Conservatives and carbon pricing
Replies to articles: The False Sincerity of Climate Politics in the 2021 Election, Create a conservative climate change policyand Assessing Climate Sincerity in the 2021 Canadian Election
Federal Conservatives have resisted pledging to tackle climate change – despite opinion polls indicating they cannot win an election without doing so. Former leader Erin O’Toole was an exception. He presented a carbon pricing plan which was later rejected by the party. Many commentators, including those who write in Policy Optionshave expressed concern about the party’s position – either because they see climate change as a fundamental challenge requiring stronger action (as Imre Szeman has written) or because they believe the Conservatives should not not see any tension between a serious environmental policy and traditional conservative values (as Jérôme Gessaroli has argued).
The current race for the leadership of the party is of fundamental importance. An effective democracy requires a credible opposition – a government-in-waiting that has a serious chance of being elected. Therefore, all Canadians need the Conservatives to choose a leader who understands the importance of reducing carbon emissions.
That shouldn’t be too much to ask, because a carbon tax is the most market-friendly (least regulatory) approach to climate change. In effect, it relies on market incentives to remedy one of the market’s own imperfections – externalities. Negative externalities exist when a transaction harms an unconsulted third party. Carbon taxes ensure compliance with third-party costs and are efficient because those who can easily reduce emissions do so to avoid the tax, while those who cannot pay it.
Carbon taxes are tailor-made for people with conservative views because overall emission reduction targets can be achieved without the government needing to identify individual households and businesses in each group.
Nevertheless, it seems that many conservatives find the word “tax” so offensive that O’Toole felt compelled to devise a plan which he claimed was “not a tax” because the “income” was to go to each individual’s savings account. – not in government.
It would not be helpful for the Conservatives to go back to some form or another of this individual savings account proposal.
Many commentators criticized O’Toole’s plan as an administrative headache given the need for so many individual accounts. Others, like Mark Jaccard in his ranking of the various carbon emissions policies proposed in the last election, expressed concern that this policy “wouldn’t be as effective as a simple $50 carbon tax.” .
I’m more concerned that this plan can’t be expected to work at all – even in theory. It is important that Tory leadership candidates design an emissions reduction plan that is not open to this criticism. This is why I write.
To appreciate the individual savings account scheme problem, consider two goods (X and Y), with output X implying carbon emissions. Each household’s net income is equal to its market earnings minus taxes plus subsidies. With carbon taxes on X purchases (T per unit) and green subsidies on Y purchases (S per unit), net income equals (market profit – TX + SY). The fact that T and S appear in the household budget constraint explains how these policies can affect behavior. But O’Toole’s savings account proposal assured everyone individual household that TX would equal SY. Thus, the terms of the tax and the subsidy would cancel each other out and therefore disappear. If there is no element of politics left, there could be no effect of politics on behavior!
Normally, policies are designed to avoid such cancellation. This is achieved by ensuring that the tax neutrality of the government initiative is imposed on the society level – do not to that of each individual level. That is, while all tax revenue is to be returned directly to individuals, the amount awarded to each individual is designed to be independent of their own behavior.
I hope the Conservatives will come to see a carbon tax as acceptable after all. If they wish to return all income to households in the same period of time, I am in favor of subsidies intended for those who are most affected by the tax. But another use of the income should also be considered. Because many of the high-emission purchases people make are for goods they consider necessities, a very high carbon tax may be needed to generate a significant reduction in demand. This high tax rate may exceed what is politically feasible, so some direct emission reduction laws, such as excluding gasoline-powered cars on a specific date, are also necessary. As a result, part of the carbon tax revenue should be used to subsidize those struggling to comply with these laws.