The carbon tax: The pros and cons of a tax on fossil fuels

The carbon tax, sometimes called a green tax, was a popular idea in the early 1990s when climate change and other global environmental issues were first coming to the fore. Now it seems to be making something of a comeback. For example:

• The Quebec government just announced plans to levy a broad carbon tax against oil and gas companies as a way of financing what it calls a $1.2 billion Green Fund over the next six years to help control the province's greenhouse gas emissions and meet its Kyoto target.
• Federal leadership contender, and possible front-runner, Michael Ignatieff caused a stir within his own Liberal party, and among some prominent Alberta politicians, for suggesting a carbon tax a week ago.
• And the notion is getting something of an international hearing courtesy of Al Gore, the former Democratic party presidential candidate who lost the 2000 race to George W. Bush by a whisker, and is now trumpeting the idea of a broad-based carbon tax with his new documentary about climate change, An Inconvenient Truth.

What is a carbon tax?

In truth, it could be any number of measures designed to increase the cost of burning fossil fuels like oil, gas and coal. The idea is both to change consumer behaviour and set aside a fund to help smooth the transition to a cleaner economy.

The most talked about proposals are either a direct across-the-board levy on these fuels or a tax based on CO2 (carbon dioxide) emissions, which would largely be aimed at industry and which is much more rare. (Norway may be the only country to have anything approaching this: It enacted a tax in the early 1990s to encourage the sequestering of CO2 emissions from its North Sea oil operations back into underground chambers deep underneath the ocean.)

Quebec is going for the direct levy on all non-renewable fossil fuels sold in bulk to retailers. It has asked the Quebec Energy Board to help work out the exact tax rates and perhaps a sliding scale in which home heating oil might be taxed at a greater rate than natural gas, which is less polluting, in order to encourage homeowners to switch.

Trumpeting this as an environmental measure, Quebec says it will be the first province to impose a specific carbon tax and that it expects the oil and gas companies, which have been enjoying huge profits of late, not to pass these added costs along to consumers.

But the fact is, all provinces already have some consumer taxes in place on fuels and gasoline: Quebec's is one of the highest, which explains why it often posts the highest gas prices in the country. And Quebec-based energy companies have, at least so far, bluntly refused to absorb the extra costs themselves.

Some proponents have called for a "revenue-neutral carbon tax" in which any levies that would be extracted from a particular sector, transportation for example, would be given back in some other form of subsidy or tax break, that would reward more fuel-efficient behaviour. The most common form of this, albeit only scratching the surface, has been the fairly modest tax breaks on small and hybrid cars.

The arguments in favour

Most environmental groups have long been in favour of a carbon tax as a way of changing consumer behaviour and getting industry to be more energy efficient. The more sophisticated among them have also argued that only with a carbon tax will you get any kind of trading system for emissions or pollution credits, which would in turn challenge already competitive corporations to do better on the environmental front.

Most economists are skeptical of the merits of a carbon tax but there are notable exceptions. Among them, the internationally acclaimed Jeffrey Sachs, of Columbia University, who has long argued for a global carbon tax, to be designed and administered by the UN so as to keep countries on an even footing.

Sachs says such a tax, of up to 35 cents a gallon in richer countries, would raise $750 billion US for the UN and could be used to eliminate Third World poverty and disease. More recently, he has also argued that a carbon tax would help change destructive environmental behaviour and that it would be welcomed by privately-owned utilities in particular so they can justify clean technology to their profit-demanding shareholders.

Sachs is not just theorizing about this. Some large utilities, notably Duke Energy Corp., a giant gas pipeline and utility operator in the U.S., has publicly called for a national carbon tax as a way of sharing the cost of reducing greenhouse gas emissions across all sectors of the economy.

The arguments against

The main ones are that so-called green taxes are really just a revenue grab by desperate governments, that they create artificial winners and losers in the economy and that, if they are not at least done in step with other countries, they will simply drive jobs and business offshore to cheaper locales.

In Canada, the notion of a carbon tax also has deep-rooted political undertones. Alberta, in particular, sees it as an updated version of the National Energy Program and a direct attack on its way of life. As the county's biggest, by far, oil and gas producer, Alberta can't help but be affected by any commodity-wide increase in energy price. A national carbon tax, if it came to that, could have a direct impact on big projects, like in the oil sands, that are pegged to projected demand and tight schedules.

The other main argument against a carbon tax at this juncture is that it would probably be inflationary; and why add to the cost of a commodity that is already at historical highs and changing consumer-buying habits anyway (fewer SUVs being sold)?

If it is not passed along to consumers (as Quebec seems to want), then how does it modify behaviour? If it is, it could be a hardship for those who already have trouble heating their homes or using their vehicles for work or competing against cut-rate products from places like China and India.

Ontario's long-running Fair Tax Commission in the early 1990s took a hard look at carbon taxes and decided against them, arguing they would distort too many key sectors of the economy, manufacturing and transportation in particular. Proponents had argued that shifting hauling from trucks to rail would represent a large-scale energy savings. But the tax commission concluded the savings would be much more limited and that in today's just-in-time economy such a shift could be counterproductive.

Who likes the idea and who don't

Well, apart from Quebec Premier Jean Charest, environmental groups, economists like Sachs and possibly Ignatieff (he has since qualified his support, saying he was merely putting the idea out for discussion), there have been other prominent backers of a carbon tax over the years.

Some European countries have versions of them and the European Union came close to adopting a broad carbon tax a few years ago. Former U.S. president Bill Clinton introduced one early in his mandate, in the mid-1990s, but Congress wouldn't adopt it. In Britain, Tony Blair's Labour government introduced a special "climate change levy" in 2001.

A few years ago, New Zealand was all set to introduce a carbon tax as a way of raising funds specifically designed to combat global warming. But then an election intervened and a new government, with new minority backers, abandoned the idea. Australia also had a hard look recently but its federal environment minister, Ian Campbell, has apparently ruled it out: He just called the idea "stupid."

Here at home, Stephen Harper's Conservative government wants no part of a carbon tax, and neither does Alberta or any of the prospective candidates vying for the premier's job there. Paul Martin's former Liberal government also ruled out the idea, according to former deputy premier Anne McLellan.

But some of today's Liberal leadership candidates are clearly flirting with the notion, if not the name. Both Gerard Kennedy and former environment minister Stephane Dion reject the idea of a carbon tax but both could be said to be dealing with the concept at least.

Kennedy wants to see punitive taxes on gas-guzzling cars to offset tax breaks for hybrids and other energy-saving vehicles, which is a kind of micro-version. Dion says he plans to introduce a variety of industry-wide polluter-pay taxes, the revenue from which would be plowed back into the respective sectors to help pay for clean technology and emission controls.

That's the revenue-neutral model and no doubt it will be called some kind of green tax. In political circles, carbon is much too dirty a word.