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Steve Ambler: The carbon tax was never worth the cost

Commentary

The federal carbon tax is set to increase on April 1 from $65 per tonne of carbon dioxide (CO2) equivalent to $80 per tonne, on its way to a planned $170 per tonne by 2030. The planned increase is, to say the least, controversial, with seven provincial premiers calling on the Liberal government to cancel the increase, with Opposition leader Pierre Poilievre promising to “axe the tax,” and with the Saskatchewan government refusing to collect the tax and remit it to Ottawa.

Economists deserve the credit (or the blame) for the idea of a carbon tax as a means of reducing greenhouse gas emissions. What, in fact, does economics have to say about the current and future levels of the carbon tax?

There is agreement among most economists that a carbon tax is potentially the most efficient way to reduce emissions. There is also agreement among many economists that, as the saying goes, the devil is in the details. For this economist, the details are: the current level of the carbon tax is very likely already too high compared to the net costs of greenhouse gas emissions; it has been implemented in the most inefficient way possible; emissions are a global problem and Canada by itself can make a negligible contribution to reducing emissions; and the carbon tax is hurting the competitiveness of Canadian companies in domestic and foreign markets. Understanding the reasoning for these conclusions means being able to make informed decisions at the ballot box and informed criticisms of proposed policies.

The logic of a carbon tax is straightforward. Even if an individual is as well off after an increase in the carbon tax (for example because of a rebate), he or she still has an incentive to substitute goods or activities with less emissions which are relatively cheaper because of the tax.

The goal is to achieve net zero (where an economy either has no emissions or offsets them) by 2050. This stems from the Paris Agreement signed at the UN’s COP21 conference in 2015. The ultimate goal is to limit the increase in the average global temperature to 1.5 degrees Celsius above its pre-industrial level.

This goal will be very hard to attain, mainly because it is very difficult to reduce some types of emissions (think heating a house with a heat pump using renewable electricity in -20 degrees Celsius weather with no sun and no wind). Bjorn Lomborg, head of the Copenhagen Consensus Institute, has calculated, using one of the UN’s own models, that all policies from the Paris Agreement would “likely reduce global temperature rise about 0.17 degrees Celsius in 2100,” an impact which would be imperceptible.

The conclusion must be that the net zero goal is suboptimal. The only economist to win a Nobel prize for work in environmental economics, William Nordhaus of Yale University, argued that a target of 3.5 degrees would balance costs and benefits and that doing nothing at all would be better than trying to hit a target of 1.5 degrees. Rather than attempting more than a very modest mitigation of temperature increases, adaptation to warming is better.

The economic justification for a carbon tax is that emissions cause harms that are not included in the prices of the goods produced using technologies that emit greenhouse gases. With a carbon tax, the total price reflects the total “social cost” of emissions.

Almost all estimates of the social cost take into account only the predicted harmful effects of CO2 (using models that have systematically overstated its warming effects). They neglect the well-established positive impact of CO2 on plant growth, which has led to a greening of the earth and an increase in agricultural productivity estimated to be worth over $3 trillion between 1961 and 2011.

A woman gasses up at a gas station in Mississauga, Ont., Tuesday, February 13, 2024. Christopher Katsarov/The Canadian Press.

A recent study of the social cost of CO2 accounts for this effect and gives a range of estimates lower than the current carbon tax—and in some cases, the estimated social costs are actually negative. If this is indeed the case, then the argument follows that we should be subsidizing rather than taxing the use of fossil fuels.

Regardless, though, if the goal is to efficiently reduce emissions, the carbon tax should be used alone. Piling on other taxes, subsidies, regulations, and controls increases the cost of cutting emissions because they introduce distortions into the operation of markets. The current policy mix has many of these, including but not limited to mandates on zero-emission vehicles, massive subsidies for the production of batteries for electric vehicles, carbon tax exemptions for heating oil but not for other types of home heating, total bans on some uses of plastic, etc. It almost seems guaranteed to maximize the cost of reducing emissions.

If greenhouse gases are a problem, they’re a global problem. Canada can do nothing by itself to solve it. If the Canadian economy were to disappear tomorrow, the increase in emissions from China, which is building two new coal-fired power plants per week, would more than makeup for the elimination of Canadian emissions within months. The Climate Tracker Action organization assesses that in February 2024 no countries are meeting their Paris Agreement targets. Many countries (including Canada) are either “highly” or “critically” insufficient.

If going it alone is futile, the carbon tax is punishing Canadian firms in an important way. It hurts their competitiveness with imports from firms that face a lower carbon tax and when exporting to markets served by those firms. It is possible (but administratively costly) to implement border adjustments that tax the imports from jurisdictions with a lower carbon tax, and which wholly or partially exempt the tax on exports to such jurisdictions. There have been discussions about implementing these adjustments, but so far they have not borne fruit.

