Dec 11,
2014
This is a debate worth having: A response to Andrew Jackson
Earlier this week, Andrew Jackson, senior policy advisor to the Broadbent Institute, wrote a thoughtful and constructively critical analysis of the Ecofiscal Commission’s first report. My first response is: thank you, Andrew. Jackson’s piece epitomizes the much-needed evolution of the debate around climate policy in Canada. It moves us squarely to the discussion we should be having: not if we need better policies, but how they should be designed.
Jackson takes us directly to one of the most important how questions central to ecofiscal reform: namely, how should governments use (or “recycle”) the revenues generated by polluter-pay policies? As the Commission states in its report, and as Jackson is sure to agree, there are many options. Among them: lowering personal and/or business income taxes, supporting the development of technology, financing critical infrastructure, and lessening the burden on the most vulnerable families.
One of the great strengths of ecofiscal policy is this richness of choice. Not only does pollution pricing present households and businesses with the incentive to make the choices that best fit their own circumstances, it allows different governments facing different economic contexts to pursue their different priorities. It is exactly this richness of choice that leads to the cost-effectiveness of pollution pricing as a means of reducing pollution; and also to the economic benefits that come from the best recycling of the associated revenues.
Jackson’s significant point of concern is the use of these revenues to reduce personal and business taxes, as was done in B.C. through the introduction of its carbon pricing policy. He claims that the economic benefit of tax cuts is small, or perhaps absent altogether. Furthermore, he finds compelling the argument that governments can play a very effective role in directing resources toward the development of new technologies and programs that hasten environmental solutions. It is therefore logical, at least given his reading of the evidence, that his preferred manner of recycling ecofiscal revenues is to increase public spending on infrastructure and technological development.
Yet Jackson’s position does not stand unopposed. There is a large body of empirical evidence, from a large group of developed economies, showing a close relationship between a country’s long-run growth rate and its rate of investment as a share of national income. There is also much evidence that the after-tax cost of capital is one of a few key determinants of business investment. These two together suggest very strongly that reductions in income-tax rates, especially for business income, can be expected over the long run to generate significant improvements in investment, productivity growth, and thus eventually to higher material living standards. In this view, using ecofiscal revenues to finance reductions in income taxes may well be the most growth-friendly policy available.
There is also a healthy and sensible debate over whether governments really are as adept as Jackson suggests at directing public resources toward the development of better technologies and innovation. For each of the many examples where government support to business has been good for the overall economy, there is an equally valid case in which government efforts to support industrial or research champions have ended in failure – with significant loss of scarce taxpayers’ funds. There is more than a grain of truth to the quip: “Government’s are poor at picking winners, but losers are very good at picking governments”.
Here is not the place to settle these debates; our two short articles just skim the surface of these central issues. It is important, however, that these issues get debated fully, sensibly, and with recourse to all kinds of evidence and interpretation. It’s for that reason that I not only welcome Jackson’s critique, I hope to see more of them—from him and from others who are ready to roll up their sleeves and give serious thought to how we achieve better economic and environmental outcomes for Canada. This is how we move beyond the past. This is how we move into the future.
About the Author
Chris Ragan is an associate professor of economics at McGill University and Chair of Canada’s Ecofiscal Commission.
2 comments
Thanks for posting this Chris. I suspect that the most effective realistic alternative to tax reductions would be to put the lions share towards infrastructure investments (e.g. transit) rather than R&D. Of course I don’t have the numbers on hand to back this up, which is why I’m asking you :).
At any rate, keep up the good work. It’s greatly appreciated by many!
Even advocates of the free market understand that it cannot account for waste by-products – please note I did not say pollutant.
Even a home construction company cannot simply dump the excess biodegradable lumber into a ditch.
The fossil fuel industry seems to get a free ride because its waste is odorless and invisible.
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Garret Hardin, a strong advocate of private property, in his landmark essay The Tragedy of the Commons (1968)
In a reverse way, the tragedy of the commons reappears in problems of pollution. Here it is not a question of taking something out of the commons, but of putting something in–sewage, or chemical, radioactive, and heat wastes into water; noxious and dangerous fumes into the air, and distracting and unpleasant advertising signs into the line of sight. The calculations of utility are much the same as before. The rational man finds that his share of the cost of the wastes he discharges into the commons is less than the cost of purifying his wastes before releasing them. Since this is true for everyone, we are locked into a system of “fouling our own nest,” so long as we behave only as independent, rational, free-enterprisers.
The tragedy of the commons as a food basket is averted by private property, or something formally like it. But the air and waters surrounding us cannot readily be fenced, and so the tragedy of the commons as a cesspool must be prevented by different means, by coercive laws or taxing devices that make it cheaper for the polluter to treat his pollutants than to discharge them untreated. We have not progressed as far with the solution of this problem as we have with the first. Indeed, our particular concept of private property, which deters us from exhausting the positive resources of the earth, favors pollution. The owner of a factory on the bank of a stream–whose property extends to the middle of the stream, often has difficulty seeing why it is not his natural right to muddy the waters flowing past his door. The law, always behind the times, requires elaborate stitching and fitting to adapt it to this newly perceived aspect of the commons.
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Milton Friedman, the grand daddy of capitalism, in 1979
Phil Donahue: Is there a case for the government to do something about pollution?
Milton Friedman: Yes, there’s a case for the government to do something. There’s always a case for the government to do something about it. Because there’s always a case for the government to some extent when what two people do affects a third party. There’s no case for the government whatsoever to mandate air bags, because air bags protect the people inside the car. That’s my business. If I want to protect myself, I should do it at my expense. But there is a case for the government protecting third parties, protecting people who have not voluntarily agreed to enter. So there’s more of a case, for example, for emissions controls than for airbags. But the question is what’s the best way to do it? And the best way to do it is not to have bureaucrats in Washington write rules and regulations saying a car has to carry this that or the other.The way to do it is to impose a tax on the cost of the pollutants emitted by a car and make an incentive for car manufacturers and for consumers to keep down the amount of pollution.
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All of this was before global warming became an issue.
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