Kill the carbon tax – and then what?

- Ontario Libertarian Party -

by Robert Lyman
March 11, 2018

(Note: a pdf is available at the bottom of this article)

KILL THE CARBON TAX – AND THEN WHAT?

Purpose

The purpose of this brief is to explore the issues surrounding the intent of the Ontario Progressive Conservative Party to end carbon taxes in the province, and to recommend an appropriate approach to climate change policy in future.

Background

The Libertarian Party of Ontario has long been publicly opposed the imposition of carbon taxes on Ontario residents, whether in the form of direct taxes or carbon prices resulting from the use of “cap and trade” (i.e. Emission Trading System).

The party’s public statements offer relatively little insight into the rational for opposing carbon taxes, although certain themes were repeated:

  • Carbon taxes would add significantly to the present burden on Ontario taxpayers
  • Carbon taxes will raise energy prices, which are already high
  • Carbon taxes will harm the competitiveness of Ontario firms compared to those in other countries and especially in the United States
  • Carbon taxes will reduce Ontario’s economic growth

These critiques are potentially true in some circumstances. They cannot be properly assessed, and the case for and against carbon taxes cannot be properly understood, without examining the broader policy context.

What is the Rationale for Carbon Taxes?

Those who support carbon taxes usually do so because of their acceptance of the following four arguments:

  • Humans are largely responsible for the emission of greenhouse gases (GHGs) and these are primarily responsible for potentially catastrophic global warming
  • By reducing GHGs in Canada, we will reduce global emissions and thereby reduce or delay global warming
  • Raising taxes on fossil fuels (oil, natural gas and coal), governments will provide an incentive to reduce energy use and emissions; this incentive will affect all fossil fuels users and be transparent in its effects
  • The revenues received from carbon taxes, if “recycled” back into the economy through reductions in other broadly-based taxes like sales taxes or income taxes, may actually stimulate economic growth

Economists add another consideration that might support the use of carbon taxes. Once a country has decided that it must reduce emissions, doing so through the price mechanism is far more economically efficient and fair than doing so through the use of subsidy programs, regulations, and other government intrusions into the economy that have to be operated by large numbers of public servants and end up treating every industry and every person differently. This assumes, of course, that in introducing carbon taxes, a government would eliminate all or most of the existing subsidies, programs and regulations.

Let us examine each of these arguments.

Global Warming and the Human Role in It

As a result of the endless repetition of media claims, “documentaries” and celebrity statements, the majority of people in Canada take it as given, and “scientifically proven” that humans are the leading cause of global warming and that the warming is potentially very damaging. They are wrong.

Unfortunately, it is almost impossible to have a calm, rationale discussion of this subject because of its highly politicized nature. Hundreds of billions of dollars in government subsidies and research funds are at stake and there are many stakeholders. Anyone who dares to disagree with the general view faces the potential intimidation of the “crowd”, and is targeted as a “denier” as though such a view were akin to denying the historical fact of the Nazi genocide.

The claim that there is a “consensus” and that this makes discussion unacceptable is itself unacceptable. Science is not, nor ever has been, about consensus, but about experimental and observational data and testable hypotheses. “Climate scientists are not high priests who must be believed. The reality is that small parts of the immensely complex climate system are better or less understood – depending upon the subject – by many different groups of experts. No one scientist, however brilliant, ‘understands’ climate change, and there is no general theory of climate nor likely to be one in the near future. In effect, there are nearly as many sides to the climate change debate as there are expert scientists who consider it.

Some key questions and answers that are relevant to the climate change debate include the following. Is there an established Theory of Climate? Answer: no. Do we understand fully how climate works? No. Is carbon dioxide demonstrated to be a dangerous atmospheric pollutant? No. Can deterministic computer models predict future climate? Another no. Is there a consensus amongst qualified scientists that dangerous, human-caused climate change is upon us? Absolutely not. Did late 20th century temperature rise at a dangerous rate, or to a dangerous level? No, in either case. Is global temperature currently rising? Yes, but at a rates less than half of what computer models predict. Finally, is the IPCC a scientific or a political advisory body? Answer: it is both.

