Wednesday, July 16, 2008

The odds on carbon taxes...

The high-stakes poker game that's leading up to the next election is playing itself out, with each party playing their hands well. The current round: carbon taxes.

The Liberals

Their "green shift" carbon tax proposal is a risky play of political strategy, but it's one that may well have saved them from losing a massive number of seats in the next election. With about a fifth of their caucus not running again, party debts and an apparent inability to fundraise (they're now
third in the country in fundraising, behind both the Conservatives and the NDP), stagnant polling numbers, a perception of poor performance by Dion, and a couple of embarrassing byelection losses, many in the party were fearing historic and dramatic losses in the next election. Since the carbon tax proposal, things have cooled down somewhat.

The carbon tax -- even if it may be a tough sell for some Canadians -- finally gives the party the chance to differentiate itself from the Conservatives via a policy it can articulate. For them, that beats the non-strategy of reflexively opposing everything the Conservatives do, or worse, talking down the Conservatives but then tacitly supporting them anyway (the story for most of the past year). Differentiating itself from its opponent across the floor was something the party desperately needed after nearly a year of looking watery, timid and indecisive. What right-leaning voters would want to support a weaker, disorganized version of the governing party?

Differentiation is also something the Liberals need to fend off an attack from the NDP, who most benefits when it can paint the Liberals and Conservatives as interchangeable. The carbon tax proposal, combined with the Dion-May deal, also steals the thunder of the carbon tax-favouring Green Party.
Suburban eco-conscious voters who would otherwise have considered voting Green will now find they have little reason to support that party when voting Liberal (as they likely did last time) will be just as likely to bring them "green" policy.

It's the same sneaky strategy the Liberals have used to curb the strength of the NDP for much of the past 50 years: steal the best ideas from their platform and use your organizational machine to take all the credit for them. The Greens have little on-the-ground organization to make up for having the carpet pulled out from under them, especially at a time of likely declining enthusiasm for what many perceive to be their core policy strength. Expect to see their numbers continue to slip to something much closer to the 6% they received in 2006.

Some might ask why Dion is trying so hard to sell the carbon tax in Alberta where the party has no seats and is unlikely to win any in the near future. Why? It probably has less to do with believing oil companies should get on board (suggested in Jeffrey Simpson's article on the carbon tax, Suncor and carbon capture technology) than winning more supporters in Ontario (as Chantal H├ębert suggests, noting that this is the same strategy Dion used to win votes in Ontario by trying to sell the Clarity Act to skeptical ears in Quebec).

While I'm certainly no fan of the party, no matter how much they're down, the first rule in federal politics should always be to never underestimate the Liberal Party, one of western democracies most successful political parties.

Risks for the Liberals: Carbon taxes may sell well in some Toronto and Vancouver suburbs, but the party could lose a lot in the rest of the country where they're currently struggling. For them, the worst case scenario: Liberals hang on to Official Opposition status, but not by much. Dion is turfed as leader.

The potential prize: The Liberal strategy gains them few seats, but it also prevents any NDP, Conservative or Green growth. The Liberals come out of the election re-energized and Dion gains a firmer grip over the party leadership.


The NDP has probably played its hand well -- at least strategically -- by opposing the carbon tax. It's betting that the negative impact of criticism by David Suzuki and other environmentalists (though many of them like the NDP's cap and trade proposal, and even
Suzuki admits that a carbon tax would only be one of a host of solutions necessary to bring about a reduction in greenhouse gas emissions) will be offset by the gains made in non-NDP ridings of the sort where voters are unlikely to be enamoured with any sort of tax on fuel. In particular, the NDP is looking at potential gains in northern regions and especially northern Ontario, rural BC, Saskatchewan, Edmonton, Atlantic Canada, and hard-hit industrial regions of Ontario, such as Oshawa.

As the traditional party representing lower income folks, remote communities, and workers, the NDP is probably also right to put the onus on the Liberals to prove that the consumption-based carbon tax won't in the end hurt those most vulnerable. And, while many have criticized the NDP for preferring to target industry, it is industry that's responsible for the greatest share of emissions.

The risks: Despite some
high-profile environmental candidates running in the next election and the party's emphasis on a cap and trade plan, they've allowed the Liberals to take the environment for themselves as an issue of perceived strength (too bad, given the whole lot 'o nothing the Liberals did when they were in government, including when Dion himself was environment minister). Even despite plans for a strong campaign, the NDP risks losing several seats.

The potential prize: If the Liberals fumble and run a disorganized next election, and the NDP manages to connect with voters in Ontario and elsewhere, it isn't inconceivable that they could pick up as many as 30 seats across the country. The party might also capitalize on the BC NDP's opposition to the tax (pity the carbon tax-toting provincial BC Liberals who
share voters with the anti-carbon tax federal Conservatives), though that battle is still playing itself out.

The Conservatives

The Conservatives are betting that concern about the economy will take the environment right off the agenda and, where the environment is still an issue, will focus on leaving "market" (i.e., oligopolistic) mechanisms as the best vehicle for reducing carbon emissions. After all, how much will a carbon tax of a few pennies per barrel drive down emissions when the cost of fuel is up over 50% in a year?

Of course, Flaherty has tried to use the economy as a hammer to knock Premier McGuinty (of Ontario, the one place the Liberals are strong these days) with. That strategy's so far failed, but there are signs that the environment is being all but forgotten by voters given their growing economic concern. The Conservative strategy: bide their time while acting like a moderate group of managers, all the while raising big dollars, embarrassing and/or co-opting the opposition as much as possible, and hope that they'll be rewarded in spades come the next election.

