6 questions Bev Dahlby why pricing pollutants works better

6 Questions for Bev Dahlby: why pricing pollutants works better than regulations, tax breaks or subsidies

Climate and Energy

“If you put two economists in a room, you get two opinions, unless one of them is Lord Keynes, in which case you get three.” So said Winston Churchill. So what happens when you put 12 leading economists in a room and ask them to focus on one of the biggest challenges of our time: growing economic and environmental prosperity in Canada? You get Canada’s Ecofiscal Commission. This Commissioner blog series gives you a glimpse into the diverse personalities and perspectives behind our work — and what it takes to wrestle through the big issues together.

  1. What persuaded you to join the Ecofiscal Commission?

When I saw the names of the people who were on the Commission, I said, “I can learn so much from these people.” Second, the issues around environmental policy and what instruments we use to address them are extremely important for the long term.

  1. What do you see as some of the biggest opportunities in Canada to use ecofiscal policies?

Number one is climate change, not only in Canada but around the world. It’s important for us to address that issue using the right policy instruments for environmental reasons. From our Canadian perspective, it’s also important for economic reasons. If we want to continue to produce and export energy, we need to show that we are doing our part in terms of addressing climate change by imposing prices or fees for carbon emissions.

  1. Why go that route rather than regulations?

If you set a maximum on emissions, then companies will abide by that. Once they’ve achieved that, they have no further incentive to find ways to reduce their emissions. It inhibits innovation that can come when firms are faced with fiscal incentives to do better.

  1. Canada has used things like ethanol subsidies and energy efficient tax credits to promote environmental behaviour rather than taxes or user fees. Do you see one approach being better?

By and large it’s better to put a price or a tax on a harmful emission. Taxes generate revenues, which we can use for funding public expenditures on education or health or reducing taxes that are inhibiting employment and investment in job opportunities. Subsidies require us to raise taxes or forgo public expenditures on things that we value. If there are green alternatives, they will emerge because it’s worth doing, not because it’s been subsidized.

  1. How do you go about creating a tax that doesn’t unfairly penalize particular regions or industries or put too great a burden on low-income families?

The Commission’s approach is to look at policies at the provincial and maybe even at the municipal level so that if taxes are imposed, the revenues that are generated will flow back into that regional or provincial economy. Starting some policies at the provincial level is good for examining policy innovation and looking at different ways of tackling the problem. We’ve got three in Canada on greenhouse gas emissions: B.C. has a carbon tax, Alberta has a levy that’s based on emission intensity, and in Quebec they have cap and trade systems. Over time we will see which ones are most effective. We may see policy convergence, or we may see that variety is good because it addresses different problems in different regions in the best way.

Meanwhile policy instruments, such as income tax reductions, could be delivered through the income tax system to shelter people at lower incomes from the direct effect of higher prices.

  1. What are you hoping to achieve through the Ecofiscal Commission?

I hope we provide policy guidelines to help Canadian governments address these issues concerning the environment and also inform the broader public why certain options, such as pricing pollutants, create a very good policy framework in many different contexts.


About the Author

Bev Dahlby is a professor at the University of Calgary, in the Department of Economics, former Member of the Technical Committee on Business Taxation, as well as a Commissioner of Canada’s Ecofiscal Commission.

2 comments

  1. Leah Purdy

    I thought this was an interesting and thought-provoking piece–taxes and levys always make for interesting discussion topics. It will be interesting to see how the Commission’s work will support policy evolution and innovation.

    Although not necessarily the domain of policy-makers or regulators, I was curious if the topic of mechanisms which create incentives for industry to improve environmental performance (versus more ‘penalty’ oriented approaches such as carbon tax) has ever come up in your discussions. For example, a few years ago I worked on the development of an international oil and gas performance standard. This standard combined a certification program with the a tradable certificates reward system (think–carbon credits) as a means of rewarding innovation and leadership in responsible oil and gas production and provide choice in the marketplace.

    While I’m not certain how this particular initiative has evolved, it would be interesting for me to know your thoughts on programs such as this and how they might align with any of the Commission’s policy development discussions.

    Thank you.

    • Chris Ragan
      Chris Ragan

      It depends on the details of the policy, but tradable performance standards are flexible, so can capture part of the benefits of ecofiscal policies. They don’t, however, generate revenue that can be recycled back to the economy for additional benefits. But these are exactly the kinds of questions we’re exploring in our research. Stay tuned!

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