Carbon Taxes: Some are Smart, Some are Not

Choosing between a carbon tax and a cap and trade system for reducing Canada’s impact on the climate may make for good political theatre but from a practical policy perspective the debate simply misses the point.  Both systems can work well if thoughtfully designed. But, both systems can be very dysfunctional if poorly designed. And ironically, a combination of the two approaches may be best choice of all.

Either system will reduce Canada’s carbon footprint if it sufficiently prices or caps emissions and if it avoids creating incentives for other countries to pollute. Either system will allow us to have a competitive economy if it takes the global nature of both climate change and of our export oriented economy fully into account. Given that whatever we do will have a real impact on our lives and the lives of our children, thoughtful policy should be the ultimate driver in getting us there.
 
Reducing emissions in Canada is relatively easy; you simply tax, regulate or cap them. The difficult part is doing it in a way that doesn’t exacerbate climate change by creating opportunities for big polluters outside of Canada to pick up the slack.  Canada’s forest products industry for example successfully exports the majority of what we make into the global marketplace.  The industry has cut its pulp and paper sector emissions by 44 percent since 1990, promptly regenerates the forests in which it operates, and is more than half way to a goal of relying only on renewable energy for its mills. If a badly designed carbon tax or cap and trade system raises Canada’s costs, other countries will simply be the ones to provide forest products to the ravenous global market.  Many of our competitors are located in countries which have no emission control regimes, significant problems with illegal logging and rampant deforestation. If the industries in these countries assume Canada’s market share the result will be a “lose-lose” situation where Canada pays an economic penalty for trying to do the right thing while global emissions still increase.
 
None of the policy proposals put forward by governments to date have internalized a mechanism to raise emissions prices over time without imperiling trade exposed industries.  For example, BC’s carbon tax will be “revenue neutral” with all of the revenues generated redistributed to taxpayers.  While this will offer some offsetting benefit to BC business generally, no distinction is made between the dry cleaner whose competition is across the street and the exporter whose competitors are around the world.
 
Fortunately, leading Canadian thinkers in this field have recently put forth innovative ideas for resolving this problem.  Professor Thomas Courchene has proposed a “carbon added tax” which would be rebated on exports and levied on imports at the border, much as is done with the GST.   Economists Jack Mintz and Nancy Olewiler also recently published a paper that included a proposal to adjust carbon charges on imported and exported products.  Not only would such a system protect the competitiveness of our exports, it would encourage foreign countries and companies that do business with us to minimize their carbon footprint.  While both of these proposals are premised on a carbon tax, their ideas on competitiveness could also be applied to a cap and trade system. 
 
Canada is the largest exporter of forest products in the world and the forest products industry understands better than most the potential for border measures to be abused by protectionist trade interests.  There is no doubt that broad international cooperation on carbon pricing is far preferable to border measures, and that Canada should do all it can to help bring such an agreement about.  However, we should not assume that a comprehensive global agreement is imminent.
 
Finally, at home, federal, provincial and territorial governments could do a great service to the environment and the economy alike by working more cooperatively on emissions control policies. In addition to the federal climate policy framework, five provinces accounting for 90 percent of Canada’s GDP have also committed to distinctive regimes to separately price or regulate emissions.  If all were implemented in an uncoordinated fashion, they would create an unworkable national mess.

Climate change is a global problem, and its control cannot be achieved without internalizing controls into the global economy. In Canada, federal engagement in this process is essential as only Ottawa can implement border measures- potentially the only way to reconcile ambitious climate policy and global competitiveness.
 
At last we are poised to act on Canada’s impact on the climate. Let’s be smart in how we do it.


Avrim Lazar is the president and chief executive of the Forest Products Association of Canada. He is based in Ottawa.

Published in: Edmonton Journal on June 18, the New Brunswick Telegraph Journal on June 20, The Province on June 22, the GlobeandMail.com on June 23