Written by Strac Ivanov, president of Vicinity Jobs Inc
Do we need a carbon tax? Can our economy afford it? There have been countless debates on this. Most people seem to agree that pollution costs money and needs to be controlled, but there is less agreement on how this should be done and to what extent. The challenge: Finding an acceptable balance between short-term economic prosperity and long-term sustainability.
It is remarkable how many politicians and special interest groups abuse this complex economic and environmental debate to promote their own partisan views and attack each other. Unfortunately, in dumming down the debate they have introduced misconceptions that get in the way of making sound policy decisions.
I don’t sympathize with any particular party or politician and I am not involved with any special interest groups. And I don’t like paying taxes… Any taxes: On income, consumption, real estate, inheritance, you name it. I’d rather keep all the money I make.
Like most people I see taxes (at least some of them) as a necessary evil, because I expect some services from the government and they cost money… Since taxes are unavoidable, they also come handy when governments want to curb undesirable behavior (think of fines, sin taxes on tobacco, liquor, etc). But taxes do need to be controlled and scrutinized.
If taxes are a necessary evil, then the question is: What should be taxed and how much?
And this is where the debate around carbon taxes somehow gets degraded to a debate on the merits of a tax increase. Since a carbon tax is a new tax, it must just get added on top of all the other taxes that we already pay. Right?
Wrong… I don’t like tax increases and I do believe that they hurt the economy. Governments should be held financially accountable and should not be just allowed to charge more without providing more services. But a new tax can actually be introduced in a revenue neutral way: It can replace other existing taxes while leaving the overall government revenue unchanged. So adding a carbon tax does not need to amount for an overall tax increase.
Once you take the tax increase debate out of the carbon tax debate, most arguments against the carbon tax just don’t hold any more. Here are the top 5 examples:
- In today’s difficult economic reality, we cannot afford a carbon tax
This argument would only make sense if our existing tax burden remained unchanged and the carbon tax just got added on top. Otherwise, if we can afford our existing tax burden and carbon tax does not change it overall, then we can certainly afford it. We just need a reduction of other taxes that will (collectively) leave the same amount of money in our pockets that we would pay for a carbon tax. For example, income tax and GST could go down by that same amount.
- Carbon taxes make everything more expensive
Carbon taxes make dirty energy more expensive. Since in today’s economy most energy comes from non-renewable sources, it is dirty. So in today’s reality, carbon taxes increase the cost of energy. The argument goes that energy is necessary to produce pretty much anything. If you increase the cost of energy, the cost of pretty much anything else goes up with it too.
And here is where this argument loses its ground in the revenue-neutral scenario. If a carbon tax only substitutes other taxes, then it will not increase the cost of everything across the board. Products and services that are produced with less energy will actually become cheaper because traditional taxes will go down. And isn’t this the whole point? Increases the cost of “dirty” products and services to curb the demand for them, while decreasing the cost of environmentally friendly products. It is a zero-sum game that rewards businesses that keep their act clean just as much as it penalizes polluters.
- Carbon taxes hurt business and the economy and destroy jobs.
The more pollution a business generates, the more a carbon tax will hurt it. But if the carbon tax is offset by an equivalent reduction in income and/or consumption taxes, that reduction will favor businesses that produce less pollution. It will create an environment in which it will be easier for such businesses to grow – so they can hire the people laid off by their dirty counterparts. It will be more expensive for dirty businesses to operate, but it will be cheaper for clean ones.
Besides, I personally find it arrogant to suggest that we should all tolerate someone causing irreversible damage to our environment just because they hire some of us in the process. It sounds to me a bit like arguing that a loan shark is good for its debtors because it gives them money. Which misses the point that the debt will eventually bankrupt the debtors.
- Carbon taxes hurt mostly the poor.
This claim is based on two assumptions: That energy consumption is not price-sensitive, and that carbon taxes result in a net cost increase. If you need to heat your home, you must pay the heating bill. If you need to get to work, you must buy gas for your car no matter the cost.
I already explained why a carbon-neutral tax will not produce a cost increase across the board. And energy consumption is price–sensitive – as long as energy-efficient alternatives are available.
The objective of a carbon tax will be to adjust people’s behaviour so they consume less energy. More energy-efficient products and services are available and will become cheaper and more attractive. And if this is not enough, all or some of the revenue from carbon taxes can be used in a targeted way to reduce the cost of energy-efficient alternatives – for example through targeted tax incentives offered to green businesses to make their products more affordable.
- Businesses do not need carbon taxes, they can self-regulate under pressure from consumers
If this was true, then it would have happened already. There are several reasons why it has not:
First, our existing tax system actually tends to reward polluters and their products. Green products are offered on the market today but tend to be more expensive. They are charged higher consumption taxes as a result. Think of a hybrid car: It costs more than the conventional equivalent to produce, so you need to pay more tax if you want to buy one – on top of the higher purchase price.
Second, companies are in business to maximize profits (I personally see nothing wrong with maximizing profits). This means avoiding cost that their clients are not willing to pay for. Green products tend to be more expensive, in part because they are newer and less established in the marketplace. Old “conventional” products have been around for a long time, are produced in high volumes, and have well established distribution networks. All this helps to keep their cost down (in addition to the overall cost advantage that comes with not having to worry about pollution).
Suppose you are the CEO of a company that manufactures conventional products, and you replace them with a more expensive energy-efficient alternative. Some of your clients will stay and some will buy your competitors’ cheaper (and dirtier) products. Soon you will lose market share and, more than likely, your job.
If sustainability is important to consumers, why not leave it to them to decide whether they want to pay for more energy-efficient products? Because even environmentally conscious consumers may be reluctant to spend more without a framework that would offer some guarantee that the extra cost will make a difference. Few people will be willing to spend extra 10K to buy an electric plug-in compact car knowing that their neighbour is driving a Hummer SUV with leather seats – which he bought at just about the same price. In other words, we are facing a typical game theory scenario: You would not want to pay a premium to clean up the environment unless you know that others will do the same (or else you would be wasting your money).
And here is where a revenue-neutral carbon tax shifts the balance. In the example above, the owner of the gas-guzzling Hummer will have to pay more in taxes for the privilege to pollute more, while the owner of the plug-in car will be rewarded with a lower tax – and lower cost as a result.
So let’s keep the two debates separately: A debate on the merits of a carbon tax does not need to be a debate on increasing taxes. I, for one, don’t want to see taxes go up. But I also don’t believe that a carbon tax is less fair or more damaging to the economy than our existing income tax, GST, etc.
And since few will argue that pollution comes with a social and economic cost attached, I see nothing wrong with taxing it to make it less attractive. In fact, such tax seems more justified to me than an indiscriminate tax on income or consumption.