Harm to Canadian economy could outweigh benefits created by reducing our country’s greenhouse gas emissions – McKitrick
Building a consensus to use a carbon tax to reduce greenhouse gas emissions is easy. Designing a carbon tax that works without unintentionally harming other sectors of the economy is much more difficult, according to a new study from economist Ross McKitrick of the School of Public Policy.
“First and foremost, carbon pricing only improves economic efficiency in the absence of other emission regulations,” said McKitrick.
The Government of Alberta’s new carbon tax contradicts several key findings of the study because it will add more stringent emission caps and regulation, such as the oil sands hard GHG emissions cap of 100 megatonnes, 30 more than they currently emit.
If pricing is simply layered on top of an emission-regulating regime already in place (such as emission caps or feed-in- tariff programs), it will not make the existing system efficient, instead it is more likely to amplify the inefficiencies, according to a press release that accompanied the study.
“New carbon taxes are meant to replace all other climate-related regulation, not add to them. Revenue from the taxes should be returned to taxpayers, not funneled into green projects,” said McKitrick.
The point of carbon pricing is to let the market identify the optimal green strategies. If the government uses the tax revenue to subsidize options the market rejected, it undermines the whole logic of the policy.”
The study explains important details of carbon taxes that are well-known in the academic literature but have been overlooked in much of th
e popular discussion, such as:
- A carbon tax or tradable permit system is only efficient if it is used instead of, not on top of, traditional command-and- control regulations.
- Carbon prices need to be adjusted to take account of inter-provincial variations in the marginal cost of raising public revenue.
- The presence of market uncertainty makes a revenue-neutral carbon tax more efficient than Cap and Trade
- Climate-economy models yield a wide range of estimates of the optimal carbon price, but empirical evidence favours numbers on the low end.
While two-thirds of the new carbon tax revenue will be given back in the form of rebates to low to middle class residents, the rest will go to programs to ease the transition away from coal for communities and workers dependent on that industry, as well as to innovation programs and energy efficiency measures.
There may be many reasons to recommend carbon pricing as climate policy, but if it is implemented without diligently abiding by the principles that make it work, it will not yield the desired outcome, and the harm to the Canadian economy could well outweigh the benefits created by reducing our country’s greenhouse gas emissions, according to the press release.