The risks: "Wait and see" might be a tough strategy as the economy worsens -- governing parties don't typically do so well when the economy tanks. And now that they've let the Liberals find an issue with which to distinguish themselves, they may have allowed that party to climb back from the near death it would have found itself in had the election been held in early 2008. There's also potential that the NDP could cut into Tory support in certain pockets of BC, Edmonton, Saskatchewan, and Atlantic Canada, thereby offsetting any Conservative gains made at the expense of the Bloc or the Liberals.

The potential prize: The Liberals flounder and Conservatives pick up support in enough suburban and rural seats to make big gains, possibly so far as to claim a majority.

Thoughts and conclusions

Canada certainly needs to move toward curbing emissions. While a carbon tax is an intriguing idea, it's certainly just one tool in the wider toolbox of strategies that can and should be used -- the overwhelming focus on carbon taxes makes it appear as if it were the one and only option ahead of us.

If a carbon tax is implemented, the revenues should be used to alleviate the hit for low income and northern citizens as well as subsidize energy retrofits, mass transit, and green technology, rather than just given away in some supposed "revenue neutral" plan.

Either way, a cap and trade system should be implemented and looks like the way to go, given the support for such a system among most Canadian Premiers, the Conservatives and NDP, and both US Presidential candidates.

The environment certainly should be an election issue, though who knows which way the winds will blow by that time? Fears of economic meltdown may yet dwarf the environment as a primary concern in most voters' minds.

Further reading

By the way, for those following the carbon tax debate, I highly recommend the Progressive Economics Forum
blog. Some of the posts on carbon taxes:

Where do greenhouse gases come from? It turns out that households emit one-fifth of Canada's greenhouse gas emissions, while businesses account for five sixths of emissions.

Where do non-fuel emissions come from? Interestingly, Dion's carbon tax scheme has no impact on non-fuel emissions meaning that, for example, one-third of the oil industry's emissions would not be affected.

Responses to high gas prices How elastic is the demand for driving in response to fuel costs? In response to the overall cost of driving? Links to some articles with important implications for understanding behavioural change from driving toward other forms of transportation, such as transit.

Dion's carbon revenues How much do the Liberals propose to raise through carbon taxes and why do forecasts not show this to be a declining revenue stream (assuming that carbon taxes work)?

Carbon taxes, distribution and politics Should the carbon tax really be revenue neutral? Beyond relief for low income folks, perhaps it would be more effective if the revenues were used to subsidize mass transit, energy efficiency retrofits, and green technologies. See also Duncan Cameron's article.

The carbon tax we pay to the oil companies Jim Stanford notes that many of us get angry at the thought of the government taking a couple of cents a litre out of our pocket for a carbon tax, but yet calmly hand over the dough when it's the oil companies asking for 50 cents more per litre.

Dion's green plan or Mintz's tax plan? Is Dion's plan a sly way to simply cut income or corporate taxes? Does it adequately protect lower income folks?

Canada's ecological footprint by income decile Canada's richest 10% have a dramatically larger ecological footprint than even the next decile down, meaning that they may simply buy their way out of changing. Given this, is income tax cuts the most effective use of carbon tax revenues?

Some perspective on carbon taxes BC's carbon tax of $10 per tonne amounts to 2.4 cents per litre. In the past years, the cost of fuel has doubled -- the same as if a carbon tax of $270 per tonne had been levied.


Anonymous said...

Great Post!

donaldstreet said...

Very good post, PT.

I have to say that I disagree with you on the subsidies for the poor.

I am very much a left-leaning type, but the foundations of all economic systems, including socialism, are unfortunately economic. When recognizing that the economy is a mere sub-system of the ecology, we can see that both capitalism and Marxism fail miserably.

The carbon tax will only be effective if there is incentive to reduce emissions. Taxing with one hand and subsidising with the other only lessens the value of the incentive. If a carbon tax is the policy - and I don't think it should be - then it should hurt to produce carbon.

My preference is cap and trade, btw.

Prairie Topiary said...

Thanks for the comment.

You make a good point about the carbon tax being ineffective if it's made up for with subsidies to the poor.

I think that would depend on how that subsidy is paid out -- if it's a sum that given to all those earning below a certain point regardless of consumption (i.e., something like the GST credit), then the incentivce to reduce carbon emissions would still be there, as they could then get the subsidy AND avoid the tax by reduing their carbon footprint.

I do think the subsidy is necessary, as I think it's wrong to hit poor folks with a carbon tax at the same time as fuel, food and housing costs are all rising quickly. In northern regins of the country, there is often little or no alternative to carbon-heavy lifestyles (e.g., diesel-run furnaces in Yellowknife). However, I wouldn't outrightly be opposed to phasing out such a subsidy over a long period of time to allow alternatives to be pursued.

Finally, even if the subsidy eases the tax's impact, we should consider that the poor represent a miniscule proortion of the carbon "footprint." Businesses produce the most emissions and, of those emissions being produced by individuals, the vast majority are generated by the wealthy, with the top decile producing the most (at least if we assume that one's carbon footprint is correlated with their overall ecological footprint).

That's not to say that behaviour in all income groups shouldn't change. Rather, if we do have a tax (and I'm personally skeptical that the Liberals' version of the tax is the right idea), we should focus on taxing those who are most responsible, while softening the clubbing of those who can least afford the tax (and who probably can least afford to avoid the tax by paying for green alternatives).