Sheldon Zakreski, The Climate Trust
October 14, 2016
As climate change continues unabated, the calls grow for creating a financial incentive to reduce greenhouse gas emissions—namely placing a price on carbon. There are multiple ways to price carbon, with the method predominantly advocated for being a carbon tax. Such an approach bears further examination on whether it can effectively reduce greenhouse gas (GHG) emissions in an economically efficient manner.
A carbon tax works by imposing a cost on producing GHG emissions, an activity that is currently free in many parts of the world. By charging for each metric ton of GHGs produced, the theory is that those who face paying the tax will take actions to reduce their GHG emissions in order to avoid paying the tax. On its surface, carbon taxes appear to be a simple and straightforward approach to mitigating GHG emissions. A closer look, however, reveals that implementing a carbon tax isn’t as simple as it appears, and doesn’t necessarily guarantee a desirable set of environmental or economic outcomes.
According to legislators, the biggest selling point of a carbon tax is the relative administrative ease of charging and collecting tax revenue. However, despite this assertion, the U.S. tax code is full of itemized deductions, exemptions, and a long list of regulatory do’s and don’ts. There is always a litany of issues for legislators to consider when implementing a tax, and it’s hard to imagine that carbon-tax-setting policy would be any less complex. Additionally, ensuring the tax isn’t too regressive to low-income families, or burdensome on trade-exposed industries, would not be simple. At the bare minimum, these hurdles undercut the premise that carbon taxes are straightforward and easy to administer.
Another challenge with a carbon tax is its lack of sensitivity to economic cycles. A carbon tax that doesn’t automatically adjust to economic signals runs the risk of being a large drag on the economy when it is weak, or failing to constrain GHG emissions increases when the economy is strong. Neither instance is desirable, resulting in undue economic or environmental damage.
Although not sensitive to economic cycles, carbon taxes are highly sensitive to political cycles. The Canadian province of British Columbia (B.C.) is a case in point. The province’s Liberal Party, then lead by Gordon Campbell, passed legislation that imposed a $10 per metric ton tax starting in 2008, that rose by $5 per metric ton annually to $30 in 2012. While emissions fell in the first few years of the tax, the province’s emissions grew by 1.8 million metric tons between 2011 and 2014—the equivalent of adding 380,000 cars to the road. This rise in emissions demonstrates the mechanism’s lack of sensitivity to economic growth, and also susceptibility to political currents. The tax hasn’t risen since 2012 due to the politically tenuous future of Premier Campbell’s successor, Christy Clark (also of the Liberal Party). Although the Liberals were widely predicted to lose the 2013 election, they narrowly returned to power, resulting in a carbon tax that has not been adjusted for fear of handing opponents political fodder. With elections slated in 2017, it is unlikely Premier Clark will increase the carbon tax as she fights for her political life.
This scenario has lead the environmental group, the Pembina Institute, to recently call B.C. a climate laggard, noting that its emissions are projected to rise through 2030 based on current carbon policies, while those in Alberta, Ontario and Quebec are projected to drop in the same period. Although Alberta has a carbon tax, one wonders if they would be on the pathway to reduce GHG emissions if not for the election of the environmentally progressive New Democratic Party, which doubled its tax upon taking office. It’s not hard to imagine carbon taxes being reduced or scrapped in Alberta and B.C. should the governments change hands in respective elections, particularly as campaigns often tout tax reductions as a means to attract voters.
Carbon taxes have a lot of momentum in domestic and international discussions as the preferred policy for pricing carbon emissions. However, carbon tax policy faces a lot of daunting issues beyond just complicated administration and being subject to political trends. The biggest detriment of employing a carbon tax (and this is a big one) is that it does not guarantee a reduction in emissions. Although cap and trade may seem to be a more complex system, it has the major benefit of establishing a ceiling on emissions that can be directly ratcheted down over time. And isn’t the point of climate policy to reduce GHG emissions that are changing our climate?
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