Wednesday 10 September 2008

Carbon Tax: Part II

In my first post about the carbon tax we learned that

  1. the conservatives initially seemed to be doing a pitiful job of fighting the carbon tax, but maybe good enough. (More likely, the Liberals are just not doing a good enough job of selling it.)
  2. it takes me two months to draw a single-panel editorial cartoon.
In this post, I intend to talk about the actual program. In fact, I had intended to dig up some of my old studies and notes from Environmental Economics where we discussed this shit, but as usual I'm too damn lazy. It was mostly math anyhow.

If I can recall a few key things from those classes, one on them is that market-based mechanisms are far superior to non-market regulations. It is more efficient because the marginal cost of reducing emissions is determined by the market. Co. A may be able to reduce emissions at a lower cost than Co.B, therefore they will reduce more and Co.B will reduce less, to the point that their respective marginal costs are equal. In the end the same amount of emissions are reduced but at a lower cost than if the government regulates A & B to reduce X amt.

Put one check on the scorecard for carbon tax for being market based. (I should mention here that I am not going to get into the climate change debate. What matters here is that most people believe that climate change is happening, and is at least partly a result of emissions, so the question is: what it the best plan to reduce emissions?)

How well will the Carbon tax work? The plan proposes the following:
  • $40/tonne tax on coal, natural gas, etc.. (after four years)
  • 7 cents/l tax on diesel (after four years)
  • no tax on gasoline.
With no tax on gasoline, the plan obviously will do sweet bugger-all to reduce emissions from cars. I suspect the tax on diesel will do likewise. I don't see trucking companies changing their behaviour for a 7 cent tax, given the large increases that they've already seen in the price of fuel. Indeed, the transportation sector is largely unaffected, even though they are a major source of emissions.

Most of the revenues will come from the $40 tax on other fuels. In particular, a "significant majority" will come from the larger corporate energy users. The degree to which this will cause them to reduce their emissions is difficult to say. It should have an impact, but there are lots of variables.

The "tax less of what we do want" part of the equation is what makes this plan "revenue neutral". While I don't disagree with the principle of a revenue neutral plan, this is hardly revenue neutral at the individual level.

The big losers: businesses. While a large majority of the tax revenue will come from businesses, they will benefit from less than 25% of the tax cuts.

Who are the big winners? Families and poor people. In addition to the lowest tax rate decreasing 1.5%, and the next two brackets going down 1%, we find these other items tucked away in the green plan:
  • a child tax benefit of $350/kid
  • replace $1000 employment tax credit with a $1850 refundable credit for incomes of less than $50,000
  • increase in working tax benefit for low income workers.
  • disability tax credit for low income disabled people.
  • rural credit of $150
  • increase in northern resident reduction
  • increase in guaranteed income supplement ($600) for low income seniors
  • new guaranteed family supplement for low income families (up to $1225)
  • increase in National Child Benefit Supplement for families b/w $21k & $26k
I have to wonder: what is this really about? The tax excludes some of the biggest sources of emissions, has an unknown impact on actual emissions, but includes a big income shift from corporations to individuals. Is this really about saving the environment, or is this a robin hood scheme?

My personal opinion is that, if you want to reduce emissions, tradeable emissions permits are the way to go. Like carbon tax, they are market-based. Unlike carbon tax, they can produce specific results. What tradeable emissions permits do not do is give the government an opportunity to buy off low income voters under the guise of saving the environment.

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