A tax is a tax, except when it isn’t
“A tax is a tax.” We hear that often enough. But it’s an unhelpful and even misleading label for carbon pricing, which doesn’t have much in common with the traditional tools governments use to raise revenue. Here’s why.
It’s not about raising revenue
Let’s take a look at how the money is used.
All federal carbon-price revenues are returned to the provinces they are collected from. About 90% goes to households (in fact, it already has) and about 10% goes to businesses, schools, hospitals, and other large facilities. Everyone gets a share of the pie, and households get the largest slice. About 70% of households that receive a rebate will receive more back than they pay in, and everyone who pays the federal carbon price is eligible. Higher-income earners will generally pay in more than they get back (since they tend to pollute more).
If the federal carbon price actually were a tax grab, it wouldn’t be a particularly effective one.
So then what’s the point?
The point is to reduce emissions, and the evidence consistently shows that carbon pricing does that. So how does it do that? By leveraging everyone’s financial self-interest. It’s here that carbon pricing actually has something in common with traditional taxes.
We all look for ways to avoid paying taxes. Think about your income taxes for a moment. You write off what you can and claim any credits you’re eligible for. Businesses do the same. They look for ways to reduce their tax load, and cut costs to gain an edge over their competitors.
Carbon pricing provides an incentive to pollute less by making it more expensive to pollute. This incentive affects the choices that businesses, investors, households, and governments make. Suddenly, choices that reduce emissions become a financial win. (For those who argue they have no way to reduce their emissions, small changes are always possible, and carbon pricing will create more options in the future.)
The goal is to reduce emissions. As Ecofiscal Commissioner Lindsay Tedds has pointed out, a successful carbon price will eventually eliminate itself as we produce less and less pollution. That’s the point.
“Tax” is a loaded term… and an unhelpful one
Canada’s courts agree. The Court of Appeal for Ontario recently ruled the federal carbon price was a “regulatory charge”. It isn’t a tax in the legal sense, nor is it a traditional tax in the economic sense. The term gives people the wrong impression of what carbon pricing is all about. The intent behind carbon pricing is very different from taxes that are specifically designed to generate revenue.
Emphasizing carbon pricing as a tax also causes another idea to get lost in the shuffle: benefits. For many people, the term “tax” implies cost. But the benefits of a policy are just as important. They’re why we have policies in the first place. When it comes to climate policy, the question is whether the benefits of reducing carbon pollution justify the costs. Smartly-designed carbon pricing passes that test with flying colours, for households and the broader economy. Other approaches are more expensive.
Less carbon pollution is a good thing for a number of reasons, and carbon pricing is the smartest way to get rid of it.
The phrase “a tax is a tax” is stripping the nuance away from a debate that desperately requires more of it. We should focus on the intent behind carbon pricing. What outcomes are we trying to achieve? Do the benefits justify the costs? And why this policy tool, and not something else? Much thought has gone into these questions. The answers deserve more airtime.
It’s not about taxation, and it’s not about revenue. It’s about shifting incentives. A tax is a tax, except when it’s not. We can’t afford to lose sight of the goal.