The currently favoured hypothesis of dangerous global warming includes the presumption that late 20th century warming was substantially caused by human emissions of the greenhouse gas carbon dioxide. This theory has failed the three main tests to which it has been subjected. First, no close relationship exists between the 20th century patterns of increasing carbon dioxide and changing temperature; second, 20th century rates and magnitude of temperature change fall well within previous natural limits of change despite accompanying increases in human-sourced carbon dioxide; and, third, the deterministic computer models

that are used to engender public alarm have proved unable to predict the course of temperature change over the period 1990 - 2017, let alone out to 2100.

At least US$50 billion dollars has been expended on climate change research since 1990. It is noteworthy that this large expenditure, and the extended efforts of the many talented scientists supported by it, have still not provided convincing evidence for a measurable human effect on global climate.

There is almost universal agreement that significant carbon dioxide increases – human-caused or otherwise – will cause gentle planetary warming. But scientific opinion remains strongly divided as to how great a warming would accompany a real world doubling, and whether any such warming will on balance be beneficial or harmful.

Reducing Emissions in Canada will reduce Global Emissions and reduce Warming

Appeals to Canadians that “we must do our part” to address international problems are almost impossible to refute – we are the world’s boy scouts. This is true even in cases where, like GHG emissions reduction, absolutely nothing we do will make any difference at all at the global level.

It should be possible to make a convincing case in this regard by simply referring to the arithmetic. Canada’s GHG emissions constitute 1.6% of the global total. All of the emissions growth is occurring in the developing countries; according to the most authoritative sources of global energy supply and demand forecasts, GHG emissions will continue to grow, not decline, for the foreseeable future. The IPCC claims that emissions must be sharply cut (i.e. by 50% or more by 2050) to avoid “catastrophic warming. So, Canada could disappear completely, and produce not one ounce of emissions, and it would have no impact on the growth of global emissions or whatever effects that will have on the climate, if any. The same obviously applies to Ontario.

There is plenty of proof to back this up. The IPCC analysis, frequently repeated using various computer models before each annual conference, is that, in order to prevent “catastrophe”, the world has to reduce emissions dramatically. Catastrophe is arbitrarily defined as a 2 degree Celsius increase in average global temperatures over those that applied in pre-industrial times.

It helps to place the claims of the IPCC in context. In 1990, global carbon dioxide emissions were 21.5 gigatonnes (GT). Since that time, there have been a series of multilateral agreements to reduce emissions. In 1990 it was agreed to stabilize emissions at 1990 levels by 2000; in 1997, it was agreed to reduce emissions by at least 5% from 1990 levels by 2010; later, it was agreed to reduce emissions by 17% below 2005 levels by 2020. Some European countries have agreed to reduce emissions by 40% below 2010 levels by 2050. The IPCC and several environmental groups are arguing that it will be necessary to reduce emissions by at least 50% below 2010 levels by 2050, and to eliminate emissions entirely by 2100 if “catastrophic warming” is to be avoided.

Every multilateral target set to date has been missed. By 2000, emissions were 23.0 gigatonnes (GT), by 2010 they were 31.5 GT and by 2016 they were 33.4 GT. So, between 1990 and 2016, global emissions increased by 11.9 GT, or about 55%. (So much for multilateral targets making a difference.)

How do present trends compare to the IPCC’s proposed targets? Reducing global emissions by 50% from 2010 levels by 2050 would mean reducing them to about 16 GT. The U.S. Energy Information Administration, one of the most authoritative sources of energy supply and demand analysis, projects that global emissions will be 43 GT in 2040 and go on increasing after that. While they disagree on the details, the International Energy Agency, ExxonMobil and British Petroleum project a substantial increase in emissions to 2040. In other words, according to every authoritative source, global emissions will probably be much higher, and probably close to three times as high, as the current targets that the IPCC and environmental groups are calling for.

Virtually all of the emissions growth is occurring in the developing countries and especially in Asia (China, India and Southeast Asia lead the way). Emissions in Canada and the other countries of the Organization for Economic Cooperation and Development (OECD) are projected to remain roughly stable over the next 25 years.

The “bottom line” is that the multilateral emission reduction goals simply will not be met. In fact, they will almost certainly be significantly exceeded, regardless of anything Canada does.

In the circumstances, what rationale could possibly exist for Ontario to undertake extremely expensive and economy-destroying GHG emissions measures? It is the worst kind of pointless virtue signaling, with no environmental or other benefits whatsoever.

