Want serious carbon reductions? Try targets, not taxes

Just one day after B.C. announced its new carbon tax, world oil prices closed at more than $100 (U.S.) a barrel for the first time. So, is it the B.C. government or OPEC that is doing more to fight global warming? This question may sound like heresy to motorists who vilify OPEC and "Big Oil" as they fill their SUVs, but let's look at the facts.

Over the past five years, the average Canadian retail price of gasoline, adjusted for inflation, has increased by about 30 cents (Canadian) a litre. B.C.'s new carbon tax starts off at 2 cents a litre, increasing to 7 cents in 2012. Comparison of these figures would say that OPEC's price increases should do a lot more than the carbon tax to reduce consumption. This was further demonstrated to motorists here on Vancouver Island when an oil-market-driven 6-cent increase in pump prices came the same week as the carbon ax proposal from Victoria.

Speaking of taxes, it's useful to remember that the pump price of gasoline in B.C. already includes provincial taxes of 15 cents and federal taxes of about 15 cents a litre. For motorists in Greater Vancouver, there is an additional "transportation tax" of 6 cents. This means most B.C. motorists were paying pump taxes of 36 cents a litre before the new carbon tax. Once the hoopla surrounding the announcement is over, will consumers change their behaviour because of a few extra pennies?

History tells us they won't. The carbon tax rises to 7 per cent of current prices over four years. In the past five years, the average inflation-adjusted retail price of gasoline in Canada went up 40 per cent, and gasoline consumption rose in every province.

One thing is already clear. While the new tax may be "revenue neutral' for the province, it certainly won't be for individual businesses and families. An excerpt from a letter to the Times Colonist in Victoria illustrates a rural/urban divide: "The biggest winners are city folks, who have better public transportation ... the rural folk further from the downtown core are the losers." People who heat their homes with natural gas or fuel oil complain of being targeted over those who heat with electricity. Some businesses claim the province's income tax cuts won't offset the additional costs. And so it goes. ... There's no question this tax creates a complex maze of taxes, rebates and inequitable consequences.

Many commentators have recognized that B.C.'s carbon tax will have little impact on emissions, but laud it as "a first step." As a private sector guy, I just don't buy the idea that a flawed plan doomed to be ineffective is a step in the right direction. Government programs such as this one often start with a noble objective; but their failure means either a new and better plan is delayed, or the entire idea becomes so discredited in the eyes of voters that politicians abandon it entirely.

As a believer in the economic concept of inverse price to demand elasticity, the resiliency of energy demand in face of big price increases has me scratching my head. Part of the reason for the bad news on the emissions reduction front lies in the good news performance of Canadian economic growth. A hopeful point is that higher fuel costs will, over the auto replacement cycle, lead to lower fuel consumption. But if Canadians need more than high prices to encourage them to change behaviour, and a B.C. style carbon tax won't do it, what would the components of an effective plan look like?

Both history and logic about consumer behaviour tells us that when the price of something has already reached expensive levels, adding a little to that price has no real impact on consumption. Adding a lot more cost would not only be politically unpalatable, but further burdens those that have no near-term alternative; such as those rural folks or public institutions such as hospitals, schools and businesses. It also makes virtually everything more expensive to produce, further hampering the global economic competitiveness of Canadian manufacturers. The key is not to make all consumption more expensive, but rather making consumption above a set level significantly more expensive. This creates an incentive to avoid the higher cost entirely by using less.

Industrial emitters who pay a tax that kicks in when emissions intensity exceeds a set target have a big incentive to find ways to avoid it through technological and operational efficiencies. If the tax is on all their emissions, the economics of investing in incremental improvements are much less compelling.

When it comes to individual consumers, adapting the concept of taxing consumption beyond a target level is more challenging. In some European countries, an energy efficiency tax is levied on vehicles based upon the amount by which they exceed fuel usage standards. There are also incentives for home energy efficiency. We need thoughtful measures that will yield results, rather than embracing an approach that both history and common sense tells us is destined to fail.