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The carbon tax debate: Be very wary

In January, the National Roundtable on the Environment and the Economy issued a report which says that Canada could achieve a 65% reduction in GHG emissions by 2050 if it introduced measures now that ...

In January, the National Roundtable on the Environment and the Economy issued a report which says that Canada could achieve a 65% reduction in GHG emissions by 2050 if it introduced measures now that place a price on carbon or CO2 emissions -the policy argument being that if the appropriate price signals are sent to the market either through a cap-and-trade emissions credits system or a carbon tax, consumers will behave accordingly.

The days and weeks that followed the report touched off renewed debate on the pros and cons of carbon taxes in particular.

The idea of a carbon tax is not new. Discussion of carbon taxes was very much in vogue about a decade ago -though I suspect most people now as then have only a vague notion of what one is or what one could be. From a tax policy point of view, a carbon tax is not necessarily a bad thing if designed properly, at least when compared to other consumption taxes.

Broadly speaking the tax economist’s rationale for such a tax is to increase the cost of burning fossil fuels in order to change consumer behaviour (consume less or switch to alternative fuel); to force industries to become more fuel efficient; and to reward fuel-savings by reducing other taxes so the overall effect is revenue-neutral and/or allocating the funds generated by the tax to investment in fuel-saving technologies and activities.

The problem is a carbon tax can take many forms. It can be a direct tax on CO2 producing fuels such as oil, natural gas and coal with the rate set arbitrarily or in direct correlation with the level of CO2 emissions produced.

It can be imposed at the producer or distributor level, or at the consumer level. (The reality being of course that even if it is imposed at the industrial level, the tax is eventually passed along in terms of higher consumer prices).

Perhaps the biggest problem is that it will be politicians, not tax practitioners that will design and implement a carbon tax. And, as we all know, governments do not have a good track record when it comes to tax fairness, to dedicating tax revenues to the issues they were supposed to address (road taxes anyone?), or to revenue neutrality to individuals or groups of taxpayers.

Carbon taxes are not in as widespread use as some might think. Countries like Norway and the UK have some form of the tax. They are being talked about in the EU but have not seen the light of day yet. California is considering a carbon tax.

At the federal level in Canada, both the governing Conservatives and the Opposition Liberals have previously rejected the idea of a carbon tax -although at times it is hard to tell whether they still hold to that view and/or whether they will continue to do so.

Beware the so-called “Green Tax.” Recently, federal finance minister Jim Flaherty -clearly not a fan of carbon taxes -seemed to intimate that if the country is going to go down the carbon tax road then shouldn’t we at least have one national tax as opposed to a hodge-podge of provincial taxes?

You can bet that the provinces are not keen to see money raised from carbon taxes going to the federal government which would then decide what the revenue should be used for and what the shares of the various provinces would be.

No province in Canada, other than Quebec, has introduced a carbon tax, though others -like B. C. -have or are thinking about it. In October of 2007, Quebec introduced a direct tax of less than one cent per litre on all fuel sold by oil and natural gas companies.

The tax which is set at 0.9 cents per litre for diesel fuel is expected to generate about $200 million per year which the Quebec government says will be used for energy- saving projects like public transit.

Government officials also said they hoped the oil companies would pay the tax and not pass it along to consumers. (Right). Other provinces like Alberta, not surprisingly, strongly object to the idea.

Where does the trucking industry stand? Notwithstanding the current economic climate, many carriers take their environmental accountabilities seriously and could perhaps see some merit replacing other taxes that do nothing for the industry with a properly structured carbon tax -if it was actually revenue-neutral to them and/or the funds were used to offset the costs of investing in new smog-free trucks, and fuel saving technologies like APUs, low rolling resistant tires, etc. (In other words, if the revenues were used to fund the proposed enviroTruck program). That’s a big “if.”

Because the last thing the trucking industry needs are higher fuel costs and more fuel taxes. At 15% to 30% fuel is the second largest component of carrier operating costs after labour.

The current provincial and federal diesel fuel taxes are antiquated and regressive.

In combination, Canadian fuel taxes are among the highest on the continent.

With fuel prices and fuel taxes where they are today -and even with fuel surcharges -the trucking industry doesn’t need to pay even more for diesel fuel to realize that increased fuel efficiency is a good thing. Behaviour in the industry is changing.

Most tax policy practitioners also agree that taxes on business inputs whether they are imposed on commercial fuel or equipment are counter-productive and job killers.

The trucking industry -particularly in those jurisdictions that have not harmonized their sales taxes with the GST -already pays too high a share of tax on its business inputs compared to other industries.

Keep in mind, for example, that the four cent per litre federal excise tax on diesel fuel was introduced by the Mulroney government in the mid-1980s for the expressed purpose of slaying the chronic government deficits that persisted at that time.

It must have worked, because we now live in an era of massive fiscal surpluses at the federal level. But, the tax still exists even though it serves no policy purpose and is just a cash grab.

I suppose the federal government could repeal the tax; call it a carbon or green tax; make sure all carriers regardless of where in the continent they are from paid the tax; and maybe use some of the funds for fuel efficiency.

Perhaps we could live with that. But, again there are just too many “ifs” for my liking.

We have too many examples of governments justifying bad policies, programs and taxes in the name of worthy goals. (Border security is but one example).

To me the excise tax on diesel fuel is just another tax on a business input and if I had my druthers it would be harmonized with the GST.

Maybe then we could sit down and have a reasonable debate about carbon taxes. Until then, I remain wary. •

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