Carbon taxes: Governments need to go back to the drawing board

MONTREAL, July 4, 2019 /CNW Telbec/ - With the carbon tax imposed by Ottawa causing discontent in several provinces, an MEI publication released today shows that governments should reconsider their GHG reduction policies, because they are not efficient.

For a carbon tax or a carbon market to be efficient, it must meet the following three conditions:

First, such a policy should be fiscally neutral, which is to say that a new tax should be offset by other tax reductions, and not be just another way to raise government revenues.

Second, the taxing of GHGs should replace all other policies that have the same objective, such as the regulation of emissions and subsidies for green energy.

Third, a carbon tax should take into account whether our neighbours and competitors have a similar policy.

These conditions are not generally met at the moment.

"Instead of being neutral, this tax serves to fund government expenditures in several provinces. In Quebec, the carbon market has become just another source of revenue for the province," points out Germain Belzile, Senior Associate Researcher at the MEI and author of the publication. "As for the federal tax, it is neutral for consumers, but not for large companies."

Indeed, the various mechanisms for taxing GHG emissions across the country create additional costs for companies that operate in several provinces.

The second condition is not respected either, as governments like those of Ontario and Quebec subsidize a multitude of projects to reduce greenhouse gas emissions.

Finally, a carbon tax must also take into account the competitive context of the Canadian economy. Otherwise, it could lead to the displacement of jobs from certain more heavily taxed provinces toward other provinces, or to the United States, where GHG emissions are not taxed everywhere. Canadian rates should remain reasonable enough to not lead to the flight of companies and production to other regions.

"There is no good reason for this waste of public funds. Subsidies and regulations are certainly more popular than taxing carbon and more politically expedient, but they should be eliminated if GHG emissions are taxed, which remains the most efficient measure," concludes Mr. Belzile.

The Economic Note entitled "Carbon Taxes: Are the Policies of Ottawa and the Provinces Efficient?" was prepared by Germain Belzile, Senior Associate Researcher at the MEI. This publication is available on our website.

The MEI is an independent public policy think tank. Through its publications and media appearances, the MEI stimulates debate on public policies in Quebec and across Canada by proposing reforms based on market principles and entrepreneurship.

SOURCE Montreal Economic Institute