Carbon Pricing Doesn’t Work

Today, Canadian Prime Minister Justin Trudeau ambushed provincial and territorial environment ministers by announcing in Parliament that the provinces had two years to come up with a carbon tax or the federal government would impose one on them. Why this issue is of such immediate importance as to destroy what was a pretty favourable relationship between the feds and the provinces, is beyond me. 

But there is a big push on to get the Paris Accord signed, and just today, the EU signed on making the accord official and in effect. The push, in my view, was needed because the world is entering a La Nina winter which will result in colder than normal temperatures for much of the world and that will take away some of the trumped up fear that the sky is falling.

There are 2 major issues with a carbon tax that I can see:

1. If it works and reduces Canada's carbon footprint by 10% at the cost of trillions of dollars to the economy, what will that mean for global warming? Well, briefly, Canada produces less than 2% of global anthropomorphic CO2. Anthropomorphic CO2 accounts for less than 4% of total global CO2 production. 

Consequently, a 10% reduction in Canada will result in a total global reduction in carbon of 0.008%. 

What will that do to the global temperature? - absolutely nothing!

2. Carbon tax doesn't work. See below:


Aldyen Donnelly, Special to Financial Post

"The Canada 2020 background paper believes that reducing

Canadian greenhouse gas emissions ("GHGs") and "pricing

carbon" through government taxation are one and the same thing.

They are not."

STEEN ULRIK JOHANNESSEN/AFP/Getty Images"The Canada 2020 background paper believes that reducing Canadian greenhouse gas emissions ("GHGs") and "pricing carbon" through government taxation are one and the same thing. They are not."

Canada 2020 a wrong-headed think tank

Canada 2020 is a think tank established “to identify progressive policy solutions and to help redefine federal government for a modern Canada.” Given this objective, it is surprising to see Canada 2020 sponsor an initiative whose goal is to “sell” Canadians on the purported merits of carbon pricing policies. Canada 2020 recently launched such a policy marketing initiative, with the publication of a background paper entitled “Why would Canadians buy carbon pricing?”

This paper should be presented as a case study in every first year economics class as a perfect example of “confirmation bias.” Researchers exhibit confirmation bias when they form a belief or hypothesis and then selectively identify or creatively interpret data to reinforce that belief.

I am not a climate change skeptic. I have advocated for efficient regulation of fossil carbon content since the late 1980s. But the Canada 2020 background paper asserts that reducing Canadian greenhouse gas emissions (“GHGs”) and “pricing carbon” through government taxation are one and the same thing. They are not.

Interested and objective researchers can review fairly comprehensive datasets for over 120 developing nation pollution pricing policy precedents going back to 1978. Roughly one-third of these are “cap and trade”-type measures, while the rest are more direct consumption, production tax and/or tariff measures or measures that combine direct taxation and cap and trade.

Not one of the pollution pricing precedents can reasonably be described as effective, let alone efficient, by any analyst who considers all of the publicly available data. Yet the Canada 2020 background paper goes to some lengths to selectively report or creatively interpret data to support its pro-carbon pricing policy bias.

For example, the report says: “British Columbia’s carbon tax stands out” as a success story and “a review conducted in 2012 concluded that: the carbon tax is working and that businesses are not unduly disadvantaged.”

But BC Ministry of Finance budget documents show, clearly, that total demand for the B.C. carbon-taxed products grew faster after the carbon-tax was introduced than over almost every other similar timeframe between 1992 and 2008 (before the carbon tax was introduced). Further, B.C.’s official 2013 Fiscal Plan expressly forecasts that, in spite of the carbon tax, B.C. demand for the carbon-taxed goods will grow another 8.6% by April 2016, while the population is expected to grow only 1.2%. This is an unprecedented rate of GHG growth, which is forecast to be realized long before even one B.C. LNG plant might become a reality.

