What the Liberals and Conservatives get right — and wrong — about the carbon tax

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Those paying attention to the debate over climate policy in the House of Commons may have noticed something confusing lately — both the Liberal government and the Conservative opposition are quoting the same report to make opposing arguments about the federal carbon tax.

The report in question is the Parliamentary Budget Officer's March release on the financial and economic costs to individuals and the national economy of a carbon tax that will rise to $170 per tonne of greenhouse gas emissions by 2030.

"This is one of these issues where both sides of the debate in this case are speaking to a kernel of truth, but also conveniently neglecting some other important considerations," said Trevor Tombe, an economics professor at the University of Calgary.

The report looks at what the cost to individuals and the economy will be in 2030, when the carbon tax rises from its current rate of $50 to $170 per tonne.

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The Liberal government points to the part of the report that features straight fiscal math — how much average households pay minus how much they get back in rebates. By that measure, the PBO says, most households profit.

The Conservatives point to a part of the report based on complicated modelling that predicts the economic impact of carbon pricing across the economy on things like wages and investment income. By that measure, the PBO says, most households are out of pocket.

Both sets of numbers show the carbon tax is progressive — those with lower incomes do better under carbon pricing than those with higher incomes.

What the report does not look at is the cost to the economy of doing nothing about climate change, the economic growth that could result from a shift to a green economy, and how carbon pricing compares to other climate policies such as regulations or tax credits.

To be fair, experts say, the report could not look at how the Liberal plan compares to the Conservative plan because, so far, there isn't a Conservative one. Former Conservative leader Erin O'Toole had a plan but his successor Pierre Poilievre has not released his.

Doing something vs. doing nothing

Without an alternative to compare carbon pricing to, experts say that using the PBO report to criticize the government's plan amounts to comparing a carbon tax to doing nothing about climate change.

The PBO's "analysis assumes that we could be richer if climate change didn't exist, which of course everyone wishes that was the world we live in. But it does exist and we have to decide how to address it," said Brett Dolter, an assistant professor of economics at the University of Regina.

According to a October 2020 report from the International Monetary Fund, the impacts of doing nothing include "lower productivity due to changes in the yield of agricultural crops and fish farming and hotter temperatures for people working outside."

That report also says that, without a climate plan, economic activity would experience more frequent disruptions, infrastructure and buildings would face physical destruction from more frequent natural disasters and rising sea levels, and more resources would have to be diverted to adaptation and reconstruction efforts.

A recent paper in Nature also attempted to quantify the cost of doing nothing and came to the conclusion that each tonne of greenhouse gas emitted into the atmosphere does $185 US in economic damage.

"We're not in a world where we are debating, 'Should we have a climate policy or should we do nothing?' I think we are in a world where … there's a moral imperative to do something about climate change," said Nicholas Rivers, associate director of the Institute of the Environment at the University of Ottawa.

An imperfect model

To determine the economic impacts of a carbon price, Rivers said, the PBO did what other economists do. It used a computer model to predict the economic impacts of policy decisions. And models, experts say, can be troublesome.

"The model captures household and company behaviour by assuming that the economy is composed of rational agents with perfect information," Rivers said. "This is a convenient modelling fiction. It's not clear whether that leads the model to over-represent or under-represent costs."

Rivers cites an example: if a company chooses to buy an expensive, more fuel efficient boiler to cut down on fuel and carbon tax costs, that money can't then be used to pay shareholders and it becomes a capital investment.

That decrease in investment income for the shareholder will have an impact on the economy and that impact is reflected in the PBO report. But the report does not look at the other revenue that same company might have made by taking advantage of the transition to a green economy.

"The made-up world in the PBO report is an approximation, a very crude approximation, of reality. It's a complicated model but the world is infinitely more complicated than the model that they have," Rivers said.

"The real world is filled with imperfect information, people acting on whims and people making choices without really considering them based on habit … that are going to lead to significantly different outcomes."

Dolter said that the PBO report is important and useful when, and only when, its results are taken in context with its limitations. Dolter said he would have liked to have seen a wider possible range of outcomes in the report, taking into account pessimistic and optimistic factors.

The cost to the economy at large

The PBO report also attempts to model the cost of carbon pricing to the overall Canadian economy. It comes to the conclusion that by 2030, the Canadian economy's GDP will be 1.3 per cent smaller than it would have been without a carbon tax.

In 2020, the National Bureau of Economic Research, a U.S. based non-partisan think tank, published a research paper that abandoned the modelling used by the PBO in favour of real-world evidence to answer the same question.

The paper examined various carbon pricing regimes in 31 European countries going back three decades and found "no evidence to support claims that the tax would adversely impact employment or GDP growth."

"The fact that they didn't find any impact doesn't mean that one doesn't exist," Rivers said. "It means that it's hard to find, there's a lot of other stuff going on and it's probably small."

"Neither [modelling or historical analysis] is a perfect approach. There's a problem with both of them."

Rivers said that the PBO's prediction of a 1.3 per cent hit to GDP by 2030 is modest when compared to how the economy is expected to grow over the next eight years.

"The best evidence out there is that the impact of a carbon price will be very small overall on GDP," he said.

Carbon pricing and alternatives

While we do not have a direct comparison with another proposed federal emissions reduction policy, economists say that all the evidence so far leads to the conclusion that carbon pricing is cheaper than emission reduction programs that rely on incentives or regulations.

"Generally when economists look at policy pathways, regulation is more costly than carbon pricing, carbon pricing is generally thought of as the most efficient option, the one that's going to cause the least amount of drag on the economy," Dolter said.

All emission reductions policies have a cost and Tombe said the challenge with a carbon tax is that the cost is up front, which can make it hard to sell. But there is also a cost to doing nothing, he added.

"For the government ignoring the costs, that is unfortunate, and for the Conservatives ignoring the benefits is equally unfortunate. Both exist and they should be compared," he said.