About two months ago, the St. Lawrence Forum in downtown Toronto packed the house for a final debate in the Toronto Centre federal by-election campaign. During this debate, Bob Rae stood up, and provided a thorough explanation of tax shifting. Tax shifting is shifting taxes off of things we like, like income, and moving them onto things we do not like, like pollution. This was a policy that at the time was not official Liberal Party policy. Rae stated his support for this type of policy and then declared that if he were elected—which he was—he would take this idea to Ottawa and push for it among his Liberal colleagues. This led to another candidate on the stage to say that he never imagined a day where he would be on stage with a Liberal candidate, who not only understood, but declared support for, this kind of change.
Since this story was first written, Stéphane Dion, the Liberal Leader, has indicated a potential shift in Liberal policy towards supporting a green tax shift. In a recent article he said, “Economists increasingly point to the benefits of taxing things we want less of—like pollution—while lowering taxes on things that we want more of—like productivity and income.” Rumour has it that tax shifting, tied to a $10-13 billion carbon tax, will be the cornerstone of the Liberal Party campaigning throughout the summer.
One month after the by-election debate, the St. Lawrence Forum brought together a full panel to discuss this idea of tax shifting. They organized two experts to argue in favour of tax shifting, and two to argue against the idea. Toby Heaps, editor of Corporate Knights, and Kate Holloway, CEO of Carbonzero, argued in favour, while Hugh MacKenzie, Research Associate with the Canadian Centre for Policy Alternatives and Finn Poschmann, Research Director for the C.D. Howe Institute, argued against.
The Basics
On the surface, tax shifting seems to make a lot of sense. Taxes on any good, service or pollutant obviously discourages purchasing or producing those things. We know that the government must collect revenue. Why would we not collect this revenue at the expense of the things we don’t like?
As the speakers were certain to clarify during the forum, green taxes, or taxes on polluting activities like burning carbon, or water use, are not representative of a tax shift on their own. The key and the beauty of the tax shift is the necessity of moving one tax off a good, income, or service we like, and then placing it on to something we don’t like.
Let’s say for argument's sake that the government collects $1000 a year in income taxes from all the citizens combined. Then, let’s say based on average output, a new $15 carbon tax placed upon each tonne of carbon emitted would generate $500 a year. The government knows that it needs to raise $1000 a year. A tax shift here could involve imposing this new carbon tax of $15 per tonne emitted, and in turn, a reduction of 50% of our income taxes. As a result, this creates an incentive to emit less carbon. Canadians no longer get to pollute for free (or as freely as before), they pay less income tax and the government collects the same amount of revenue as before.
While tax shifting has yet to truly hit the mainstream in Canada, Western Europeans have been engaging with the concept for years, and it is slowly gaining ground in North America with proponents like New York City mayor, Michael Bloomberg, expressing strong support. During the St. Lawrence Forum, Holloway and Heaps not only put forth a strong case for this reform, but also effectively dispelled many, if not all, the criticisms lodged by their opponents.
Public Revenue and Spending
One concern raised by Hugh MacKenzie, which you might have already noticed in the example above, is tied to maintaining government revenue streams. He said, “why would you focus on a tax base you are looking to shrink?” In the earlier example, half of the government’s revenue would come from a carbon tax, with a goal being to reduce the amount of carbon. If the tax shift were enacted and set in stone at $15 per tonne, of course, if the amount of carbon emitted were to shrink, the government would collect less than the $500.
However, this is no reason not to enact the tax shift. No one is saying that we are going to drop income taxes altogether. Nor is anyone saying that things are set in stone. If carbon emissions decreased, that would be a fantastic thing. Should that happen, the charge per tonne could always be increased to $20 to $50 per tonne and beyond, if necessary, to maintain the government’s revenue stream. It is also possible to leave the carbon tax at $15 per tonne and increase a different tax instead (eg. income tax). Either way, pollution goes down and the government continues collecting the exact same amount of revenue. Furthermore, should new green taxes fulfill their purpose in reducing pollution, we will likely see additional benefits throughout society, if not outright increased savings. Should air pollution drop significantly, we will see greater respiratory health among the public, longer, healthier, more productive lives, and reduced health care costs.
Toby Heaps believes that something like 50% of our public spending goes to dealing with the impacts of pollution. He said that China is seeing 10% of their GDP disappear due to poor air quality. While striking the right balance may be a challenge, this has the potential to deliver a true win-win situation when it comes to enhancing our public ecological goods along with our public finances.
Magic Bullet?
One of the concerns lodged by the con-side during the discussion was that there is an apparent belief on the part of tax shifting proponents that this taxation reform is the solution to all of our problems. The tax shifting supporters were happy to recognize that such tax reform is not at all the silver bullet that will solve all of our problems. The pro-side gladly accepted that a tax shift is a logical, powerful mechanism, amongst many that are needed, to steer our society in a better direction.
