The carbon tax is dead. Long live the carbon tax

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You’ve got questions about carbon pricing. I’ve got answers.

I keep hearing that my family is going to get back more in carbon rebates than we pay in carbon tax. Seriously? What is this, ArriveCan accounting?

It’s regular accounting. About 80 per cent of Canadians will get a tax rebate that’s bigger than their tax payments.

According to the Parliamentary Budget Officer, the federal government will raise $11.8-billion from the carbon levy this fiscal year. Some of the money is going to green initiatives, but roughly 90 per cent of what’s collected in each of the eight covered provinces (Quebec and British Columbia run their own systems) goes directly back to the residents of that province. You pay based on carbon consumption; you get rebated based on family size.

If you’re lower income, you are almost certainly among the 80 per cent of net beneficiaries. Why? Because you don’t have enough money to consume more than the value of the rebates. And if you have a seven-figure income, you’re among the other 20 per cent. For everyone else, your choices – heating with fossil fuels vs. electricity; a fuel-efficient car (or electric vehicle) vs. a gas guzzler – will determine how far you come out ahead or behind.

But didn’t the PBO say that the carbon levy would leave the average Canadian worse off?

Yes. And no.

Last March, the PBO looked at two things: the fiscal impact of what it calls “the federal fuel charge,” and the economic impact.

Calculating the fiscal impact is fairly straightforward, and the PBO found that the vast majority of people will receive an annual rebate worth more than the tax paid. It called the rebates “broadly progressive.”

And that should have been that. But then the PBO decided to estimate the economic cost of the tax. And in designing its analysis, the PBO did something odd. Instead of comparing the economic impact of the carbon tax with other carbon-reduction policies, it compared the cost of the carbon tax to the cost of doing nothing.

By that measure, the PBO found a small negative economic impact, which will leave most Canadians slightly worse off, even if they get a carbon rebate worth more than their carbon taxes.

The PBO didn’t do an apples-to-apples comparison. It compared the economic cost of the carbon tax apple with the economic cost of buying nothing, and found that an apple costs more than nothing. It’s like a study of which grocery store offers the lowest food prices concluding that the best way to save money on groceries is not to eat.

But why have a carbon levy? Aren’t there other ways to reduce emissions?

There are. There are subsidies, like those Ottawa and some provinces give to buyers of electric cars. Or subsidies to the oil industry for carbon capture and storage. Or almost $40-billion, and counting, in subsidies to electric-vehicle manufacturers.

Governments can also order businesses and people to do this, or stop doing that. There are, for example, clean fuel regulations that are forcing refiners to make less dirty gasoline, and rules that will compel car makers to sell more and more electric vehicles in the coming decade, and eventually stop selling cars with internal combustion engines.

None of these is free. And inflexible rules, regulations and subsidies tend to be more costly than putting a price on pollution and leaving it to millions of people and companies to make trillions of individual decisions on how to respond the price signals.

The carbon tax’s visibility is what makes it economically and ecologically effective. That’s also become its political Achilles heel.

So if Canada axes the consumer carbon tax, our carbon emissions will go up?

Yes, but maybe not by much. A new report from the Canadian Climate Institute estimates that consumer carbon pricing will be responsible for between just 8 and 14 per cent of the reduction in Canadian emissions between 2025 and 2030.

However, a less visible carbon price – the price on pollution paid by industry – will be responsible for an estimated 20 to 48 per cent of emissions reductions by 2030. That system has no rebates for taxpayers, and the same goes for the litany of emission-reduction rules and regulations.

The bottom line is that it is possible to lower emissions through measures whose costs are hidden. Their political costs may be lower, but the economic and fiscal costs are usually higher.

I keep hearing that unless Canada drastically reduces emissions, we’re setting ourselves up for more disasters like last year’s record wildfires. Is that true?

Canada can’t singlehandedly wreck, or fix, our own climate. We only generate 1.5 per cent of the world’s carbon emissions. The rest of the planet, led by China, is responsible for the other 98.5 per cent.

This is history’s biggest collective-action challenge. Canada is part of the problem and part of the solution, but we’re a relatively small part. It gives us, and every other nation, an incentive to try to become free riders. Let somebody else pay.

That’s not what we should do. But given the diffusion of responsibility for this global threat, there’s every reason to expect that the political pressure to do less rather than more is going to grow, around the world. That is, after all, what’s happening in Canada.