Smoky orange sky over the Golden Gate Bridge as 2020 wildfires rage on in California.
If there was ever a time to reconsider the logic and purpose of the carbon tax, it is in the wake of the severe weather events that caused so much damage in British Columbia in 2021.
Proponents of the present “revenue neutral” carbon tax, where the revenues are dedicated to rebates or the reduction of income and other taxes, see the carbon tax solely as a means of providing incentives to reduce fossil fuel use and associated greenhouse gas (GHG) emissions. A revenue neutral carbon tax addresses the criticism that a carbon tax is primarily a “tax grab”; however, it ignores the fact that the GHG emissions generating the carbon tax revenue in fact impose costs, which government directly or indirectly will have to pay.
Encouraging households and business to reduce emissions is critically important. And imposing a carbon tax, as virtually all economists will tell you, is an economically efficient way to do that.¹ But the expenditures government must make to deal with the widespread damage caused by severe climate events, like the November flooding in British Columbia, are huge. And the investments that need to be made in public infrastructure and services to enhance the preparedness and resilience of utility, transportation, municipal and other government services to mitigate the damage of future events are even greater.
The obvious question is: Why shouldn’t the costs of mitigating and addressing climate-related damage be paid by the activity most directly responsible – use of fossil fuels that generate GHG emissions?
The present federal carbon tax is $30 per tonne of CO2 and generates nearly $3 billion annually. The federal tax is scheduled to rise to $50 per tonne in 2022 and reach $170 per tonne by 2030, in $15 per tonne annual increments. With a revenue neutral carbon tax, none of the current or increased revenues from higher tax levels will be available to finance the ever-growing costs governments face as a result of the climate change we are experiencing.
The November “atmospheric river” produced record rainfall in 48 hours over much of British Columbia. One consequence was massive flooding in the Fraser Valley. The mayor of Abbotsford has estimated repair of local dikes and compensation for destroyed infrastructure in and around his city will reach $1 billion. Probably, the cost of repairing and strengthening damaged rail and road infrastructure elsewhere in B.C. will amount to an additional $5 to $10 billion. As an initial estimate, the costs generated by record rainfall in B.C. are several times the current annual carbon tax revenue. That estimate ignores the climate-related costs of more severe forest fires, deaths due to heat waves and climate-related costs elsewhere in Canada.
Right now, financing remedial expenditures will come either at the expense of needed and almost universally underfunded health, education and other public services or through increased income, sales and other taxes. Ottawa has initiated a revenue neutral carbon tax schedule on the legitimate rationale that such a tax will reduce GHG emissions. But there is an equally legitimate rationale, based on the principle of “polluter pay,” to increase the carbon tax sufficiently to cover climate-related costs We shouldn’t be asking hospitals and schools to forgo needed funds, or workers and business to pay higher income taxes, to pay for these costs. We should be expecting those most directly responsible to pay.
We need a carbon tax per tonne of CO2 at least as high as required to cover the costs reasonably linked to GHG emissions. This in turn requires a more rapid increase in the carbon tax than the federal government is currently planning: annual increases of $30 instead of $15 per tonne over the 2023–2030 period. And it requires abandoning the revenue neutral policy in order to dedicate the carbon tax revenues to offsetting climate change–related costs.
With annual increases of $30 per tonne, the carbon tax would reach $290 per tonne by 2030. At that level, the tax would induce both significant substitution away from fossil fuels and significant revenues from remaining fossil fuel use.
You don’t need economic theory and price elasticity estimates to justify the tax. You just need the common-sense requirement that costs must be paid for, and those responsible should pay. You might find a lot more understanding and support for a rapidly rising carbon tax schedule if the revenue was targeted for climate-related costs.
For more from our Inroads 50 feature on climate change, click to read Getting Serious About Climate Change, by John Richards.
¹ Inroads editorial board member Gareth Morley was co-author of the B.C. submission to the Supreme Court of Canada in support of the federal constitutional power to implement a national carbon tax.