Some perspective on carbon taxes

At a meeting I was at the morning, Green Party deputy leader Adrienne Carr made a familiar refrain that a carbon tax is needed to help solve our transportation woes by making driving more expensive. I generally support a carbon tax, as long as the revenues are recycled in a manner that ensures that overall income inequality is not worsened (low-income credits are one option, per capita transfers another). Design is a huge issue in how a carbon tax is implemented.

But the run-up in gas prices in recent years got me to thinking. A few years ago, the price of gas at the pump was about half what it is today (about $1.30 a litre). BC’s carbon tax of $10 per tonne as of July 1 will translate into an additional 2.4 cents per litre. Put these together and the result is that today’s prices are essentially equivalent to prices a few years ago plus a $270 per tonne carbon tax.

Now, a few years ago, if one dared suggest a $270 per tonne carbon tax, it would have been followed by cries of bloody murder and dismissed as politically unfeasible. Heck, BC’s carbon tax of $10 per tonne has the Canadian Taxpayers Federation so livid it looks like their heads are going to explode. Yet, today we are essentially in that world, except Big Oil is turning much of that money into record-high profits, rather than the government, who could use the revenues to offset the impact on working families (excess profits tax, anyone?).

In response to those higher prices, we are seeing some modest behavioural shifts: more people taking public transit, SUV sales down, fewer trips, more carpooling. But overall these shifts are relatively small – there is still major congestion on the roads in rush hour – which is consistent with the modeling that transportation is the last sector to respond to higher prices, whether through a carbon tax or market prices.

So how high would a carbon tax have to be before we saw really large shifts in behaviour? Probably another doubling or tripling of prices, I’m guessing, which would translate into carbon taxes on the order of $500 to $1,000 per tonne, assuming no change in market prices (futures markets are pricing in a fairly modest increase for oil). The truth is we really do not know what the elasticities of response are at such high prices.

That is not going to happen any time soon – even the Greens are only endorsing a carbon tax of $50 per tonne. And from the Jaccard modeling we learn that changes in decision-making around capital stock turnover happen at much lower levels of a carbon tax. The point is that we are not likely to solve GHG emissions from transportation via carbon taxes, and trying to do so would have lots of adverse consequences elsewhere in the economy.

That said, we could certainly use some of the revenues from a carbon tax to build out alternatives like public transit, rail for shipping, and developing electric cars. Moreover, building out these alternatives will help offer a carrot rather than just relying on the stick of higher prices. But the argument that a carbon tax will solve our transportation problems is running on empty.

UPDATE: Duncan Cameron makes similar points, and kicks way more ass than me, in his rabble.ca column:

It is important to debate the best way to stop global warming, and essential to reduce greenhouse gas emission. The 65 per cent increase in the price of oil will have a much greater impact on energy consumption than the B.C. carbon tax or anything the Liberal party is likely to come up with.

The carbon tax is favoured by Big Oil, and Big Business generally, so long as it is revenue-neutral i.e. corporate and personal taxes are reduced correspondingly. Both the B.C. government, and Dion have accepted this principle. In the meantime, we are not supposed to notice that the price of oil has gone up, and that windfall profits are leaving the country. In the name of the environment, we are supposed to welcome the tax cuts being given to the oil companies making windfall profits while happily accepting a regressive tax hike.

How dumb do they think we are?

A small revenue neutral carbon tax imposed on top of the oil price increase will not do much to reduce consumption of energy further, and will most certainly not allow governments to deal with the distress caused by the rising price of oil. An excess profits tax would ensure that the benefits of ownership go to the rightful owners, the people of the oil producing provinces, and allow governments to soften the impact of the 65 per cent oil price increase.

Oil equals money, but neither belongs by right to the oil companies.