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Turns out carbon taxes aren't free after all

30 Mar 2022 | News Roundup

Part of the green mirage now vanishing due to the Ukraine War is this idea that somehow getting rid of affordable reliable energy would make us wealthier as well as cleaner and more elegant. Including in Canada the government’s claim that as the carbon tax climbs towards its target of $170 per tonne most households would be better off, getting more back than they paid into it. It was always silly in principle, since you can’t price gasoline out of people’s reach if you send back all the extra money they paid, and because it relied on not counting all the costs that businesses will pass along to households. And in practice, our federal Parliamentary Budget Officer, Yves Giroux, has just confirmed that it’s not true, as had already been pointed out a year ago almost to the day by the Fraser Institute. By 2030-31 most households will pay more than they receive and, remarkably, the government as well as citizens will be further in the hole.

Just because the PBO said something climate skeptics find plausible and appealing doesn’t mean it should be accepted without question. The PBO (and the Fraser Institute) incorporated into its calculations not just the “fiscal” impact, that is, direct out-of-pocket cost of carbon taxes but also the “economic” impact, “the loss in real, or inflation-adjusted, employment and investment income due to carbon pricing under the HEHE climate plan” and computer models of the economy, like those of the climate, should be treated with a healthy dose of skepticism. But the Liberals’ mantra that switching away from fossil fuels will increase prosperity should be treated with an entire bucket of the stuff.

It is also hard to determine whether the federal Liberals who made the promise intended it to be true. Or whether they realized at some point it wasn’t working out. Like many politicians here and elsewhere they possess a peculiar combination of cynical cunning and goofiness, plus a practised habit of talking in slightly off-topic clichés, that pretty much defies any effort at clarity from any direction.

If it was cunning, it was pretty dumb cunning, since they were bound to be caught at or shortly before the numbers became big enough to matter. (For instance two days from the publication of this Newsletter and post, when the already troubling price of gas will rise another 2.2 cents per litre by government design.) Not least because another thing neither they nor all the neoconservative pundits telling them price mechanisms are the most efficient way of interfering in markets seem to have heard of is “price elasticity of demand.” Which, in case you don’t speak economese in your daily life, is the vital measure of how much less gasoline, bread or latte a person will buy for any given increase in its price.

If there’s something very similar they could get instead, for instance a Third Cup latte instead of one from Ishmael’s, or a brioche instead of a bagel, then a very small price increase will bring a very big change in shopping habits. Which economists phrase as “high elasticity.” But if it’s a choice between gasoline for the car or not driving, then even a big price increase will cause only a small decrease in gas purchased, with everything else being sacrificed, including lattes, to keep the car running. This, the “low elasticity” case, means it will take big price hikes to get small returns in terms of emission reductions. (Of course less latte may mean slightly fewer car trips but the main sacrifice would be specialty caffeine not regular gas.)

And if you’re wondering how a government can lose money on a tax, it’s simple. They promised to rebate the carbon tax revenue. But the higher energy costs means less consumer spending on everything else and lower incomes, which in turn would mean lower sales and income tax revenues. So they end up with a bigger deficit, and if they raise taxes to cover it, the costs for households just continue piling up.

The Parliamentary Budget Officer is used to receiving bouquets or brickbats from partisans depending whether his discoveries help or hinder their narrow interests. As he said, “I don’t really have anything to say to people who want to use any of our reports for political arguments. The point of any of our reports is to provide unbiased, nonpartisan information and analysis to parliamentarians so that they can have an informed debate.” As part of which, he also said, “The moment you decide to decarbonize the economy in a relatively short period of time – and we’re talking here less than 10 years to significantly reduce greenhouse gas emissions – it’s clear that there is going to be a cost.” Which actually does reinforce the arguments of one side, though it’s not why he said it. But was it really clear?

To be sure, in some sense the politicians and analysts were always privately committed to pushing up the price of gas until you stopped buying it no matter how much it hurt, something they were not keen to share. Possibly not even with themselves. To their credit, and the dismay of a Conservative MP, the Liberals just voted against reducing a different tax on gasoline to help reduce soaring prices. But they may well not have thought much about how they would maintain this policy if it turned out it had to hurt a lot or since they certainly seem not to have thought much about there being no point to a gas tax even of $100 a litre if you just sent the money back to whoever paid it to ensure they could buy even more.

Which reminds us that there is no limit to the incompetence of people in government, not least because unlike people in business they do not pay a high price for delay, error and arrogance. (In economese the study of incentives in government is called “public choice theory” for the purpose, again, of discouraging purchases of books on the subject. But it does reveal that concepts like “price elasticity of demand” do apply to the state, except profit and loss are reckoned in votes not dollars and evidently it takes a very steep deterioration in the quality of governance for voters to “purchase” less of it.) So it is entirely possible that they did not realize they were not actually refunding all the money, let alone that it was necessary for the policy to succeed that they fail to do so.

Such statements may sound too cynical or stereotypical. But the Star, a left-leaning Canadian paper with a strong Liberal red tinge, just reported that the government is going to have to increase its rebates in the four provinces where they are paid (this being a fractious federation, the others have their own plans in place of the federal backstop) because it underpaid them in the past two years, violating the legal requirement to return 90% of the money.

Certainly they seem to have no idea what to do now. Redesign the program so it really does defeat its own purposes? Pretend it’s not happening? Admit that the pain is necessary and all that soothing talk of increasing prosperity with clean green high-tech jobs was just the vapourings of consultants, the musing of utopians or the recommendation of focus groups?

No, wait. They do know. They’ve decided to stop rebating the money as part of your year-end overall tax return, and send specific earmarked payments every three months to buy your vote as well as your gasoline with your own money.

So stay tuned. The next instalment is bound to make up in amusement for what it lacks in good sense.

3 comments on “Turns out carbon taxes aren't free after all”

  1. How exactly are carbon credits/taxes calculated and by what metrics? Looks like a lot of bunk even with a quick sniff.
    Exactly who does the carbon credit or tax assessments and which government departments? Are there teams of inspectors with various emissions meters probing factories and industries or is a thumb suck applied to all and sundry?

  2. It's not really that complicated. Energy is an input cost for nearly everything you do. In Canada, it is even an input cost to doing nothing during the Spring, Fall, and Winter. It is therefore impossible to make society wealthier by switching to a more expensive energy source, even if it does bring a host of well-paying green jobs. (It doesn't, and they aren't paid nearly as well as the jobs in the fossil fuel sector.) Switching to a more expensive energy source necessarily makes society poorer - and those who are least adaptable to the switch the poorest of all.
    And that's not even taking into account the stranded assets, like all those ICE vehicles with years of life left in them that will no longer be able to find fuel, the filling stations that will no longer be needed, the pipelines and other energy infrastructure that has been built up over the centuries.... Society will be trillions of dollars poorer because our sunk capital will be under-utilized. Greenie progressives live in a fantasy world.

  3. One thing is certain- government does nothing effectively or efficiently because they aren’t held accountable enough by voters.

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