Barry Dewitt is a Toronto-based decision scientist.
Just like many here in Canada who worry about climate change, I am worried about attacks on the carbon tax. As others have written, the carbon tax works – it reduces greenhouse-gas emissions – and crucially, it accomplishes that goal while ensuring most Canadians receive more money from the yearly rebate than they pay in extra tax. And yet, the carbon tax is increasingly unpopular.
As a decision scientist, I study how decisions are structured, what people think about them and how to better design decisions so people can make the choices that best align with their values. A few weeks ago, I listened as callers expressed their frustration with the carbon tax on CBC’s Ontario Today call-in show. Many callers seemed not to know they were likely making money from the policy’s rebate. Now that the Conservative Party has put the carbon tax in its crosshairs (“Axe the tax!”), taking advantage of the tax’s unpopularity to win support, we might lose a tool to combat climate change because it is politically expedient to get rid of it.
The blame for such a failure lies largely with the government. Of course, the Conservatives are not helping, but opposition parties always hit the government where it is weak. Clearly, people do not know or feel the tax is working for them. But how could that be, if the majority are financially better off than without the policy? Decision science suggests an answer: the policy, as designed, requires us to feel that it makes life more expensive so the policy works.
According to this line of thinking, the carbon tax leverages the fact that we usually consume less of something when its price rises. But if we felt the true magnitude of the rebate – that it makes us richer even with the extra tax payments – then that would diminish the effectiveness of the very mechanism required to make the policy work. We would internalize the fact that our budget to spend on energy has increased, at least partially offsetting the effect of higher prices.
But that is not what happens. We do not feel the effect of the rebate the same way we feel the effect of the tax, so we consume less energy – and so the tax achieves its goal of lowering emissions. That makes sense to a decision scientist: it’s an example of “loss aversion,” wherein a loss of money feels more “bad” than a gain of the same amount feels “good.” It could be that the rebate, even if it is higher than the tax, is not high enough to offset negative feelings of higher prices.
We also only get the rebate a few times a year, but are directly confronted by the tax each time we fill our cars or buy fossil fuels in another capacity. In addition, once enough time passes after the latest rebate deposit, we go to the pump or open our natural gas bill and we feel the sting of higher prices with no accompanying emotional salve from the rebate. Each rebate payment will, without much notice on our part, get eaten up in smaller amounts by regular household expenses. We don’t place it in some mental accounting column as “money to pay for the increased cost of energy” every time we pay for fossil fuels. All of these factors contribute to a negative overall feeling toward the policy. It is worth repeating that the success of the policy depends on us not feeling the rebate makes up for the tax when we make decisions about how much energy to purchase.
If the continued success of the policy did not require people to like it, then its current implementation might be just fine: a government can’t please everyone, and policy-makers would know the finances of Canadians are better off, even if many do not believe it. But, for better or worse, the policy must be popular for it to be effective in the long term, because otherwise, a new government will probably get rid of it. The Conservatives might be elected because they are promising to do exactly that.
How might we design something better? If the policy needs to be popular to succeed, then we need to convince Canadians they are better off with it. That could mean better communication on how the rebate works, and it might also include a better explanation of its climate benefits. If policy-makers relent slightly on the amount of the tax, diminishing its cost (and, arguably, its effectiveness), even that would be better than electing a government that would get rid of the carbon tax completely.