Carbon taxes in Canada: Was Stephane Dion Right?

Former Liberal Party Leader Stephane Dion was an inept politician, but a better policymaker.

Former Liberal Party Leader Stephane Dion was an inept politician, but a better policymaker.

Global climate change is a complicated study for scientists. Modern climate models evaluate enormous amounts of physical data and their forecasts require some of the world’s best supercomputers. The complexity of the issue certainly leads to imprecision, and climate scientists are unafraid to admit that. But like most complicated issues, climate change is a phenomenon that is scientifically approachable, despite the gaps in our collective understanding. Even allowing large margins of error, scientists agree that human industry has had the effect of warming up the world by changing the composition of the atmosphere. Their predictions over the last few decades have been borne out. Even at the lower bounds of estimation by scientists and evaluations by economists, the future is one where climate change will be noticeable and costly.

The famous 2006 Stern Review estimated that GDP in 2200 would be around 14% lower as a result of climate change, representing something like a 0.1 percentage point decrease in GDP growth per year over that time. This is trillions of dollars over the decades, lost to more frequent natural disasters, physical displacement from coastal areas and ultimately reduced crop yields resulting from scorching.

There is a minority of economists who would argue that, when discounted, the costs of global warming are not large, especially as a proportion of economic activity as a whole. However, the cost of mitigation is almost certainly less, as Nobel winner Kenneth Arrow argued in 2007, even at extremely high rates of future discounting. There is broad agreement in the developed world, at least academically, that the future costs of climate change justify enacting policies now to mitigate them.

As is the case with many technically complicated public policy concerns, a general consensus among scientists, economists and technocrats has not resulted in the accumulation of enough political capital to make meaningful changes, at least in Canada. Canada is a geographically huge, relatively cold place, and energy use per capita is very high. Our energy sector is highly developed and productive. It isn’t really our fault that we aren’t as inclined as Europeans to voluntarily raise the cost of energy, whether through carbon taxes or emissions trading. And not many of our elected leaders want to play the role of climate villain, asking us to make the sacrifices that would seem to weigh on our economy.

There was one politician who tried. It was really a courageous thing for Stéphane Dion (former federal leader of the Liberal Party) to begin talking about carbon taxes in June of 2008, while the North American economy slowed to a crawl and we feared job losses in the US would spill over the border. His naïve faith in the distracted public to support his scheme proved what most Canadians knew: he was an awful politician, even if he would make a good bureaucrat.

But Dion’s Green Shift, to his credit, was an entirely sensible plan from the standpoint of climate science or economics. It involved a phased-in tax on carbon dioxide emissions, rising from $10/tonne to $40/tonne over the course of a few years. Gasoline itself would have been exempt, already having its own tax. Other energy-related costs would have gone up slightly. An average household might have expected to spend an extra $500 or so on energy each year as a result. To compensate this, Dion’s plan would have reduced marginal tax rates on the bottom three income brackets. By most estimates these tax cuts would have more than compensated for any extra energy expenditures; a family of four with an income of $60,000 would have saved $1,300. The net costs of the law would have been borne mostly by producers.

While the plan was lambasted, there was really nothing radical about it. The NDP at the time had proposed a European-style cap-and-trade system (probably because it would allow them a greater feeling of the control they craved than would a broad tax-based approach). Nobody was proposing anything as unproductive as blocking the construction of oil pipelines, as has become an issue in the United States.

The Liberals were practically reading their policy from an economics textbook. The most efficient taxes are those that correct for market failures. Anthropogenic climate change is perhaps the most profound market failure of which we’re aware. A Pigouvian tax on carbon would have the effect of partially building the costs of the long-term effects of carbon emissions into market prices. And while Dion might have coopted the corrective tax as a new revenue stream, he instead advocated broad-based tax rate reductions that most economists would support.

A carbon tax in Canada would not go very far to change the global path of climate change over the next century. It might be nearly as valuable as a moral signal to the world as it would be an emissions reduction tool. While I am always skeptical of government as a solution to the world’s big problems (hunger, disease and poverty have been better addressed by markets), I recognize the value of corrections to our tax code in the face of genuinely vague, but certainly real and looming shocks to our economy that will come as a result of climate change. It would be unwise for conservatives like myself not to embrace a reasonable federal policy of emission reductions along with compensating reductions in income tax rates—even if it was the Liberals’ idea.

This article first appeared in the Prince Arthur Herald on August 20, 2013.

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