Tuesday, November 27, 2007

Carbon Tax Poverty

Imagine carbon taxes so high that people can't afford to heat their homes in the winter. Think this could never happen? Think again. It's happening right now in the UK and could happen here too if the current climate change hysteria allows government to carry through with similar measures.

The UK government imposes three measures that tax industry for carbon emissions; the Climate Change Levy, the Renewables Obligation, and the EU Emissions Trading Scheme.

However, according to the UK National Action Plan, virtually the entire cost of CO2 reductions will be borne by consumers of because the industry can flow 100% of the cost increase through to consumers. To help consumers deal with the increase in electricity prices, the UK developed the Fuel Poverty Strategy. Since the the Fuel Poverty Strategy began the number of fuel poor households has remained at about 2 million.

We have our own energy use is subject to a levy (government speak for tax) on our hydro bills. We have our own renewables obligation with the government's decree that all new electricity purchased by B.C.'s electricity monopoly, BC Hydro, emit net zero greenhouse gas emissions. The B.C. government is also a partner in a number of emissions trading schemes.

If residential electricity bills in British Columbia double over the next 10 years, the government will almost certainly have to set up its own fuel poverty strategy. There is a deep perversity about significantly increasing the cost of energy only to turn around, after the bureaucracy takes its cut, and fund people in fuel poverty.


Crampton said...

Economists advocating carbon taxes for global warming typically recommend that such taxes be revenue-neutral. If folks, on average, pay about $1K in carbon taxes, then they should get $1K back as income tax cut or as tax credit if low income to spend as they please. The argument for the efficiency of carbon taxes relies on changing the relative prices of carbon-producing activities and other things. Making sure the thing stays revenue-neutral by appropriate cuts to income or other taxes makes it equitable.

Giving a subsidy to low income folks for fuel use completely defeats the purpose of the carbon tax.

Of course, if the government just sees the carbon tax as another source of tax revenue rather than as a pigovean instrument that ought be revenue-neutral, then there are bigger problems. The kind of problems James Buchanan wrote about in The Power to Tax. Leviathan is a nasty beast.

Maureen Bader said...

Revenue neutrality is a tricky concept and it assumes that government can determine people's behaviour.

You are right, if the income tax reduction is used to fund gas tax increases, what's the point?

Also, as I showed in a previous post, the gov in the UK is generating twice as much revenue as the social cost of CO2 emissions there. This is a tax grab ...

Crampton said...

Tax neutrality doesn't have to be hard in the aggregate. At the individual level: well neigh impossible. But "close enough" measures aren't too hard. Step one, see how much money the carbon tax brings in. Step two, cut income taxes by that much, trying to set the cuts/rebates proportionate to typical carbon taxes paid by folks of that income cohort.

A government that were honest about its being a revenue neutral mechanism would build it into the legislation though - an automatic mechanism for cutting income taxes keyed to carbon tax revenues.

Cameron W said...

Crampton said, "...A government that were honest about its being a revenue neutral mechanism would build it into the legislation though - an automatic mechanism for cutting income taxes keyed to carbon tax revenues..."

Exactly! From the article, it's not clear that Bader is even aware of the concept of revenue neutral tax shifting.

I just got finished writing and submitting a letter to the editor to my local paper in response to Bader's piece.

Here it is.

- - - - -
Letter to Editor re: Dec 6th guest editorial by Maureen Bader

Maureen Bader misrepresents carbon taxes while making fun of global warming 'theorists'

Poverty is a serious concern, but Bader's use of the issue to breed fear of a carbon tax is misleading. By suggesting that we imagine carbon taxes "so high that people can't afford to heat their homes in the winter" in the opening of her missive entitled 'Get ready for poverty fuelled by carbon tax', she tries to scare us out of using critical thinking to examine the situation. By listing "global warming theorists" as beneficiaries of a carbon tax, Bader manages to question the reality of climate change while suggesting that public concerns about climate change are somehow preyed upon by scientists for financial gain. Ridiculous! This suggestion seems more like a call from Bader to question the science of climate change than a sincere concern for Canadians living in poverty.

It is irresponsible of Bader to haphazardly dismiss the seriousness of climate change, and by conflating the subject with poverty she leads the reader to conclude that action on climate change in the form of a carbon tax will invariably lead to widespread poverty. It's also irresponsible to dismiss the concept of a carbon tax without first investigating how it could be implemented correctly, or why many respected economists support the idea.

Only one national political party is calling for a carbon tax and suggesting that the revenue be used in part to reduce income and payroll taxes, as well as kick start green energy industries. This tax shift can be as close to revenue neutral as we want, and Canadians can decide for themselves if they wish to spend their tax savings in ways that reduce or increase carbon emissions and climate change.

In the absence of tax shifting, a carbon tax would likely impose a higher cost on some people than on others, in particular those who cannot afford to upgrade their energy efficiency or who have no alternative to driving long distances. The Green Party would use tax shifting in a way that provides equivalent tax breaks to such people, so that they would not suffer economic hardship. We cannot afford to dismiss the use of carbon taxes, and using tax shifting to achieve fairness is a way to make it work.


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