This is latest instalment in our ongoing effort to frankly consider how we might respond to the spectre of climate change. Previously, we attempted to look frankly at the questions surrounding the regulation of Canada’s oil and gas sector and the politics of pricing carbon. Now, what to make of a new report from the International Monetary Fund?
Why, you might ask yourself, does the International Monetary Fund want to kill jobs?
A new report from the IMF recommends that countries tax energy production commensurate with the expense of dealing with the environmental and public health costs that that production creates. That increase in energy taxes would be matched by a corresponding decrease in income taxes:
Energy prices in many countries are wrong, because they are set at levels that do not reflect environmental damage, notably, climate change, air pollution and various side effects of motor vehicle use, such as traffic accidents and congestion. Whether on energy or any other product, prices should provide consumers with an accurate assessment of the actual costs associated with the product . . .
The report stresses that energy tax reform need not be about raising new revenues. Rather, reform could focus on restructuring the tax system away from taxes that are likely to be most harmful for efficiency and growth, such as income taxes, and toward carefully designed taxes on energy—smarter taxes rather than higher taxes. According to the report, getting energy prices right involves extending motor fuel taxes, which are already well established and easily administered in many countries, to other fossil fuel products, such as coal and natural gas, or their emissions, and aligning the rates of these taxes with environmental damage.
That might remind you of what Stephane Dion proposed in 2008—a new carbon tax on emissions coupled with reductions in income and business taxes (Dion muddied the waters somewhat by also planning to use carbon tax revenues to address poverty).
But you might remember that at the time, a prominent individual with a degree in economics said Dion’s proposal would, to use a technical phrase, “screw everybody” and “recklessly harm the economy and the economic position of every Canadian family.”
The IMF’s Ian Perry tells the Canadian Press that addressing such concerns is important:
In an interview, co-author Ian Parry agreed that such proposals have caused a voter backlash whenever suggested, but adds that the trick is to make clear to voters that other taxes, particularly those on income, will be cut by identical amounts. “We are not talking about increasing the overall tax burden; we are talking about a smarter, more efficient way to use taxation to meet a country’s fiscal objectives,” he said.
British Columbia’s carbon tax is also supposed to be revenue-neutral, though this analysis points out that the province has cut other taxes beyond what the carbon tax has raised in revenue.
Regardless, calculating the cost of pollution, carbon emissions and climate change seems like an entirely useful exercise—former U.S. treasury secretary Robert Rubin argued in the Washington Post this week that it must be a priority. On that note, the White House recently released a report that attempts to project the cost of not acting to address climate change, while Harvard professor Robert Stavins reviews the Environmental Protection Agency’s projections for the benefits of new coal regulations in the United States. (Spoiler: He argues there is a net benefit, but that the EPA overstates it.)
Even if the Canadian government under Stephen Harper has opposed a per-tonne tax on carbon emissions, it still calculates a per-tonne cost of carbon emissions for the purposes of determining whether regulations result in a net benefit; this is called the social cost of carbon (SCC). As of 2012, it was “$28.44/tonne of CO2 in 2012, increasing at a given percentage each year associated with the expected growth in damages.” (In 2013, the United States increased its estimated SCC to $36 per tonne.)
For the sake of comparison, Dion would have started with a tax of $10 per tonne, increasing to $40 per tonne over four years.
As Rubin argues, a simple argument about the costs of reducing greenhouse gas emissions fails to consider the reason we would want to reduce those greenhouse gas emissions:
Many people argue that moving away from fossil fuels and reducing carbon emissions will impede economic growth, hurt business and hamper job creation.
But, from an economic perspective, that’s precisely the wrong way to look at it. The real question should be: What is the cost of inaction? In my view—and in the view of a growing group of businesspeople, economists and other financial and market experts—the cost of inaction over the long term is far greater than the cost of action.
Therein might be the real argument.
But maybe a tax swap isn’t an attractive enough option for dealing with this situation. In that case, maybe the government should just give people money.
Writing in the New York Times, James K. Boyce, an economics professor at the University of Massachusetts, points with some hope to new legislation tabled by Chris Van Hollen, a Democrat congressman from Maryland. Van Hollen has introduced the Healthy Climate and Family Security Act, which would cap emissions and auction permits to “the first sellers of oil, coal and natural gas into the U.S. market.” But Van Hollen would then equally distribute 100 per cent of the proceeds to the public as quarterly dividends.
This is generally known as cap and dividend (Van Hollen previously tabled a proposal for this in 2009). But NDP-turned-Independent-turned-Green MP Bruce Hyer is, in my memory, the only federal MP who has actively advocated for cap and dividend.
Why isn’t such a policy more popular? I posed that question on Twitter, and David McLaughlin, former president of the National Round Table on the Environment and the Economy, offered one theory:
2 reasons: still too close to a carbon tax for the right; & not enough social redistribution of revenue for the left.
Conversely, Boyce argues that cap and dividend should be welcomed by Republicans, because it moves money from the government to the public (though I suppose it actually moves money from industry to the public) and because the policy actually works to redistribute wealth, since the more affluent tend to produce more emissions.
But what if you reject the IMF, British Columbia and Van Hollen models? Australia’s new government has, famously, dumped the country’s carbon tax—see last week’s post. Prime Minister Tony Abbott’s counter-proposal involves paying companies to reduce their emissions through a reverse auction (the proposal with the lowest cost per reduction wins the money).
The Abbott government’s plan has the benefit of not being an explicit tax, but it still has a public cost, insofar as the billions committed to the Emissions Reduction Fund are public funds. There are also questions about how well the “direct action” approach will reduce emissions.