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Matthew Lau: Costs of the carbon tax to Canadians are much higher than Ottawa is letting on

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Last week, the Parliamentary Budget Officer (PBO) furnished the Liberal government with the confirmation bias it was looking for in order to be able to claim its carbon tax system would enrich most Canadians. According to the report the PBO released, “most households will receive higher transfers than amounts paid in fuel charges. They will therefore be better off on a net basis because the rebate exceeds the household carbon cost.”

One of the charts in the report purports to show that almost all households in Alberta are enriched by the carbon tax — and that the higher the tax rate, the higher the net benefits. Most readers will find that hard to believe. And with good reason: the PBO report arrives at its conclusion that the federal rebate exceeds the cost of the carbon tax only by excluding much of the cost.

The cost to the private economy of raising an additional $1 in government revenues ranges from $1.77 in Alberta to $6.76 in Ontario

The cost of any tax is much higher than simply the flow of dollars it produces for the government levying it. For example, in the case of provincial personal income taxes, a recent

study by tax economists Bev Dahlby and Ergete Ferede found that the marginal cost of public funds — that is, the cost to the private economy, including lost economic activity, from raising an additional $1 in government revenues — ranged from $1.77 in Alberta to $6.76 in Ontario.

The cost to households of raising $1 in carbon tax revenues is also much higher than $1. A carbon tax functions like a tax on labour and capital but is actually more distortionary since it is applied to the narrower base of carbon-intensive activities. As with taxes on personal and corporate income, the effect of a carbon tax is to cut capital investment, eliminate productive jobs, and reduce income growth — costs that, if they had been included in the PBO report, would have swamped the reported net gains to households.

By excluding these costs, the PBO report naturally describes an outcome in which most households benefit from the carbon tax-and-rebate system. Using the PBO’s methodology the most harmful and absurd taxes could be justified as creating net benefits for most households.

Imagine, in an example adapted from economist Robert P. Murphy, that in order to discourage caffeine addiction the federal government imposes a $350,000 tax on each cup of coffee consumed. To make the policy revenue-neutral, every dollar collected in coffee taxes is distributed back to households in rebates. The result is that almost nobody in the country would buy coffee. But suppose one rich individual, perhaps as a marketing stunt, does purchase one cup of coffee and pays the $350,000 tax. If so, the revenues would be distributed back to the rest of the population at a rate of — dividing $350,000 by the 35 million of us — $0.01 per person (though no doubt the government would eat up a good part of the $350K collecting and redistributing the revenue).

If you look only at cash flows, you might well conclude such a tax enriches almost all Canadians. After all, every household in the country but one receives more from the coffee tax rebate than it pays in coffee taxes. But, of course, by depriving Canadians of coffee, the tax makes coffee-drinkers — of whom there are many! — worse off, some much worse off.

So it is with the carbon tax, except that instead of depriving Canadians of coffee, it deprives many of them of jobs and income growth.

Carbon-taxers would argue that, even if the tax is not financially beneficial to Canadians, the financial losses are at least offset by the environmental benefits of reducing carbon emissions. Yet even this much weaker claim is questionable. In a study published last month in the journal Environmental Economics and Policy Studies, Kevin Dayaratna, Ross McKitrick and Patrick J. Michaels produced estimates of the social cost of carbon (the present value of damages caused by future climate change due to emissions today) by updating the FUND climate model, which is co-developed by academics David Anthoff and Richard Tol, with the latest  — mainstream — estimates of the effects of greenhouse gases on plant growth and climate.

This latest evidence suggests the climate is less sensitive, and plant growth (which is a good thing) more sensitive, to the concentration of carbon dioxide in the atmosphere than originally thought. As a result, the marginal damages of carbon emissions are, as McKitrick puts it, “basically zero through the mid-21st century. In other words even if you accept mainstream climate science it still doesn’t justify costly policy measures.”

Indeed, the study found that by improving plant growth and crop harvests, carbon emissions might actually yield net benefits — over the next 30 years, at least. The federal carbon tax, on the other hand, does no such thing.

Matthew Lau is a Toronto writer.

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