Carbon taxes: Cash grab or climate saviour?

A carbon tax is an example of a what's called a Pigovian tax, as advocated by British economist Arthur Pigou (1877-1959).

Where in the world taxes have been tried, how they've worked

A coal-fired power plant in Chicago spews gases from a smoke stack in December 2006. ((David Klobucar/Associated Press))

In places like Sweden and Finland, it's old news and part of everyday life. In New Zealand, it was proposed by the government —and yanked back off the table.

And now, across Canada, the carbon tax debate has been placed on the front burner. Liberal Leader Stéphane Dion will unveil his party's plan for a national tax on June 19. In addition to controversial new taxes on emissions, sources say the plan will also call for large personal income tax cuts and extra help for vulnerable Canadians.

The mere idea of a carbon tax has prompted praise from environmental organizations such as the David Suzuki Foundation, howls of protest from other quarters and a series of "attack ads" from the Conservative government.

But all the hot air begs the question: What exactly is the carbon tax? And would it, or could it, work?

What is a carbon tax?

A carbon tax is an example of a what's called a Pigovian tax, as advocated by British economist Arthur Pigou (1877-1959).

When an activity has a negative social cost, such as pollution, Pigou argued that it should be taxed. That, according to his theory, provides an incentive to stop the social harm and move to more positive alternatives — a similar idea to "sin taxes" on products such as alcohol and tobacco.

So the idea of a carbon tax is to turn people and businesses away from "bad" fossil fuels and toward "good" clean alternatives. Under some models, it can also provide funds to help combat the wider effects of climate change, with the idea that the "polluter pays" for green initiatives.

In practice, a carbon tax can be:

  • an across-the-board levy on all fuels based on CO2 (carbon dioxide) emissions.
  • applied to just the businesses that produce carbon emissions, leaving it up to them whether or not to pass costs along to consumers 
  • directly levied on consumers.

Under a "revenue-neutral" carbon tax, any levies that would be extracted from a particular sector — say, transportation — would be returned in the form of a subsidy or tax break.

The tax level is often calculated in terms of dollar cost per tonne of emissions. This can then be translated into a cost on the fuel that emits the greenhouse gases (e.g.: 10 cents a litre on gasoline).

Where it's been tried

Quebec was the first province  to introduce a carbon tax  — albeit a limited one — in 2007. The levy was just under one cent for a litre of gas, with funds to pay for energy-saving initiatives such as improvements to public transit.

Compare that to countries such as Finland, where drivers pay a carbon surtax of about eight Canadian cents per litre — and have been doing so for years.

Scandinavian countries, indeed, have a long history with carbon taxes. Sweden implemented such a tax in 1991 that is currently $150 per tonne of carbon dioxide emissions, though industries pay half of this and there are other exemptions.

Swedes also pay almost 40 cents extra per litre in carbon taxes at the pumps.

Yet, through a variety of measures, Sweden reduced greenhouse gas emissions by nine per cent between 1990 and 2006 — under the level mandated by the Kyoto Protocol — while experiencing economic growth generally above the rest of Europe.

The Netherlands, which also introduced a carbon tax and other energy-saving measures in the 1990s, dropped its emissions to 1990 levels for 2005, instead of having them rise an estimated 32 per cent without measures.

Many other countries have considered carbon taxes. New Zealand even drew up legislation that called for a $15-a-tonne emissions levy in 2005, only to see it scuppered by a change in the government's makeup.

Not so British Columbia. The province has introduced a wide-ranging carbon tax of $10 per tonne starting on July 1. The tax, which the British Columbia government says will be the world's most comprehensive, will cover virtually all fossil fuels and be "revenue-neutral".

In the first phase of the tax, the price of gas will increase 2.4 cents a litre. By 2012, it will be 7.25 cents more. And home heating will also cost an extra 2.8 cents tax per litre for home heating fuel.

Other North American municipalities, such as Boulder, Colo., and the San Francisco Bay Area, have also implemented carbon taxes in recent months.

The case for a carbon tax


(Canadian Press)

"[We] must create competitive advantages by lowering taxes on things we want more of — income, innovation, savings, and investment. And we must shift those taxes towards the things we want less of — pollution, greenhouse gas emissions, smog, and waste. And in doing so, we also will be able to help the middle class and lift many Canadians out of poverty so they can offer all of their talents and skills to the nation."

- Liberal leader Stéphane Dion, May 15, 2008

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 by shifting production away from higher-cost fossil fuels and towards greener technologies.

But in the United States, the idea has gained some other notable and surprising backers, including Gregory Mankiw, a former chairman of U.S. President George W. Bush's Council of Economic Advisers. He coined the Pigou Club as a term to describe what he says are fellow supporters who cross the political spectrum, from former Bush speechwriter David Frum to former vice-president Al Gore.

"The burning of gasoline emits several pollutants," Mankiw, a Harvard economist, writes on his blog. "These include carbon dioxide, a cause of global warming. Higher gasoline taxes, perhaps as part of a broader carbon tax, would be the most direct and least invasive policy to address environmental concerns."

Many economists are skeptical of the merits of a carbon tax, but there are notable exceptions. One of them is internationally acclaimed professor 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 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 case against


(Canadian Press)

"…I think what we don't need right now when we do face rising gasoline taxes and rising taxes on energy products are governments to come and specifically impose carbon taxes on our economy. We think that is a foolish and unnecessary policy that is being proposed by our opposition."

- Prime Minister Stephen Harper to reporters, May 21, 2008

Detractors say green taxes are really just a revenue grab by desperate governments. 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.

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

Yet if it is not passed along to consumers, either at the pumps or in home-heating bills, then how does it modify behaviour? Would it actually work? If it is, could it be a hardship for those who already have trouble heating their homes or using their vehicles for work?

In Canada, the notion of a carbon tax also has deep-rooted political undertones. It's seen by some as unfairly damaging the economies of energy-producing provinces, such as Alberta.

A word about 'cap and trade'

Under a "cap-and-trade" system, a central authority or organization limits the total greenhouse gas emissions allowed by industry. Big polluters that exceed those limits would have to buy credits from companies that come in under the cap, making it pay to go green.

British Columbia introduced such a plan for industrial emissions in April 2008, while Ontario and Quebec agreed to work together on cap-and-trade system a few months later.

Both plans, however, work through controlling emissions through market prices, leading some to argue that they are two routes to the same solution.