Debating Revenue-neutral Carbon Taxes

During the 2008 federal election, proposals to implement a federal carbon tax were a major point of contention. Although Canadian voters ultimately rejected the plan, the issue of carbon pricing remains at the forefront of environmental discourse. This is for good reason: climate scientists, having shown conclusively that the earth is warming, now mostly concern themselves with both the size of the effect, in addition to its primary determinants.

In 2007, the Province of British Columbia (BC) successfully implemented a carbon tax with an important feature: revenue neutrality. The government expected to generate nearly $5 billion annually via carbon taxation and, accordingly, it would reduce personal and corporate taxes by an equal amount. This, in effect, slays one substantial criticism of a carbon tax, which is that it amounts to an additional overall tax burden on individuals, families, and firms. In British Columbia, the policy managed to deter purchases of gasoline and other carbon-intensive products by nearly 10 per cent relative to the rest of Canada, without burdening British Columbians with additional taxes.

Granted, those statistics only measure the carbon that British Columbians purchase in BC. They do not consider the stories of weekend lineups at American border towns where Canadians buy cheaper gas now that the price difference is large. This phenomenon may certainly account for some of the change, but it is quite difficult to imagine this effect being substantial. How much gas must a Vancouverite purchase to justify the two-hour drive, plus the wait in line?

Carbon pricing is also part of the discussion in Atlantic Canada.

In a series of papers published in 2009, University of New Brunswick economist Joe Rugger analyzes the environmental and taxation implications of a BC-styled revenue-neutral carbon tax in New Brunswick. The study found that a tax equivalent of 7 cents per liter on gasoline, applied to all forms of fossil fuel, would reduce carbon emissions in the province by roughly 7.5 per cent. This would occur primarily through higher electricity and heating bills, in addition to consumer purchases of gasoline and oil.

Changing carbon consumption occurs because of two opposing forces. First, making gasoline more expensive creates a “price effect” that causes people to shift their consumption away from gas and towards other things. This is what people refer to when they talk about nudging consumer behavior in a direction hoped to be socially beneficial. The second effect is due to the decreased tax burden–the “wealth effect.” Here, income goes up because of a smaller tax burden. People will then tend to consume, on average, slightly more of everything, including carbon. This works in the opposite direction of the price effect. In the case of BC, it became clear that the price effect was larger than the income effect and, therefore, total consumption was less than it would have otherwise been.

This highlights a confusing irony of carbon pricing policy–anything that makes people richer will tend to mean that they consume more carbon. People should continue to prosper; however, the primary objective is reducing carbon consumption. There are also distributional effects that occur based on the form and target of the tax cuts, as well as consumption behavior. This will be the topic of a second blog post.

In sum, Canadians are becoming more environmentally conscious and they recognize the need for not only fiscal, but also ecological, prudence. In this light, carbon-pricing policies are likely to remain in public discourse. By pairing the carbon tax with associated general tax cuts, rendering it revenue neutral, British Columbia’s experiment shows that it is at least possible to deter carbon consumption, while also minimizing harmful economic effects.

With the upcoming New Brunswick election in the fall of 2014, I would not be surprised if this issue arrives on the campaign trail. Considering recent curiosity in New Brunswick about local shale gas development, this policy has the potential to become quite the wedge issue.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Obamacare: An Intro

This week was the fourth anniversary of passing the Affordable Care Act (ACA), colloquially known as Obamacare. Many, including Canadians and numerous Americans, thought first that it meant universal health insurance and were subsequently surprised to realize this is not the case.

The ACA’s intent is primarily to increase the number of Americans who have health insurance. Of the roughly 46 million Americans who were “uninsured” in 2009, a substantial chunk could not afford insurance. Several others–roughly half and most of whom are young and healthy– thought it not worth their while to have it. However, if they got injured, hospitals picked up the bill, which was then dispersed among other people’s insurance premiums.

