June 29, 2008

Not Effective, Not Neutral, Campbell Tax

Appearing on CKNW from 8:30 AM to 9:20 AM on June 27th, Premier Campbell attempted to defend his carbon (fuel) tax. His party is usually pretty good at stacking the phone lines, but all but one or two of the calls during his appearance were hostile to his tax. One of the callers asked him to identify who had a net loss. That is a key question.

According to Campbell, his carbon tax is revenue neutral. That term is defined in the legislation, but the caller reduced it to simple terms. If some people are ahead as a result of the tax shift, then others must be behind or the sum total won't equal zero. The caller asked Campbell to identify those who are behind. Good point!

There are two fundamental problems with Campbell's carbon tax: 1) it is inefficient in reducing greenhouse gas emissions, and 2) it may not be revenue neutral (by any definition).

Carbon taxes are Inefficient

To reduce greenhouse gas emissions we need to reduce consumption of fossil fuels. The idea behind the tax is to make it so expensive that we will drive less and turn down our thermostats, or at least if we do so we'll use energy in a more efficient way. To be more efficient requires new stuff: new cars and new heating and insulation systems which cost a lot. The problem with using higher energy prices to drive those outcomes is that there are numerous "unintended" consequences.

Energy is "price inelastic"; in other words, when the price of energy goes up by 1%, the demand for it goes down by less than 1%. That means that rather than decreasing consumption of fossil fuels in response to higher prices and higher taxes, most people will reduce their spending elsewhere: don't eat out, don't travel, don't buy new clothes, don't, don't, don't … By comparison, a regulation that requires more energy efficient consumption of fuels doesn't have the "leakage" of forcing families to lower living standards with respect to substituting things like food for energy (economists call that the substitution effect).

Campbell's "revenue-neutral" approach to reducing greenhouse gas emissions through the price system has other consequences. Offsetting energy taxes with tax cuts means that many people will spend their subsidy by buying more of the expensive fuels; in other words, the policy has additional leakage when people decide not to change.

Campbell's consultants, M. K. Jaccard and Associates, were only able to estimate a reduction of 3 million tonnes of greenhouse gases 12 years after the implementation of the tax. The Campbell government's target bill calls for greenhouse gases to be reduced by 33% relative to 2007 emissions by 2020, but the catch 22 is that they don't know what the 2007 level of emissions was for BC. In 2005 BC had about 66 mega-tonnes of GHG emissions, up from 63 mega-tonnes in 2003. Cutting GHG emissions by 3 million tonnes by 2020 is nothing more than eliminating the increase between 2003 and 2005, peanuts at a substantial cost.

Campbell's Tax is Not Neutral

Campbell's Bill 37 (Carbon Tax Act) defines the tax as being revenue neutral "if the dollar amount of the carbon tax collected in a fiscal year is less than or equal to the estimated dollar amount of the reduction in Provincial revenues in the same fiscal year as a result of revenue measures." The first thing to notice is that neutrality is defined for the province, not for individual tax payers. The second thing to notice is that "neutrality" depends on "ESTIMATED" tax reductions. When former Finance Minister Carole Taylor introduced the carbon tax she talked about the plan that the legislation requires each year, and she said: "This plan must show how carbon tax revenues, including excess revenue collected in previous years, will be returned to taxpayers over the following three fiscal years through tax cuts." Taylor may have believed that, but nowhere in the legislation is there provision to separate estimates of revenues from actual revenue.

The Ministry of Finance is notorious for its conservative estimates which produce surprise surpluses at yearend; worst still is the federal government which administers income taxes. In some years hundreds of millions of dollars are noted as adjustments in the provincial accounts due to the federal government correcting previous payments. Does that mean that BC taxpayers would get substantial tax increases or cuts to compensate for adjustment errors in the new carbon tax formula? There is nothing in Campbell's definition of revenue neutrality that guarantees that provincial revenues from carbon taxes will equal compensating measures when the final books are closed, and there is nothing to reveal who and how many lose in order to balance to zero when the government boasts about the many winners who are better off due to their scheme.

Some academics, primarily economists who have a blind belief in the price system, support Campbell's carbon (fuel) tax as a matter of dogma. They have a long way to go to convince their neighbours whose common sense tells them that the tax is neither efficient nor neutral.