Some Invalid and Irrelevant Criticisms of the Carbon Tax

     An ad opposing Canada's carbon tax came across my Facebook feed the other day, sponsored by the Fraser Institute, and I'm going to unpack it here. This is the original image:

     As you can see, the ad objects to the carbon tax on four criteria: that it's not revenue neutral, that it doesn't replace existing regulations, that it doesn't reduce other harmful taxes, and that it doesn't fund subsidies to alternative energy sources. These are all silly and irrelevant objections, which I'll address in turn. 

Revenue Neutrality

     Whenever there's talk of a new tax or indeed any change to the tax system that isn't a straight up tax cut, the anti-tax crowd likes to insist that it should be "revenue neutral", meaning that it shouldn't change the total amount of revenue collected by the government, as if somehow the government is currently making exactly the right amount of revenue and should avoid disturbing this perfect balance.

     The carbon tax is a new tax on fuels that emit carbon dioxide into the air. The basic idea is that emitting carbon creates what economists call an externality: a cost of an activity that is not reflected on the balance sheet of the person choosing to engage in the activity. Someone else ends up paying the cost. In the case of carbon emissions, someone who chooses to burn a fossil fuel enjoys the benefit of the energy, but the cost (in terms of increased greenhouse effect and the resulting climate change) is borne by everyone, and not equally. In economic terms, the problem with an externality is that it distorts the decision-making process; the agent making the decision doesn't have a full measure of costs and benefits on their balance sheet.

     So the purpose of a carbon tax in this case is to change that calculus by making the price of carbon a little more reflective of the true cost, with the hope that people will shift their purchasing choices accordingly. Just like you might find yourself eating more bread if the price of potatoes goes up.

     What, then, would be the point of making a carbon tax revenue neutral? None, really. If a blight makes potatoes scarcer and thus more expensive, the grocery store does not reduce the price of bread for the sake of revenue neutrality. Potatoes just get more expensive, and so people start buying more bread instead. That's how markets work, and incidentally that's why the carbon tax is generally preferred by economists as a more free-market-friendly approach to the problem.

Replacing Existing Regulations

     There's a certain amount of sense here, if you consider the regulations in question to be straightforward restrictions on how much carbon you're allowed to emit. After all, ideally the increased price of carbon fuels should encourage people to use less simply out of economic self-interest, with no need for minimum fuel-efficiency standards.

     Except that regulations exist for a whole lot of reasons besides simply encouraging fuel efficiency. There are regulations requiring, for example, that diesel and gasoline pumps be clearly marked and identified as such, because you can do a lot of damage putting one in a vehicle designed to use the other. I suppose if you're paying more for fuel you might be extra careful not to waste money buying the wrong kind, but it seems unrealistic to hope that might be enough.

     It's entirely possible, of course, that there are regulations which are indeed rendered unnecessary by a carbon tax, and of course such regulations probably should be repealed. But that's only a valid criticism of the obsolete regulations, not the carbon tax itself. It's not the fault of your new refrigerator that you can't be bothered to take your old one to the dump.

Reducing Other Harmful Taxes

     I feel like this particular complaint is just a sneaky way of counting the first one on revenue neutrality twice, because the only way to make the carbon tax revenue neutral is to reduce other taxes accordingly. But let's pretend it's an independent argument, one that doesn't try to pretend that current revenue levels are ideal.

     Let's agree, for the sake of argument, that other taxes are indeed harmful and should be reduced. (In general, I do not think taxes are such a terrible thing, but I'm sure there are some which really should be cut or even eliminated.) With respect to the carbon tax, though, so what? Why is it the responsibility of the carbon tax to address these other inappropriate taxes? There are all sorts of important and pressing problems that the carbon tax utterly fails to remediate. It doesn't improve literacy scores. It does nothing about electoral reform. It doesn't prevent bank fraud, drunk driving, shark attacks or plagiarism. SO WHAT? Neither does brushing your teeth.

     Want to reduce other harmful taxes? Fine, have at it. But you can do that whether or not there's a carbon tax in place to try to combat climate change. Sheesh.

No Subsidies to Alternative Energy Sources

     Of all the criticisms, this is the one that actually makes the most sense. Yes, it actually would be good if some of the proceeds from the carbon tax went to either subsidize alternative energy sources, or to compensate the people most affected by climate change, the people paying the true cost of the externality. (In fact, the Alberta provincial carbon tax does fund programs aimed at facilitating the transition to other energy sources, but let's pretend it doesn't for the sake of argument.)

     But this is not an argument against having a carbon tax. A carbon tax is a carbon tax; what you spend the revenue on is a separate question. The tax end of the equation works regardless of what you do with the money, because it encourages people to shift their consumption away from fossil fuels by raising the price. Indeed, that in itself is a kind of indirect subsidy of alternative energy sources, because it makes them more price-competitive.

     I can't help but feel there's something a little disingenuous about the Fraser Institute objecting to a carbon tax for failing to offer subsidies to alternative energies. The other three (two) criteria are all consistent with their ideological concerns of reducing taxes and regulation, and it seems to me likely that if someone were to propose, independent of any carbon tax, that we should subsidize wind or solar power, they would object. And they'd object to adding a carbon tax to pay for it, since apparently they think a carbon tax ought to be revenue-neutral.

     It doesn't really seem like they're arguing in good faith.