Tuesday, June 11, 2019

The revenue neutrality part of a revenue-neutral carbon tax

Though commonly recommended as a means of gaining political acceptability, I’ve never been a fan of the revenue-neutral part of a ‘revenue-neutral carbon tax’. That’s the notion that the revenues carbon taxes generate should be offset by reductions in income or other taxation. The goal of a revenue-neutral carbon tax is simply to provide an incentive to reduce the amount of greenhouse gases (GHGs) we emit in what we produce and consume. It is not to increase the so-called burden of government taxation.

Notwithstanding the protests of Premiers Kenney, Ford and other Conservative leaders in Canada, the problem with a revenue-neutral carbon tax is not the tax itself, which after all is doing the right thing just not enough of it. The problem is that the call for revenue neutrality ignores the fact that addressing climate change requires more than just incentives to change behaviour.

Meaningfully addressing the challenges of climate change will require major commitments of government resources both to deal with the impacts we are already experiencing and to accelerate the speed and lower the cost of reducing GHG emissions over the longer term.

In British Columbia and Alberta there is the immediate need to increase efforts in wildfire prevention, suppression, damage assessment and affected community support. Here and elsewhere there is need for more planning and investment in flood control. Measures to prepare for and mitigate the risks and damage from severe storms are required. All of this requires resources.

For the longer term, there is the need for government investments in transportation infrastructure, electricity supply, building design and other areas in order to support and enhance the energy consumption and other behavioural changes we need. There is also the need to support research in alternative energy, carbon capture, and other areas that may be critical in mitigating the extent and impacts of climate change.

In short, the needs are great and the required commitment of resources very large. The question is: how will those requirements be funded.

Some would argue that government should simply reallocate the tax revenues it already collects. But that ignores the other pressing needs government must address – in child care, housing, health care, K-12 and post-secondary education. And it ignores the structural deficits that jurisdictions like Alberta are already facing.

Responsibly dedicating the resources needed to address climate change requires more tax revenue. There are of course many ways government can raise revenues. It could increase income, general sales or value added taxes. Local governments could increase property taxes. Public utilities can increase rates. But the question I have is: why shouldn’t government direct some or all of the revenues it collects from carbon taxes to the measures it must undertake to address the immediate and long run challenges that the carbon emissions give rise to. Why look to other sources of tax revenues when you have a potential source that is directly linked to the problems and challenges you have to address?

The answer to Premier Kenney’s flippant rejection of carbon taxes –“they wouldn’t prevent the forest fires that have plagued Alberta these past weeks” – is: “yes, but they would provide the financial resources  you need to suppress those fires, to support affected communities and begin the major efforts needed to reduce the incidence and severity of future fires. Even if you don’t accept the near universal advice of economists that carbon taxes are an  efficient way to reduce GHG emissions, you need to do more to protect Albertans right now and you don’t have the financial resources to do that without putting Alberta further into debt”.

Carbon taxes can and should be an integral part of government policy to address climate change, but they will most effectively and immediately do that if not constrained to be revenue-neutral.