Although Ontario’s supposedly imminent carbon pricing plan seems to keep getting kicked down the road, and won’t be in the upcoming budget, it does seem like this will finally be the year it happens.
Long overdue, but better late than never. The key, though, is to get it right, so we don’t lose more time with a failed program. To make the right choice, all we must do is look at which approaches have succeeded and which have not.
Carbon pricing is a fiscally responsible approach, basically taking away the privilege of polluting our atmosphere for free and instead making everyone responsible for their own actions and repercussions, by putting a reasonable price on emitting fossil carbon. This has support not only from environmentalists and climatologists, but also economists and major businesses, including some global oil companies. The two main routes are a simple fee, or some kind of quota system underneath a total limit, called a “cap”.
Quota systems, as a cap-and-trade, have been tried in Europe and found lacking. The key problem is how you allocate quota and set the cap. It seems far too common for certain industries to successfully argue that they are “critical”, so deserve a partial or total exemption. Events like an economic downturn or a cold winter are used as an excuse to loosen limits. Big polluters are “grandfathered”, and companies are allowed to buy dubious “offsets” from outside the cap. The end result is that the system is byzantine, leaky, corrupt, and fails to provide meaningful reductions.
A fee, on the other hand, is fair, even, predictable and direct, easy to monitor or adjust as targets are reached, and avoids all the wheeling-and-dealing that seems to undermine caps. The key, then, is to make sure the carbon fee doesn’t overburden the economy, becoming a job-killer or drag business. And that’s actually easier than you might think; just make the carbon fee revenue-neutral by returning all the income to the economy in the form of tax cuts or dividend payments.
British Columbia chose the route of a carbon fee returned via tax cuts, and has proven several important things. One is that a government (and a Liberal one, at that!) truly can implement a new tax while returning all the revenue back to the public, so that the total tax burden (and government revenue) does not rise. Ideologues assert this can’t be done, yet it has been, and has been independently verified. The other finding is that a revenue-neutral carbon fee need not hurt business, jobs, or the economy. Of course, it will push some industries to shrink or reform, and encourage others to grow, but overall it does not create a general drag. What it does bring is innovation leading to better productivity, efficiency, and competitiveness in a cleaner economy.
In fact, as was reported in this paper on Tuesday, the BC economy is expected to lead all other Canadian provinces in economic growth this year, at a respectable 3% rate. So any time someone asserts that a carbon price is economic suicide, be assured that their alarmism is counter to the truth.
So here’s hoping Ontario pays attention to what works and implements a simple carbon fee, and returns all the revenue either through other tax cuts or with a direct payment to every Ontario resident.
Published as my Root Issues column in the Barrie Examiner (and Innisfil Examiner) as "A simple carbon fee can work"