October 26, 2008

Self-Righteousness of Carbon Tax Proponents

The self-righteousness of the carbon tax crowd is hard to take. Stéphane Dion's spectacular defeat wasn't enough to send a message to Gordon Campbell who arrogantly insists that he is right and he won't touch his tax. Some pundits, apparently taken in by Campbell's spin, insist that his $144 million accelerated tax cut outweighs a few cents per liter gas tax. Talk about mixing apples and oranges! They refuse to acknowledge that Campbell's carbon tax will take $631 million from British Columbians next year, up from $338 million this year.

Apart from a few dinosaurs like Sarah Palin, most people know that the earth is suffering from climate change as a consequence of human activity, the burning of fossil fuels. The issue is not whether or not something should be done about that, but what should be done. Those who push carbon taxes with the same furor as religious dogma are not helping to save the planet. We all want to reduce greenhouse gas emissions; the question is what is the best way to do it.

Two problems with carbon taxes are: 1) the elasticity of demand, and 2) income elasticity. Elasticity of demand measures the percentage change in consumption in response to price changes. A one percent change in price for energy produces a much smaller percentage change in demand; hence it takes a very big increase in price to see any significant reduction in demand. When carbon taxes are made revenue neutral through offsetting cuts in other taxes, the income effect also becomes relevant. The offsetting tax cuts increase income and result in increased expenditures on fossil fuels, thereby defeating the purpose of the carbon tax. An alternative to inefficient carbon taxes is to invest in energy saving technologies, more energy efficient automobiles, homes and appliances.

For major emitters of greenhouse gases, cap-and-trade schemes are recognized as the best way to reduce emissions. In addition to putting a price on carbon, plans with hard caps are designed to reduce emissions regardless of the price. Cap-and-trade is a failsafe method for reducing greenhouse gas emissions; however, it is only practical for major polluters. A successful policy that deals with emissions from transportation and from industry must combine cap-and-trade with incentives to adopt new technologies. Both are possible without resorting to carbon taxes, which allow the rich to pollute while reducing incomes.

Premier Campbell's 10 point scheme failed to mention his carbon tax. Some have claimed his tax won't be relevant in the May 2009 election. The challenge for Carole James and the NDP is to clearly explain that they care as much about global warming as anyone, but they recognize that carbon taxes are inefficient and won't work. Think of it in terms of tobacco taxes. In the long term BC would save money if there were no tobacco related diseases, but if everyone stopped smoking tomorrow the province would lose $705 million per year in tobacco taxes. The carbon tax seems to be premised on the same assumption as tobacco taxes, let the province be a partner with the devil but make sure not to defeat him, or even get the upper hand for fear of losing essential revenue. In order to work carbon taxes have to be substantially higher than the level initially set, and if they are high and work, revenue to government will fall. Wouldn't it be better to adopt a strategy that reduces greenhouse gas emissions without leaving an aftermath of reductions to health, education and social services?