Finn Poschmann said that he believes the environmental double-dividend (being able to reform the tax system in a manner which simultaneously improves the environment and the economy) is over sold, and questioned the ability of the government to enact a policy that decreases income taxes and improves the state of the environment. He went on to say that governments “have a voracious appetite for money…[and] we don’t believe government can get it right.” Instead he would expect the government to fail to implement revenue neutral tax changes and ultimately, ‘overtax’ the public.
A revenue neutral tax shift means that any new tax revenue collected in one place (eg. a carbon tax) is offset equally by tax reductions elsewhere (eg. an equivalent reduction in income tax). If one took Poschmann’s thinking to an extreme they would conclude that the government is incompetent and should not be allowed to collect taxes of any kind. If they cannot tax shift responsibly, how can we assume they will collect any form of taxes responsibly?
Toby Heaps offered a simple solution to quell these concerns about the government’s ability and restraint. Heaps said that when passing legislation regarding tax shifting, laws should be included stating exactly where the money raised must be spent. If the politicians—and the public—wish, such laws could state that any revenue over and above a certain level must be redistributed to the public by a certain date. While it is questionable whether or not this is the best use of this money, as significant ‘green’ investments are required, if the government’s self-control is Poschmann’s greatest concern, such a statute would make it impossible for the government to hold on to a penny extra than they are meant to have through these changes.
Regressive Taxation
Hugh Mackenzie also raised an important concern. Green taxes—included in a tax shift or on their own—have the potential to be regressive in nature, taking a greater percentage of the income earned by those in the lower income bracket relative to the wealthy. For example, those with less already spend a greater proportion of their income on energy before a green tax is put in place. A green tax has the potential to exacerbate this effect. This potential led Mackenzie to say that a tax shift could or would hit those with less, while the wealthy would fail to or be less inclined to change their behaviour.
On their own, green taxes do place a greater burden on those who are less fortunate. That said, no one is proposing that we enact these taxes in a vacuum, or take no other action to ameliorate these negative impacts upon this income group. Kate Holloway said that there is no reason why this impact cannot be offset through appropriate tax credits. In instituting British Columbia’s new carbon tax, the province announced they would be providing a rebate to citizens up front. Subsidies could also be provided to lower income groups to offset any negative impacts. Holloway noted that the wealthy cause a disproportionate amount of the damage to the environment. As such, the new taxes could target goods and services that are primarily available to people in higher tax brackets.
It is possible that the wealthy will not change their behaviour. The super wealthy can spend however they wish and ignore the new costs associated with a tax shift. That said, consider the following scenario. Let’s say we have two companies producing personal jets of equal quality for executives. After the tax shift occurs, placing a $50 per tonne tax on carbon emissions, one company either finds a way to produce their planes in a far more energy efficient manner, or finds a way to improve the number of kilometers flown to the litre with new technology. As such, that company’s planes now cost 10% less than their competitors, or can fly the same distance as their competitors using 15% less fuel. People can have all the money in the world. Regardless, which plane do you think they are going to buy?
The con-side also stated that any increased costs through a carbon tax, for example, will automatically be passed on to consumers. One astute audience member got up during the question and answer period and responded to this concern with a scenario that ties into the plane example. They said if company A innovates—decreasing their carbon tax costs—while company B sticks with business as usual (ultimately attempting to pass the increased carbon tax onto the consumer), guess who is going to lose? Company A has a competitive advantage where they can charge less, ultimately winning more customers, while company B is forced to match company A’s pricing, and is hit where it counts – the bottom line.
Little Impact?
Next, MacKenzie raised another concern. He said that a $30 per tonne carbon tax works out to about seven cents per litre of gasoline and this seven cents is a fraction of the fluctuation we have seen with quickly rising oil prices. He said that the increases in oil prices that we have seen would amount to the equivalent of a $100 per tonne carbon tax. Based on this occurrence, there is good reason to question whether a $30 per tonne carbon tax would have much of an impact.
Later on, Heaps referred to the International Panel on Climate Change’s estimate that we will require a $50 per tonne price on carbon. This is the price the IPCC thinks is needed to keep carbon dioxide equivalents (CO2e) concentrations from exceeding 450 parts per million by volume (ppmv) in the atmosphere. This level of stabilization would avoid temperature increases of more than two degrees Celsius compared to preindustrial temperatures. (We must ultimately bring concentrations down to 350 ppmv if not lower).
Returning to the potential seven cents per litre tax, on one front, if the increase is as ‘small’ as he says, then there is less to worry about – less, not nothing – in terms of a potential consumer backlash to more heavily taxed gasoline including this kind of carbon tax. Let’s say the increase in price is as insignificant as MacKenzie says it is. We now return to the example similar to that given earlier about the plane producers. If a gas company can reduce the amount of carbon emitted during production or combustion of their gasoline, what consumer is not going to go to the gas station that is then able to save themselves one to two cents or more per litre of gasoline?