B.C.’s per capita demand for the carbon-taxed goods did decline between 2007 and the end of 2011, by 13.5 terajoules (Tj) per 1,000 persons. But B.C.’s decline in demand for those same commodities was -16.6 Tj/1,000 persons over the four years immediately preceding the introduction of BC’s carbon tax. And it was -14.3 Tj/1,000 persons over the four years starting in 2001. In fact, the rate of decline in B.C. per capita demand for the carbon-taxed goods slowed down after the tax was introduced. To claim the carbon tax is working, analysts have to take the post-carbon-tax trend entirely out of context.

The Canada 2020 report and the two B.C. carbon tax “studies” it references imply that consumer prices for the carbon-intensive goods went up because of the B.C. C-tax, and consumer demand for the goods went down in response to the price increases.

In reality, reduced industrial demand for diesel accounted for over 61% of the reduction in post-2007 per capita demand for B.C. carbon-taxed products. Within months of the introduction of the carbon tax, the pump price for diesel had fallen from $1.40/litre to less than $0.95/litre, a floor below which the price of diesel had not fallen since early 2005. The nominal retail price of diesel did not return to pre-carbon-tax levels until April, 2012. No objective analysts can review this price history and can reasonably attribute the 2008-2011 reduction in per capita diesel demand to BC’s carbon tax.

Most of the reduction in B.C. diesel demand, as well as the diesel price crash, reflect the unprecedented rate at which B.C. lumber, pulp and paper mills shut down after 2007. Direct employment in B.C.’s forest sector–which accounted for over 35% of BC industrial GHGs prior to

2008–fell from 82,880 to 53,340 jobs between 2007 and the end of 2011. So the correlation between job loss in the value-adding part of the forest sector and BC’s 2008-2011 per capita GHG reductions is pretty clear. A similar correlation between value-adding job losses and GHG reductions is evident in the European, Japanese and U.S. data. I do not take the position that BC job losses were due to the carbon tax. But BC’s forest sector job losses and GHG reductions have the same cause, so to claim the carbon tax is in any part responsible for BC’s GHG reductions, one must also attribute the job losses to the tax.

Beyond the indisputable correlation between job losses and GHG reductions, there is a more frightening signal in the European data. Due largely to the coincident implementation of the two general carbon pricing strategies to which Canada 2020 limits the scope of its new “dialogue that is respectful of all positions,” Scandinavian and German households typically pay over CAD$0.40/kWh for electricity. But 40% to 50% of the electricity generated to supply the fully integrated Scandinavian and northern German markets still comes from burning coal. Swedish taxpayer-owned utility Vattenfall is currently building two of the largest coal-fired power plants in European history, one in Denmark and the other in northern Germany. To maintain a secure long-term supply of cheap coal for these plants, in 2004 Vattenfall bought the eastern German lignite coal mines that the government of
Germany was then proposing to shut in.

Any objective reviewer of European energy taxation, pricing, demand and development trends since 1990 must reasonably ask: At prices well over CAD$0.40/kWh, why can’t Europeans afford zero-emission electricity? How can policies that deliver so little renewable energy at such a high cost to families be found, by objective analysis, to be efficient?

Canadian governments have a stellar history of adopting product standards that efficiently move suppliers of polluting products to “green up.” This is how we got lead levels down in gasoline and paint, sulphur levels down in gasoline and diesel and massively reduced the ozone-depleting substances in refrigerant chemicals.

In all of these examples, companies competing to secure their shares of the new demand arising from our regulated product standards massively reduced pollution content while nominal prices for the regulated products fell. Our historical environmental policy successes and failures clearly show that governments can only foster highly competitive, efficient pollution reduction outcomes with product standards that do not involve governments in either the price-setting or new technology selection processes.

Yet the Canada 2020 framework for policy evaluation does not even allow for the possibility that pollution levels can fall while retail prices for polluting commodities and their substitutes are declining. The Canada 2020 model for dialogue has slammed the door on any consideration of the only pollution reduction policy model that has worked well, and often, in the past.

Aldyen Donnelly is President, WDA Consulting Inc. in Vancouver.