A defence of carbon pricing for people who care about equality.
Henry Paluch, Contributor
Many people are skeptical of the carbon tax in Canada, although for different reasons. For instance, most people on the political right see the carbon tax as a drag on the economy or a driver of inflation and the cost of living. Some might even think that climate change is insignificant or not worth addressing. The political left, however, has somewhat different reasons to doubt the carbon tax. This is because pretty much across the left cares about preventing the harms of climate change in one way or another. There is no doubt that we need a policy for fighting climate change. Rather, any disagreement is about the proper choice of climate policy.
A common objection made against carbon pricing has to do with its unequal effects on welfare. This argument, in its various forms, contends that the higher cost paid for fossil fuel products (gas, oil, and so on) disproportionately falls on those with lower income. In other words, a worker making minimum wage will be much more negatively affected by higher gas prices than someone on the upper end of the income distribution. Carbon pricing burdens the poor instead of the rich, rather than vice versa. Surely there must be a more equitable way of fighting climate change?
I sympathize with the spirit of this position. The costs of fighting climate change should be borne fairly and not at the expense of those who are worse off. Nonetheless, there are a number of details omitted from the above line of reasoning. The first is that, as the carbon tax currently stands in Canada, those in the lower and middle parts of the income distribution receive a tax rebate at the end of the year which cancels out – and often exceeds – the extra tax paid for fossil fuel products. The answer to “who” pays for carbon pricing is simple: those with higher income. On this point, the claim that the carbon tax puts the burden on the poor is plainly wrong. If you don’t believe me on this particular figure, just take a look at the Open Letter on Carbon Pricing currently signed by 413 economists from across Canada, 38 of which work at the University of Toronto. Better yet, consult the Government of Canada’s own models.
You might be thinking: “doesn’t giving money back just make the carbon tax useless in the first place?” To understand why this isn’t true, it is worth returning to the reason why carbon pricing works. One need not be an economist to understand the rationale behind it.
The overarching goal of any climate policy is to reduce carbon emissions from burning fossil fuels. Gas, oil, and other fossil fuels are just like any other thing people buy: if you want people to drink less wine or smoke fewer cigarettes, you simply increase the price of these things. When put in place by the government, these kinds of artificial price increases are known as Pigouvian taxes. Carbon pricing is no different. By raising the price of gas, oil, and the like, everyone tends to use less of them. Even if you rebate money to certain people, the incentive to use less gas still remains. More generally, no matter what income distribution the tax system imposes — be it more equal or less equal — the incentive for everyone to use less gas remains because of its higher price. The overwhelming consensus among economists and public policy specialists is that carbon pricing works wonderfully to achieve its intended effect without placing unnecessary burdens on those who are worse off — even in places outside Canada (e.g., progressive European countries).
There are many other objections that could be made, and have been made, against carbon pricing. I don’t have the space to address them here. Instead, I hope to have provided some reasons for why the left’s most common objection to the carbon tax doesn’t hold up. Those who care about reducing income inequality and reducing carbon emissions can pursue both. Carbon pricing allows for those who care about equality to have their cake and eat it too.
