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

Competing to Stay Alive

The notion of cross-border shopping is nothing new, especially during the holiday season. For decades, Canadian retailers have lost customers to the United States. The rationale behind travelling to the United States to cash in on pre-holiday deals, however, is changing and so, too, is the strategy to keep Canadians shopping at home.

Retailers in the United States are generally able to offer a greater variety of goods to consumers at a much cheaper price than Canadian retailers. The precursor to the holiday shopping season, colloquially known as Black Friday, accentuates this disparity. Retailers dramatically reduce prices, stores open early, and customers travel from afar to wait in line for hours.

In 2012, the amount of purchased goods allowed to enter Canada with duty-free status increased dramatically. These new allowances encourage Canadians to take advantage of the aforementioned price disparity (which, however, is shrinking). Furthermore, a strong Canadian dollar makes shopping in the United States an even more attractive option, especially for those who live closest to the border.

Canadian retailers, as a result, lose profits because of fewer customers choosing to shop locally and many find it necessary to lower prices in order to stay competitive and remain in business.

To combat this issue (and the economic recession), Canadian retailers introduced their own Black Friday deals. This year, however, proved the most comparable yet to the United States Black Friday tradition. The Bank of Montreal’s 2013 Holiday Spending Outlook (conducted by Pollara), for example, reported that 47% of Canadians planned to shop on Black Friday this year, up from 41% last year, and 59% of Canadians plan to shop on Boxing Day this year, down from 62% last year.

Pre-Christmas bargains are evidently gaining popularity in Canada, however, Boxing Day sales, which typically account for the largest proportion of retail sales in the year’s last quarter, are taking a hit. In an attempt to stay competitive, Canadian retailers are mimicking American retailers by reducing prices and restructuring sale targets and timing. This year, for instance, retail stores and shopping malls across the country offered huge discounts, door-crashing specials, and, for some, extended hours to tempt shoppers to spend on Black Friday deals in Canada, instead of the United States.

Copying American traditions by targeting Black Friday over Boxing Day and reducing prices to stay competitive are essential if Canadian retailers intend on surviving. In addition to the profits retailers gain from introducing Black Friday, Canadian consumers have a greater chance to save on holiday spending without leaving the country. While there are several other issues to consider, the direction in which Canadian retailers are heading is, for now, clear.

Nevertheless, this rapidly evolving strategy has left me questioning how much the Canadian Black Friday will prosper. Will the friendly Canadian reputation be at risk from the same type of crazed consumerism witnessed in the United States? On the other hand, is it possible that online shopping presents the next challenge to both Canadian and American retailers?

Rachel Lowe 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

I Won’t Complain… I Just Won’t Come Back

It has been said that the goal of the company is to have customer service that is not just the best, but legendary.  In private enterprise there are clear incentives to provide a superior service or product, namely that if you do not, consumers will deal with your competitors.  Companies are constantly trying to be better; creating a positive cycle of growth.  However, things can get a bit more complicated in a monopoly.  Things get much more complicated in government run monopolies.  These monopolies generally emerge because there is a gap that the private sector refuses to cover, generally because there is little to no profit, or because the state feels they can better deliver the service.  This brings me to a unique monopoly: public transit.  By all means, a necessity to get from point A to B for many individuals.  However, few have claimed their ride on public transit to be a pleasure or the customer service to be legendary.

Public transit systems across Canada lack the funding they need to emerge a leader in the market.  Toronto’s subway system has been described as the world’s best 1970’s subway system.  People complain about public transit to their friends, they Tweet it, they post Facebook statuses, and some even call in to complain.  However, I ask: does it even matter?  The reason no one takes public transportation is that the service is so bad while the reason that the service is so bad is that no one takes public transportation.  This problem could be solved by having more people take public transit, or by improving service.  Unfortunately, one cannot happen without the other.

The Halifax Regional Municipality made a great step forward by creating a new bus line which services the airport.  They took a step backwards when they said that luggage would be at the bus driver’s discretion.  Of course if I wanted to take the bus to the airport I would have luggage, and anybody who has a flight to catch would not leave their luggage up to chance.  It is instances like these, where common sense is lacking that public transit finds its faults.   But how do we make a stronger system without creating undue stress on hardworking tax payers?

I propose a simple solution: competition.  Competition would give consumers a choice.  If Company A provides inferior service, the bus-rider could chose to ride on a bus owned by Company B.  I realise that in cases where extensive infrastructure is required that this could get costly.  However, if open to competition market forces would ensure that both services become better, less expensive, and more efficient.  A more efficient system would move more people in a shorter period of time which would create satisfied consumers.  The satisfied consumer would be more prone to ride the bus again, which would decrease gridlock, and pollution while increasing revenue.  If people start riding public transportation because the service is better, the service will continue to get better and so more people will use the transit.  This would create a positive cycle of growth, efficiency, and positive experiences on public transit.

Charles Darwin once said “It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”  So let us make our public transit systems across Canada more responsive to change.  Let us empower them to create new routes, and open the industry to private competition and public-private partnerships to ensure that the systems operate as businesses and not merely as lost earnings.  Until consumers are able to say “I won’t complain.  I just won’t come back”, and mean it, our public transit systems will continue to provide poor service while continuing to throw away tax payers’ money.

-Alanna Newman