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Carbon tax theory and practice

13 Feb 2019 | OP ED Watch

In the National Post, Peter Shawn Taylor of Canadians for Affordable Energy argues that carbon taxes work better in the classroom than the legislature. Economists say they would be more efficient than regulations at reducing GHG emissions. But in the messy world of politics, what you get is taxes and regulations: the worst of both worlds.

He is right up to a point. Carbon taxes in practice get a lot of criticism from a lot of quarters, from committed climate alarmists who think they are set far too low in response to political pressure, to opportunistic politicians who promise to fight climate change but not with any actual policies, to people who think CO2 has nothing whatsoever to do with climate. But it should also be noted that the distorting effect of politics is not only a problem in climate policy. Virtually no tax code looks anything like what an economist would design. For that matter, very little public infrastructure resembles an engineer’s recommendation.

The solution is for everybody, wherever they stand on the climate issue, to take seriously the inherent difficulties in governing. There’s a famous passage in John Stuart Mill’s Autobiography about the stern and justified rebuke he earned from his father for saying something worked in theory but not in practice. If it doesn’t work in practice, the theory is wrong.

Or in this case, it’s the wrong theory. The problem here isn’t the relationship of carbon taxes in practice to economic theory but to “public choice theory”.

The key insight of the “public choice” school is that incentives and self-interest operate in government just as powerfully as in the private sector. But the incentives are different and often considerably more perverse, when power not profit is the key measure of success. Politicians and public servants seek to satisfy not customers, suppliers and shareholders but voters and interest groups, and whatever wins elections survives and flourishes.

It’s not possible to take the politics out of politics, of course. But it would be very helpful if more people abandoned the strangely widespread yet tacit view that government is omniscient, benevolent and omnipotent. In practice, and therefore in correct theory, there is much that it cannot do, much that it does not and cannot know, and very little that it does that is not self-interested in the personal or institutional sense.

Taylor argues that one reason there is less public support for carbon taxes than poll results showing widespread concern over climate change would suggest is that the public is skeptical of idealized visions of how the state operates. The populace, Taylor says, grasps that “the theoretical model of an efficient and revenue-neutral carbon tax never seems to survive contact with the real world”. And, we suggest, the average voter understands better than the average commentator or activist that politics bends even the best and simplest ideas into strange and unhelpful shapes.

It may be that those on one side of the spectrum are more inclined to trust government, and that to a considerable extent policy debates are implicitly about whether government can do things not whether it should. But certainly, as Taylor points out, the sobering contrast between carbon taxes on the blackboard and carbon taxes on the lawbooks including the BC government’s ludicrous, arguably insincere and certainly empty promise that its carbon tax would be “revenue neutral” should persuade people to take more seriously the problem of getting governments to do what politicians promise.

2 comments on “Carbon tax theory and practice”

  1. Bill C-69 requires that large developments like pipelines take into account "downstream emissions" of CO2. But wait a minute! Didn't we already put a tax on "downstream emissions"? If you must put a "price on pollution," don't then put another thumb on the scale against development by regulating it, too.

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