Furthermore, while Heaps recognizes raising gas prices by 10 cents a litre may not do a great deal to change gas consumption at the pump, should, say, $15 billion be raised through such a tax and pumped into financing energy efficiency retrofits in houses across the country, this would have a profound effect. While it is not based on a carbon tax, Manitoba currently has such a retrofit program which has been extremely popular and is already 300% oversubscribed.
Heaps also talks about how the top 10 emitting plants across the country spew out 11.4% of all of the country’s carbon emissions for the year. According to Heaps, one of the worst plants is TransAlta’s Sundance plant. He says that if this plant were hit with a $30 per tonne carbon tax this would lead to a charge of $500 million per year, the present value of which is more than the plant's assets combined. It is for this reason that Heaps is confident that a well designed, and well placed, carbon tax could yield great results in pollution reduction and reshaping the private sector to be both more innovative and efficient.
Positive Approach
Someone mentioned that BC has brought in a carbon tax and suggested that it will be predictably and transparently phased in over a number of years. This is generally a good way to bring in a tax shift as it gives people, and business, time to get used to the idea, adjust and prepare for the changes. One member of the audience said that other major factors like Hurricane Katrina, or rising gas prices, are unpredictable and seem out of peoples’ control. As such, when these things occur, consumers are unable to prepare, and can been seen simply shrugging their shoulders and maintaining the same behaviour as before.
With a predictable phasing in of a tax shift, consumers are now aware, and certain of, the coming increased prices and have an opportunity to prepare by shifting behaviour. Poschmann also said that there are times where regulation is simply better than an action such as a tax. He said, “I don’t want a gradually increasing tax to produce good water quality.” He is of course entirely correct. While his statement makes sense, it has no bearing upon the general concept of enacting tax shifting.
At one point, MacKenzie said that the point of our tax system is to provide financing for the services our public requires. Holloway was quick to point out that we have long taken for granted the essential services provided by our natural systems (eg. clean water and air). Green taxes are a way to value and protect these services.
Building and Energy
Holloway and Heaps made additional points in favour of bringing about tax shifting. Holloway says that up until now we have tended to tax labour, and subsidize equipment, and that this will obviously lead to fewer people being employed. Heaps talked about how we can build-in greater incentives to encourage maintaining and reusing old structures, as opposed to simply knocking them down and building new structures.
Old buildings often represent a great deal of embedded energy—the energy that went into the building’s materials and construction—that we do not want to waste. Heaps said that we could impose a destruction tax for every building that people plan to demolish to build new structures. Obviously, this would need to be considered on a case-by-case manner to determine if the ecological benefits of maintaining the old structure outweigh that of the new potential structure. These are the types of situations that can be improved through the appropriate tax shift.
Heaps raised an additional potential benefit associated with a green tax shift. He said that right now, coal powered generation generally sets the price for electricity. Consumers are currently paying between 5 to 5.9 cents per kilowatt hour in a province like Ontario.
First, we must note that these are artificially low prices. Ontario is subsiding electricity prices on the consumer’s bill using other tax sources in order to bring down the stated price. This pricing also fails to consider the additional environmental and social costs of unrenewable energy generation. While a green tax shift is not necessary to solve this problem, it could be used as the justification for increased power prices.
Heaps says that once electricity begins to cost somewhere in the range of 10-11 cents per kilowatt hour, it is at that point that other renewable sources of energy become financially viable and competitive. At that price point, major increases in the production of renewable power would allow for significant economies of scale, bringing down the price of green power, and our ecological footprint.
United States Energy Prices
Heaps brought up the potential for greater complications arising in the international trade arena. He believes that it is inevitable that the United States will bring about some form of carbon pricing. When this happens, if we not have our own, similar, carbon pricing, he believes the U.S. will target the goods that we attempt to export to the south and apply duties at the border to make up for our failure to charge for the carbon those goods represent. Heaps says “they won’t just pick our pockets. They will take our pants off.” He then went on to say that should we fail to take preemptive action, this situation will be far worse than what we saw with the softwood lumber debate.
"The Devil is in the Details"
Heaps said, ultimately “the devil is in the details” and he explained how he would implement a tax shift. First you need to target the carbon choke points in the economy to which 80% of our carbon emissions can be traced. Places like liquid natural gas (LNG) terminals and large coal-fired power plants make up these choke points. He would phase in an initial $50 per tonne carbon tax, using half of the money for offsetting the impacts on those in the lower income bracket, while funneling the other half of the money into retooling and retraining our workforce to create a green, innovative economy. While this would not be a revenue neutral approach, perhaps it would strike the right balance. From both sides of the panel, Heaps and Mackenzie agreed that the electorate is ready to vote for politicians who will increase taxes and spending in the name of improving our ecological situation.
Heaps said that to not to begin to undertake this green tax shift “is exuberantly irrational.” “No one thinks,” he said, “that a carbon tax or a green tax is a silver bullet. But without them our gun is not even loaded.”