There are three provisions in the bill:

1)    Mandates requiring individuals to purchase health insurance or else suffer a significant penalty: either purchase health insurance from a private company or pay a fee to the federal government

The Supreme Court’s (SCOTUS) ruling in 2012 confirmed the bill’s constitutionality and it has been gradually taking effect since 2013. The second mandate requires employers with more than fifty employees to provide all full-time staff with health insurance or, similarly, pay a substantial fine. Alternatively stated, this means that employers cannot hire (or retain) full-time workers unless hey can also afford to pay for that person’s health insurance. Labour unions caught on to this and many of them now voice strident opposition to Obamacare. Thus far, there have been thousands of documented layoffs because of the employer mandsate.

2)    Expansion of state Medicaid programs

Canadians unfamiliar with American healthcare should know that while private firms insure a majority of Americans, Medicaid is a safety-net health insurance program for those without the means of acquiring insurance (typically the poor). It is run at the state level, which bears the cost and financial responsibility for their expansion. Because of this, nearly 33 states have refused to expand their Medicaid programs in the wake of Obamacare, citing fear of future insolvency issues. In addition, the Medicaid fee schedules for doctors seem to be so low that many of them no longer accept Medicaid patients.

3)    “Health insurance exchanges”

Essentially, an exchange is a regulated and subsidized marketplace where the uninsured can shop for health insurance policies, the price of which adjusts to their annual income. They came into effect in October 2013 and were the subject to scrutiny due to technological errors precluding consumers from accessing the website.

In sum, Obamacare is not universal health insurance. Principally, it is a mandate requiring Americans to purchase their own health insurance. If employers fail to provide coverage, individuals may hope to find subsidized policies through the marketplace exchange or become eligible for Medicaid in certain circumstances. While the implementation of each of these reforms has been shaky and mixed with unintended consequences, the policy community remains divided on whether, on balance, the bill has been a success thus far.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute

Government Intervention and Market-Oriented Principles

In public policy discourse, some individuals characterize free-market policies as “pro-business,” “favouring the powerful,” or other phrases intended to invoke an emotional or predetermined response. The truth, however, is often the opposite.

Generally, most people benefit from a freer economy. The paradox is that individual corporations have an incentive to lobby for government handouts, or particular regulations (and the larger the corporation, the easier the process becomes).

New Brunswick recently introduced a catastrophic drug coverage plan amounting to an individual manadate for every New Brunswick family, who must now purchase a drug plan, while Blue Cross will administer a subsidized opt-in to cover a substantial chunk of New Brunswickers. Although the plan is clearly a form of government intervention, it seems to serve Blue Cross quite well. In fact, Blue Cross may stand to gain from the arrangement quite substantially.

What company would oppose forcing people to buy their product by law? The same is true in New Brunswick for automobile insurance. At the risk of someone getting in an accident and not having insurance, there is an individual purchase mandate in New Brunswick for registered vehicle owners. I bet the automobile insurers do not mind this regulation at all!

At the federal level, companies like Chrysler perpetually ask the government for bailouts, even when they are not needed or justified. Chrysler can afford lawyers, lobbyists, and public relations experts for these endeavors and it is easy to imagine that it prefers government intervention. This narrative is also true in the regulatory sphere. Too often, companies will lobby for regulations that punish competitors, while benefiting themselves. Additionally, these arrangements disproportionately punish smaller firms, who may not have a sufficient economy of scale to compete with larger firms under a stringent regulatory regime. Consider food-labelling regulations–McDonald’s can easily afford to hire a dozen chemists to test the nutrient value of their menu, while the food truck run by your neighbor may not.

On the other hand, imagine if businesses actually had to survive market conditions and offer valuable services in order to remain viable. This is a pro-market position. This is what “market-oriented” means. I cannot imagine anything scarier-sounding to someone who is used to bending government laws in their favour.

Michael Craig is a 2013-2014 Atlantic Institute for Market Studies’ Student Fellow. The views expressed are the opinion of the author and not necessarily the Institute