Why doesn’t Trudeau use carbon taxes to raise revenue?

Virtually all governments in the western world are struggling with their projected finances and the threat of significant deficits. With aging populations and increased demands on health care systems and exploding social security expenses, governments at all levels are looking at some very bleak scenarios in terms of revenues versus costs.

Increasing income or consumption taxes, except perhaps on the mythical 1%, is seen as non-starter.  And at some point increased taxes start to have a drag on the economy or spur creative ways to avoid paying them.

Carbon taxes, on the other hand, have the potential of raising a significant amount of revenue.  Way back in 2009 when Obama presented his first budget to Congress he included a cap and trade scheme that projected to increase government revenues by $650 billion dollars.   As expected the Republicans quickly chopped that budget item off the budget.  Although it was not strictly a carbon tax, and aimed largely at big industry it pointed to the significant revenue potential of carbon taxation.

BC’s carbon tax raises about a billion dollars per year, all of which is returned to BC residents as lower taxes. Alberta’s new carbon tax is projected to bring in revenues $3 billion per year by 2018.  

If a national carbon tax was put in place, extrapolating from BC and Alberta data, the federal government could expect an increase in annual of anywhere revenue between $10-$30 billion dollars!.  This would be more than enough to cover Trudeau’s promised infrastructure expenses and then some.

Some argue that carbon taxes should be revenue neutral as for example in the case of British Columbia.  In reality, the BC carbon tax is a progressive tax like many others where most of the tax revenues raised at the pump go to lower income families. Virtually all taxes are “revenue neutral” in the sense that only a small percentage of our tax revenue is spent on government operations and defence.  Most of the money that governments raise in taxes is returned to the taxpayer in terms of health services, old age security, education and so forth.

An important feature of carbon taxes is that increasingly the public sees them as a “virtuous” tax, or conversely as a “sin” tax depending on your perspective much like cigarette or liquor taxes.  Alcohol and tobacco are always seen as fair targets by tax authorities, as such taxes are rationalized as a health saving measure in providing a disincentive in partaking of such vices.

In theory, those who believe in global warming and want to do their bit in reducing our impact on the planet, could adjust their lifestyle to reduce the impact of carbon taxes.  This is the one big advantage of a carbon tax versus cap and trade.  

Cap and trade is in effect is a hidden tax.  In addition to its convoluted administration it does not provide ordinary citizens an opportunity to directly do their bit in reducing their own carbon footprint.

One of the main arguments against carbon taxes is that they can unfairly penalize domestic manufacturers who must compete against companies in jurisdictions with no carbon taxes.

One solution is to apply a carbon “duty” on imports equivalent in value to the carbon of the imported product.  But imputing the value of carbon within an imported product is extremely difficult. There are so many factors that affect the carbon value of a product as for example the source of electricity used in the plant to manufacture the product.  Within the USA the carbon value of a given product can vary significantly depending on whether it is manufactured in a state where most of the electricity is generated by coal versus nuclear power.  

A much simpler solution of calculating the imputed cost of carbon is to apply a carbon tax to the exporting nation’s products into Canada based on the average carbon intensity in terms of tonnes of carbon per dollar GNP.  This simple calculation removes all sorts of complexity and also hopefully spurs the exporting nation to reduce its carbon intensity to remain competitive.

With governments facing huge deficits and citizenship very much against new income taxes, carbon taxes promise a whole new opportunity for governments to raise essential  revenue that will also have the potential to reduce our collective carbon footprint.

Bill St. Arnaud is a Green Internet consultant who works with universities and businesses in devising strategies to reduce their carbon footprint  bill.st.arnaud@gmail.com