Carbon Tax Choices

It never ceases to amaze me that some people can be so utterly certain about the right answer to questions that don’t have simple answers. The answer to “What is one plus one?” is simple. The answer to “How should we use carbon tax revenue?” is not. And for good reason.
To reduce carbon pollution we need to price it or regulate the technologies and fuels that cause it. We could just regulate. We could just price. But we know we have to do one or both to seriously reduce the pollution that causes global warming. After that, the certainty dissipates rapidly as each jurisdiction tries to mesh its carbon pollution policies with its other policy goals, the preferences of its voters, and the actions of its major trading partners.
Some environmentalists tell me that all carbon tax revenue in all jurisdictions must be used to reduce carbon pollution via subsidies to building insulation, public transit, energy efficient appliances, low-emission vehicles and renewable energy. This is one possible use. But there are many others. And depending on priorities in a given jurisdiction, the approach can differ.
When British Columbia enacted a carbon tax, politicians were focused on political acceptability. This would be North America’s first – and it still is, which suggests that the concern was legitimate. Business and voter acceptance was deemed more likely if our political leaders could defend the tax as revenue neutral: not increasing net taxes. They therefore legislated that all carbon tax revenue be returned as corporate and personal income tax cuts, and as tax credit payments to lower income people – who otherwise would not be compensated for higher fuel costs because they pay little or no taxes.
Was this the right choice? It’s difficult to say. Some environmentalists point to surveys showing that some people say they would more strongly support the carbon tax if the revenue was used to subsidize the pollution reducing actions I listed above. But, in my view, these surveys are poor at predicting the anti-tax dynamic that would emerge through the media as stories surfaced of “carbon tax poverty” (since the offsetting tax cuts and tax credits would be gone) and “carbon tax boondoggles” (as some of the tax revenue would inevitably be misspent). You only need a modest percentage of people to be upset about a policy for politicians to balk.
And that reminds me of another benefit of the revenue-neutral approach. Real-world experience continually reminds us that the public and politicians are fickle. Initial enthusiasm can diminish as other priorities emerge. But the revenue-neutral carbon tax has a built-in poison pill for future politicians seeking a quick popularity gain by canning it: its elimination would cause a gaping budget deficit, unless they also reversed the associated income tax cuts. In the recent British Columbia election, I bet Premier Christy Clark – desperate for votes as she trailed in the polls – would have cut the tax if she could have, just as she cut the tolls on a new bridge. But since she also needed to appear fiscally responsible by balancing the budget, the best she could do was promise to freeze the tax for the next five years. Staying-power is an important design criterion.
This is the real world of politics in which carbon taxes, if they are to occur and survive, must be designed and defended against some pretty crazy arguments based on misrepresentation and false evidence, not some rational world in which everyone has the same goals, carefully studies the policy, agrees on the facts, and then comes to agreement on how it should be applied. In fact, a majority of British Columbians still refuse to believe that the carbon tax is revenue-neutral, and every week there is another incorrect article in the newspapers telling them they are right.
And this is why the carbon tax arguments of some economists can seem as out-of-touch as those of some environmentalists. These economists harp on economic efficiency as if that were the only thing the politician had to worry about. Sure, using almost all of the carbon tax revenue to reduce corporate taxes would be a big stimulus to investment and economic growth. But try selling that to voters, most of whom would only see this as a subsidy to fat corporations.
This is also why it’s misleading to compare the complexities of cap-and-trade with the “simple elegance” of a carbon tax. Yes, B.C.’s carbon tax was initially quite simple – the politician who implemented it, Premier Gordon Campbell, happened to be a policy wonk. But over the years, he and his successor have yielded to complaints from this industry or that region by introducing various exemptions and rebates – with undoubtedly more to come.
Just imagine the U.S. implementing a carbon tax in order to simultaneously address its climate and budget deficit reduction goals. Were this unlikely event to happen, we can be pretty confident the outcome would entail lots of complexity, both in the tax rate charged to different groups and in the use of the carbon tax revenue. Cap-and-trade – indeed even regulations like the proposed Clean Energy Standard – might not seem so inferior in terms of economic efficiency and administrative complexity after the political horse-trading plays itself out.