Jack Mintz on the Politics of a Carbon Tax

Jack Mintz of the University of Calgary has an interesting article in the Financial Post explaining that carbon taxes don’t “pass the smell test” among voters. Although Mintz is speaking to a Canadian audience, some of his observations dovetail nicely with points I have been stressing for years here at IER. In particular, voters don’t want a carbon tax—despite its theoretical superiority to other regulatory approaches—because (among other reasons) they fear the pain of higher energy prices will not correspond to meaningful emission reductions, and because they don’t trust the government to honor its pledge of revenue neutrality. Mintz backs up his arguments with survey data and real-world examples of (failed) carbon taxes in action.

At the start of his article, Mintz cites a World Bank report documenting that only 23 countries have an explicit carbon tax, whereas 176 countries have “targets for renewable energy and/or energy efficiency.” On the face of it, this is surprising, because (at least in theory) a properly calibrated carbon tax can achieve the same objectives as top-down energy regulations, at substantially lower economic cost.

For example, Mintz notes that “studies have shown that electric vehicle subsidies have a carbon-tax-equivalent cost of over $600,” and further observes that in Canada “[t]he federal proposed fuel carbon standard may have a carbon price ranging from $450 to $650 per tonne.” These implicit tax rates on carbon dioxide emissions are an order of magnitude higher than the typical proposals for an explicit carbon tax. Moreover, these regulations don’t bring in tax revenue, which (again, in principle at least) could be used to reduce other taxes.

So if governments are currently enacting policies with (implicit) high carbon tax rates, why not implement the real thing? In other words, why are voters so reluctant to agree to carbon taxes, if certain technocratic economists think they’re just what the doctor ordered?

Mintz argues in his article that voter skepticism is well-founded. Based on a report of surveys from around the world, he relays five reasons for the political unpopularity of carbon taxes:

(i) the levies are regressive, hitting lower income households most, (ii) voters are worried about competitiveness and employment effects, (iii) voters view the personal costs as too high, (iv) carbon taxes are believed to be ineffective in reducing emissions, and (v) governments can’t be trusted.

These reasons are self-explanatory—and the interested reader can check out Mintz’s full discussion—but let me amplify his points that overlap with ones I have been making here at IER over the years.

Proponents of a carbon tax admit that it will raise energy prices—that’s the point, after all, to get households and businesses to change their behavior and reduce greenhouse gas emissions. Yet proponents claim that the revenue from a carbon tax can be used to cushion the impact on poorer households. However, that claim is misleading if it’s construed as families “making money” from the tax.

Also, the promises of compensation for the poor conflict with the other promises made for the receipts—such as funding “green” technology, giving tax rate reduction to corporations and high-income individuals (to promote GDP growth), and giving a fair lump-sum rebate to everybody. Oren Cass rightfully refers to this rhetoric as the carbon tax shell game.

In the United States, a small but vocal group of intellectuals and former policymakers have been beating the drum for a supposedly conservative/libertarian carbon tax. Chief among the claims is that a modest carbon tax could be implemented as part of a package deal, in which the government simultaneously phases out top-down energy regulations and strictly abides by a revenue-neutral use of the new money.

Mintz’s article shows just how naïve such claims are. He points out that governments around the world prefer top-down regulations because of their hidden cost, and he also explains that no jurisdiction has obeyed its promises for a revenue-neutral carbon tax. He cites two recent examples from Canada:

[V]oters don’t trust governments who so often break their promises. A government might argue that carbon revenues will be used to reduce taxes or provide a certain subsidy. But with no ironclad way to make sure the revenues are earmarked for a purpose, a government can easily use the money to expand their budgets and increase the size of the bureaucracy. When B.C. and Alberta brought in their carbon taxes, they promised that revenues would not be used for the general budget.

Both provinces have now backtracked, increasing cynicism among voters. These arguments underlying the political fragility of carbon taxes leave out another important dimension: non-transparency.

Elsewhere, I have explained that British Columbia—which used to be the poster child among technocratic economists for a carbon tax “done right”—exhibits the familiar consequences of a tax hike. Not only did the provincial government eventually renege on its promise of revenue neutrality, but the claims that the BC economy was unharmed by its carbon tax also fall apart under scrutiny. It turns out that deliberately making electricity and transportation more expensive is not good for the economy.

Conclusion

Jack Mintz is a Canadian expert on the economics of energy. His recent article explains the very sensible reasons that voters around the world are skeptical of a carbon tax. Despite the assurances of some academics and policymakers, the general public is wary of promises that new tax revenue will be refunded back to them to shield them from a policy that deliberately raises energy prices.

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