Some environmentalists may argue that, by making a sacrifice, Ontario (and Canada in general) would be setting a “model” for other countries and especially developing countries to follow. This grossly exaggerates Canada’s influence in the world, and does not account for the fact that increasing energy consumption is closely aligned with developing countries’ increasing populations and economies, and they certainly will not sacrifice their pursuit of higher living standards because of what a country like Canada does or says.

The Incentive Effect of Raising Energy Prices

There is no question that, in theory, raising energy prices will provide an incentive for energy users to reduce consumption and switch to alternatives where those are available. Economists refer to this as the “price elasticity of demand” and it varies by energy product and service based upon the availability of alternatives and the implicit value placed on the service. Thus, in general, raising prices for coal, other things equal, may make it uncompetitive as a source of thermal electricity generation because of the ready availability of low-cost natural gas in most areas in North America. In contrast, the demand for motor fuels for light duty vehicles (i.e. cars and SUVs) is typically quite inelastic (unresponsive to higher prices) because there are few alternative fuels and people want to minimize their commuting time in cities.

Thus, while raising prices will have different effects depending on the elasticity of demand, raising prices is a simple and transparent way to influence behavior and it leaves the choice of how to respond in the hands of the consumer, not some government official.

The main disadvantages of using carbon taxes and thus raising energy prices is that it raises consumer costs and can adversely affect industry competitiveness.

The Recycling of Carbon Tax Revenue

A number of economic studies examining the potential effects of implementing a carbon tax have concluded that, while they will certainly have important distributional effects (e.g. making some consumers and industries worse off and others better off, and disproportionately hurting low income consumers), they can be designed to stimulate the economy if the revenues are used to reduce the rates of certain generally-applied taxes like personal or corporate income taxes or sales taxes. Carbon tax proponents use this to justify their imposition of a new set of taxes.

They fail to mention two important points. The first is that the same stimulation of the economy could be achieved via a reduction in government expenditures in areas that do not help the economy (of which there are many) and the subsequent reduction in tax rates. New taxes are not necessary.

The other is that the experience in jurisdictions that have implemented carbon pricing regimes (carbon taxes or Emissions Trading Systems) is that full recycling of the resulting revenues is the exception rather than the rule.

The Institute for Climate Economics (I4CE) is a think tank based in Paris that is funded by the French Caisse de Depots, the French Development Agency and Morocco’s Caisse de Depots et Gestion.  In October 2017, it published an article summarizing the results of its study of the use of carbon prices in the world. The article, entitled Global panorama of carbon prices in 2017, can be found here:

https://www.i4ce.org/wp-core/wp-content/uploads/2017/10/Global-Panorama-Carbon-prices-2017_FINAL_5p-2.pdf

The I4CE article contains some interesting information using data for fiscal year 2013-2014.

  • More than 60% of the revenues received by governments from carbon pricing went to members of the European Union.
  • On the global scale, only 29% of revenues were recycled into the economy in the form of tax exemptions.
  • 34% of the revenues were used to subsidize projects that would reduce GHG emissions.
  • 37%, the largest share, were allocated to the general budget.

So, the record clearly shows that politicians and treasury officials, when provided with a windfall of revenues from a carbon tax, are very unlikely to return all of it to the citizens directly. Instead, as should be no surprise to those who study public administration (or human nature), they spend it on their preferred causes, groups and industries. That certainly has been the case in Ontario up to now.

The Alternative to Carbon Taxes

To date, the opposition to carbon taxes and, more generically, carbon pricing as implemented through Emissions Trading Systems, has focused on the demerits of the policy instruments and not the policy objective. Yet, if the objective of reducing GHG emissions significantly is left unchallenged, the alternative to carbon taxes is not necessarily “nothing”.