The bottom line: pause increases in the carbon tax permanently and have a serious discussion about eliminating the hodgepodge of rules and regulations that are harming the efficiency and competitiveness of the Canadian economy.

Patrick Luciani: Is populism destroying European democracy?

Commentary

In the latest Hub book review, Patrick Luciani takes a look at Democracy Erodes from the Top: Leaders, Citizens, and the Challenge of Populism in Europe, by Larry M. Bartels (Princeton University Press, 2024), which tries to assess just how much of a threat populism is to European democracy.

Those who have followed European politics over the past 15 years no doubt felt a significant decline in support of liberal democracy. These years were marked by the emergence of populist governments in Poland and Hungary and the seismic Brexit event in 2016. In Western Europe, the growing popularity of Marine Le Pen in France, the right-wing government of Giorgia Meloni in Italy, Vox in Spain, and the recent rise of Chega in Portugal have only strengthened this perception. 

Numerous factors have contributed to Europe’s radical shift towards anti-elitist and anti-establishment parties. The economic disruptions of globalization, the influx of unregulated immigration from North Africa and Middle Eastern countries, and the alarming rise in crime have all played a significant role. Even in the traditionally stable and peaceful Scandinavian countries, immigration has strained the tolerance and budgets of generous social welfare programs. 

This situation has led to a widespread belief that traditional democratic institutions have failed to address the urgent need for reforms. The disillusionment with democratic liberalism is borne by Pew data and further amplified by Hungary’s Viktor Orban’s declaration that “the era of liberal democracy is over,” a sentiment that gained traction after the election of Donald Trump in 2016. 

But those on the political Right aren’t the only ones dissatisfied with liberal democracy. Those on the progressive Left are perhaps even more disappointed with democratic liberalism’s very roots, which entrenched individual rather than group rights based on identity politics. Ireland’s recent rejection of a change in its constitution’s wording to incorporate group rights is a case in point. What was supposed to be an easy victory for Ireland’s political elites in redefining the meaning of relationships and the role of women in the home was solidly rejected by a public suspicious of an attack against traditional values. 

Though parties on the extreme Right in Europe have increased their vote count, they have yet to see their support garner more than 10 to 20 percent of the popular vote in most countries. 

In his new book on the erosion of European democracy entitled Democracy Erodes from the Top, Larry Bartels, a political science professor at Vanderbilt University, challenges the prevailing notion that the public is the catalyst for radical reform. He is one of the rare thinkers who goes against the prevailing wisdom that the public is driving radical change in Europe. 

His extensive research, covering 23 European countries over the last 15 years, reveals a stark contrast between the perceived crisis of democracy and Europeans’ actual attitudes. Contrary to popular belief, support for democracy as a system of government has not weakened, and trust in national parliaments and politicians has remained virtually unchanged. Both go against conventional wisdom and general perception. 

People are reflected in a window with the logo of the World Economy Forum on the last day of the forum’s Annual Meeting in Davos, Switzerland, Friday, Jan. 19, 2024. Markus Schreiber/AP Photo.

The real culprits for the turmoil and European political troubles, or what Bartels calls “political backsliding,” lie not with ordinary citizens but with political elites. The author doesn’t conclude that citizens are passive agents in the demand for political change and play no role in demands for democratic reforms. He observes that we tend to exaggerate the threats of populism and the alarmism that comes with it.

He reminds us that the financial collapse of 2008 was routinely compared to the crisis in the 1930s, yet by 2014-15, average satisfaction with the economy in Europe was higher than before the crisis and continued to improve until COVID-19 hit in 2020. Public support for European integration held steady during the Euro crisis in the early years of the 21st century, and even under the threat that Greece would leave the Eurozone. 

What about the highly contentious problem of immigration? Where one would expect a deep deterioration of support and demand for more restrictions, Bartels sees little evidence in public surveys that immigration and asylum-seeking have produced “any significant erosion in public attitudes toward immigrants.”  

The author reminds us that warnings about the collapse of democracy are hardly rare. Popular and scholarly writings about the crisis of democracy have a long history and can be found in articles in Foreign Affairs from the 1930s. Most recent books on the rise of populism, such as David Runciman’s How Democracy Ends, have been inspired by Trump’s election in the U.S. or Bolsonaro in Brazil and the threat they and other populist leaders pose to liberal democracies. But populism is a notoriously difficult concept to define. Populists too often make the mistake of believing they are fulfilling the “will of the people” and find there is no such thing. Professor Bartels reminds us trying to discern what people truly believe is hard work.