Carbon Tax Is Unpredictable

The finance department in a secret memo says information is lacking on how a federal carbon tax will impact Canadians, but cautions the “tax would cascade throughout the economy.” Cabinet proposes to tax greenhouse gas emissions beginning in 2018.

“Information is lacking,” said the May 18 staff memo to Finance Minister Bill Morneau. “Without sufficient information on energy consumption or carbon alternatives, emitting sectors and consumers may not be able to respond to price incentives.” The May 18 memo was obtained through Access To Information.

The memo Carbon Pricing In Theory And In Practice said that, while the tax should encourage consumers and industry to economize, “measurement is difficult”. “While taxing fuels is a relatively simple way to price combustion emissions, other emissions like those related to livestock are difficult to measure and may therefore be impractical to price,” it said.

Cabinet has proposed a tax of $10 per tonne of carbon emissions in two years, rising to $50 per tonne by 2022. Individual Canadians account for about 23 tonnes a year through home heating and commuting.

The carbon tax “would generally operate like current excise taxes on gasoline and diesel fuel, although it would be applied to a greater number of fuels,” said Carbon Pricing; “A manufacturing firm would pay a higher price for energy derived from burning fossil fuels. In turn, this firm would increase the price of its goods to reflect higher input costs for energy obtained from carbon.”

“The tax would cascade throughout the economy and prices would increase most for goods that make intensive use of carbon-based energy,” said the memo. “There would be a broad incentive to substitute away from carbon in the whole economy. It would also stimulate technological innovation.”

‘Not Simple Economic Theory’

However the memo acknowledged cabinet has little data on the practical effect of the tax. “Carbon pricing and energy use are disconnected,” the memo said. “For example, increased electricity prices may not lead a landlord to invest in energy efficiency improvements in a rental property if the tenant pays the heating and power bills. Alternatively, tenants may overuse energy if the landlord pays the heating and power bills.”

Environment Canada has proposed a 30 percent reduction in 2005 greenhouse gas emission levels by 2030. The Parliamentary Budget Office in an April 21 report Greenhouse Gas Emissions calculated a tax of $100 per tonne was more likely to meet emission cuts.

Carbon Pricing noted that comparisons to provincial climate change programs are imprecise, though cabinet has frequently cited British Columbia’s 2008 carbon tax as a model. “Provincial actions are difficult to compare since they are sometimes complicated and differ across multiple metrics,” it said.

The B.C. tax of $30 per tonne is levied on all fuels at the equivalent of 7 cents a litre but exempts industrial emissions and exports, First Nations, farmers, trucking companies and marine shippers. Tax revenues of $1.2 billion a year are used to finance a 1 to 2 percent tax cut for B.C. corporations and small business, and a 5 percent cut for low-income earners, Carbon Pricing noted.

“In practice, markets do not function as predicted by simple economic theory,” the memo said.

By Staff

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