One alternative is the status quo concerning how governments are trying to reduce GHG emissions. A partial list of measures now in place includes:

  • A wide range of tax incentives and deductions for favoured “green” investments such as renewable energy, electric vehicles, and energy efficiency;
  • Over 280 programs at the provincial and territorial levels in Canada that provide funds and other support, including favourable advertising and “educational” programs, for those green causes;
  • A large number of regulations that prohibit the production and sale of commercial products, ranging from vehicles to appliances and beyond, unless they reduce emissions;
  • Electrical energy policies that force the early retirement of still valuable and low cost coal fired power plants, provide large subsidies (in the billions of dollars per year) to renewable energy generators and the transmission capacity related to them, deprive local governments of land use planning authority over wind and solar plants, and impose sharply highly prices on electricity consumers;
  • An ever-increasing number of policies that are intended to reduce or eliminate cars, including urban zoning, mandated use of bike lanes, discriminatory pricing, and subsidies to urban transit.

The result is a massive, expensive and intrusive set of government interventions into the energy marketplace based on the presumption that governments know better than their citizens which energy sources should be used and that reducing GHG emissions is more important than anything else. No one has ever even attempted to estimate the cost of this because the interventions are so pervasive; they surely run to several billion dollars per year in Ontario alone. Worse, they are almost certainly more expensive than carbon taxes.

Consequently, if the move to eliminate carbon taxes is successful, and no new carbon tax is implemented in Ontario but the vast array of other government programs, regulations and other interventions to reduce emissions continue and expand, Ontario residents will be worse off.

Conclusion

Simply opposing carbon taxes still has some merits because of the potential future damage that carbon taxes could impose on the Canadian economy. The present federal government policy is that taxes in all provincial and territorial jurisdictions must rise to the equivalent of $50 per tonne of carbon dioxide by 2022. That, however, is clearly only the beginning. To reach the current Ontario target of an 80% reduction in GHG emissions from 1990 levels by 2050 would mean the near elimination of all oil, natural gas and coal consumption from the province. That is probably impossible in economic, technical and political terms but in pursuing this goal, Ontario could raise carbon taxes to $300 per tonne and above, as recommended by the former National Roundtable on the Environment and the Economy in 2012. The result of that would be an economic catastrophe far more certain than what the global warming catastrophe environmentalists warn about a century hence.

Simply opposing carbon taxes without acknowledging that the alternative could be worse is not credible. It betrays a failure to think through the real nature of the problem and to move towards a more viable solution.

Directly challenging the belief that the science of global warming is “settled” is desirable in principle, but it is fraught with risks because the widespread indoctrination of the population. The task is better left to others.

The argument that, whatever the merits of the science, Canadians (and certainly Ontario residents) are too small a part of a global problem to be able to “fix” it can be very powerful and is fully supported by the facts and analysis. It has only two faults. First, it leaves unsatisfied the common Canadian predisposition to be “doing something” good even if the contribution to solving the problem is nil. Second, it does not answer the question of what to do about the alleged “catastrophe” coming down the road in several decades.

Ontario can “do something” that makes economic sense and reduces the serious harm imposed by current climate policies by doing the following:

  • Establishing, as a key principle, that all measures to reduce GHG emissions will be subjected to rigorous analysis of the costs and benefits to be sure that they are justified;
  • Similarly establishing the principle that the selection of measures to reduce emissions will henceforth proceed from those that are most cost-effective to those that are less effective;
  • Ensuring that, where measures to reduce emissions cannot be justified on the basis of economic costs and benefits, that the value of the “environmental premium” (sometimes referred to at the Social Cost of Carbon) will be transparent and consistently applied;
  • Formally abandoning the target that Ontario will reduce GHG emissions by 80% below 1990 levels by 2050 as unworkable and excessively damaging to the Ontario economy;
  • Repealing the Green Energy and Green Economy Act of 2009 which implemented the system of above-market feed-in-tariffs for renewable energy producers, inflated consumer electricity costs and reduced the authority of the Ontario Energy Board to regulate the Ontario electricity sector in the best interests of consumers;
  • Directing future climate-related funding more towards measures that will enhance the ability of the province to adapt to any climate changes that may occur in future as a result of the increases in global emissions over which Ontario residents have no control; and
  • Working to promote the adoption of comparable principles and approaches at the federal government level

Robert Lyman

Robert Lyman is a semi-retired economist and policy advisor, with 27 years of experience working on energy, transportation and environment issues in the Canadian federal government. He also has ten years experience working as a part-time consultant carrying out policy research for federal and provincial government departments. He has written extensively on online blogs (especially that managed by the Friends of Science, a Calgary-based organization) on climate change and related issues. He is a resident of Nepean, Ontario, near Ottawa.