in 2008 to create a mechanism to charge for carbon is quite opportunistic and springs from the fact that the price of gasoline at the pumps has dropped below a dollar a litre even in far-off Ontario places like Thunder Bay.  The provincial government wishes to share in the economic dividend being bestowed by Saudi oil policy. 

Given the phasing out of coal in Ontario electricity generation, a carbon tax will fall mainly on fossil fuels in Ontario meaning of course gasoline and diesel - that is drivers - as well as heating fuels.  In the case of electricity generation, the conversion to natural gas generation also means that there will now inevitably be a carbon tax for electricity consumers even though coal has been phased out.  The operation of the carbon tax in British Columbia has apparently translated into about seven cents per litre of gas at the pump.  Implementing a carbon tax now with an increase in the price of gas at the pump is probably seen by the provincial government as being easier on consumers given the plummeting price of oil. 

The question is whether a carbon tax in Ontario will be about reducing emissions - meaning it should be implemented in a revenue neutral framework - or whether it will be mainly used as an opportunity to enhance government revenues given Ontario's persistent deficit.  My real concern is in its haste to take advantage of the drop in oil prices and quickly bring in a carbon tax, the Ontario government may indeed bring in something that is poorly designed.  However, I do not know enough about the British Columbia example to know what pitfalls Ontario should avoid. 

We will have to wait and see what the spring budget brings.

Comments

[Roger Sparks]

The fall of oil prices is praised for accelerating the economy "as if it were a tax reduction". Of course, central banks are trying to stimulate the economy by holding interest rates down and buying financial assets.

Now it seems to me that a carbon tax would just fly in the face of central bank efforts. It seems ridiculous to both stimulate the economy with free money and then turn around and tax carbon.

Perhaps we should do either one, depending upon the goals of government, but doing both is counter-productive. Doing both is taxing with one hand and subsidizing with the other. Doing both creates a situation where government will choose who will get to use fuel and who will be penalized when using fuel. Not a good situation in my view.

[Majromax]

@Roger Sparks:

A carbon tax is not, to first order, about the size of the economy; it's about the distribution of the economy.

Saying that "the fall of oil prices is praised for accelerating the economy 'as if it were a tax reduction'" is at its root misleading, since high oil prices were both sector-specific (relating only to oil, obviously) and -- since they were reflecting the real marginal cost of production -- not contributions to deadweight loss like a tax (in isolation).

The central bank should act to set aggregate demand in the aggregate, with little concern for specific distribution. Its tools are far too blunt to try micro-targeting.

Monetary stimulus also does not disproportionally favour or penalize energy-users. A carbon tax combined with loose monetary policy is a compatible combination, in that all economic activity is supported but carbon-intensive activities are more expensive than they would be otherwise.

[Roger Sparks]

@Majromax:

"A carbon tax is not, to first order, about the size of the economy; it's about the distribution of the economy."

"The central bank should act to set aggregate demand in the aggregate, with little concern for specific distribution. Its tools are far too blunt to try micro-targeting."

I think we are making an error if we look at these two macroeconomic events from two perspectives: A micro carbon focus on oil but a broad "aggregate" focus on stimulus. In my view, both are very broadly intertwined aspects of modern economies and both will have focused effects that can be identified. Central Bank stimulus would certainly increase oil usage no matter how high the carbon tax.

The intent on the carbon tax could be to disadvantage the carbon based economy from initial production to consumption. If a carbon tax was combined with overpowering subsidies to competing alternatives (such as battery powered cars), it is likely that progress could be made to convert the oil consuming transportation sector into an electric energy consuming sector. Stimulus from Central Banks could have a supportive role in this effort if the stimulus was focused through government fiscal policy.

[Bob Smith]

"The question is whether a carbon tax in Ontario will be about reducing emissions - meaning it should be implemented in a revenue neutral framework - or whether it will be mainly used as an opportunity to enhance government revenues given Ontario's persistent deficit."

I think it's pretty safe to say it won't be revenue neutral. At least for now. The province is just too far underwater. Now, if they, somehow, manage to wrestle down the deficit (which I don't see, but maybe the falling dollar and price of oil will spur the economy enough to do the heavy lifting) in the next three years, I could see them annoucing a tax cut ahead of an election to "return" the carbon tax revenue to voters.

[Bob Smith]

The interesting political question is how the carbon tax proposal will play out in the federal election later this year. Back in 2004, Dalton McGuinty's health care levy took some of the blame for hurting the federal Liberals in Ontario, causing (at least in part) Martin to lose his majority government and giving the Tories a toe-hold in Ontario.

Adding a 7 cent gas tax (and that's how it will be characterized) ahead of the next federal election, whatever the policy merits, won't do much for the Liberal brand in Ontario.

[Tim]

@Bob Smith

I actually think the discussion about introducing an Alberta HST by the Alberta PC's could have more of an impact on the federal election than whatever comes out of the Liberal government in Ontario. The fact Joe Oliver is even talking about compensation for Alberta introducing as HST seems to indicate that discussions are far more along than what is being publically acknowledged. (In a strict legal sense I don't really think Alberta is entitled to HST compensation so I don't really know why Oliver even mentioned it unless a political decision has already been made by the Alberta and Federal Conservatives to go forward with a tax).