Is the carbon tax really hurting us economically?

Confused by all the contradictory claims by proponents and opponents of Canada's federal price on carbon (or "carbon tax", depending on your political affiliation)? You're not alone.

The price on carbon was brought in by Justin Trudeau's Liberal government to incentivize Canadians to change their habits away from carbon-intensive activities and products in favour of more environmentally-friendly options like heat pumps, public transit and electric vehicles. The idea is to gradually ramp up that price over time so that its impact is increasingly felt. 

It is still widely agreed worldwide that a carbon tax is the most efficient and cheapest way of combatting greenhouse gas emissions, although it is by no means the only one. An independent analysis by the Canadian Climate Institute has highlighted the fact that other methods need to be employed alongside a carbon tax, particularly industrial carbon pricing, a cap on oil and gas emissions, and methane regulations (the consumer carbon tax is described as "fuel charge" in this analysis).

It has been badly promoted and explained but, in return for the carbon taxes they pay, Canadians receive a Climate Action Initiative Payment (recently renamed the Canada Carbon Rebate in an attempt at more clarity) through their income tax returns so as to make the initiative largely revenue neutral, and to ensure that, broadly, consumers are not actually out of pocket. In practice, this rebate works in a progressive fashion so that lower income Canadians are more likely to benefit overall, while higher income Canadians, leading a more polluting lifestyle with bigger homes and cars, are more likely to find themselves out of pocket. People in rural areas also get an additional top-up on the grounds that they probably use more energy and don't have so much access to public transit options. Sounds pretty reasonable to me.

In the last year or two, though, Conservative populist Pierre Poilievre had been on a crusade against the carbon tax during a time of high inflation and belt-tightening ("axe the tax", and all that). His fiery rhetoric (at least in comparison to Trudeau's rather tepid and lacklustre response) has been remarkably successful in turning large segments of the population away from the erstwhile broad support for the carbon tax to opposition. And the main way he has done that is by insisting that it makes everything more expensive, mainly by pretending that Canadians don't receive a rebate, but sometimes by arguing that the tax is not revenue neutral for most people.

There are two conflicting narratives at play here. The Liberals and NDP point to a Parliamentary Budget (PBO) report that concludes that 80% of Canadians are better off, in that their rebates are greater than the carbon tax they pay in day-to-day life. The breakdown of this by province and income level can be found in Figure 1 of the report.

Poilievre, on the other hand, focusses on Figure 2 of that same report, which attempts to include what it calls "economic impacts" (such as potential losses in employment and investment income) in addition to the direct "fiscal impact". (There are some serious questions about just why the PBO decided to add this additional, and very subjective, analysis.) This figure concludes that about 60% will pay slightly more in carbon taxes than they receive back in rebates. You can see why this is what Poilievre stresses in his parliamentary tirades and slick video advertising.

As so often, though, the devil is in the details. For one thing, the report looks at the fiscal and economic impact in 2030, when the carbon tax is planned to be at its highest level - $170 per tonne compared to $65 today - so any disparities are hugely magnified (although the rebate is planned to compensate proportionately). Plus, the 60% figure hides disparities between different provinces and income groups, with the lowest income groups still benefitting overall. Plus plus, the percentage increased cost to the average Canadian is actually pretty small, ranging from 1.2% to 1.9% (so pretty close to revenue-neutral, as advertised). And finally, it ignores completely the cost to Canadians of climate change if nothing is done (hard to assess, but palpable nonetheless).

Those are just a few points that occurred to me on a cursory look at the data (and I'm no analyst). But the bottom line, as I see it, is: nobody said this was going to be easy. People have been enjoying the benefits of heavily-subsidized oil and gas for decades, and now, when a government finally has the guts to make people pay for some of the externalities and pollution they have become so used to, there is a big fuss (well, to be fair almost entirely due to Poilievre power-hungry crusade and disingenuous arguments against it).

I get it that a lot of people are hurting financially at the moment, but the carbon tax is not the reason (it contributes 0.15% to the inflation rate, according to the Bank of Canada). This is just one individual politician's (and his coterie of hangers-on) campaign of disinformation and artful deceit. Poilievre sees this issue as his ticket to the top job, and he will pursue like a bulldog with a bone.

UPDATE

More recently, it has been revealed that the PBO analysis on which all these opinions and claims are based, was not even accurate. The PBO's Yves Giroux insists that it was just a small, unimportant error, but when so much is riding on it, and it is being used by all and sundry to prove their own self-serving points, any error is a big and possibly fundamental one. It certainly deserves more than the quiet admission of error that was published in a low-profile update on April 16th, and that is only coming to public light now, in early June.

The effect of the error is to overstate the negative impact of the consumer carbon price - it remains unclear by just how much - which goes to bolster Pierre Poilievre's contention tha consumers are out of pocket as a result of the carbon price.

The main error was that the alternative scenario it compared with the carbon tax was actually one with no carbon pricing at all, not even the industrial carbon price. Giroux calls this a mere "modelling tweak" (whatever that means) rather than a mistake, and insists that it would not affect the conclusions much, because the big cost driver is the consumer carbon price, not the industrial price.

But he seems to have that the wrong way around completely. The Canadian Climate  Institute estimates that the industrial carbon price is likely to be responsible for 48% of Canada's emissions reductions by 2030, as compared to 8 - 14% for the consumer carbon tax. Nevertheless,  Giroux says the PBO is not expecting to re-do the work until the fall. Why?