Carbon pricing is market friendly but may not be fair: Don Pittis

Canadians suffering from recent bouts of extreme weather may be glad the federal government has decided to take some concrete action to tackle climate change as soon as this autumn.

But as the government talks seriously about a national carbon tax, there are reasons to think that it will be less-wealthy Canadians, the poor and the struggling middle-class, who feel the effects from the rising cost of carbon. And if you don't believe me, look at the latest data on SUV sales.

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The thought struck me during a holiday exploration of Richmond, B.C., by public transport. Looking down from the SkyTrain window I noticed a Volvo car lot packed with SUVs ready for sale.

Carbon effect

"Why is it that in the province with the carbon tax that economists like best, where people are generally environmentally inclined, carbon-spewing SUVs are still such a hot seller?" I asked myself.

The answer may be that while carbon taxes have a real effect on consumer behaviour, the effect on people who can afford one is just not significant enough to overcome their desire for a new SUV.

Internalizing externalities

For instance, most Vancouverites who bought their houses 10 years or more ago, will be hardly affected by the additional cost of carbon tax. The people forced to change their ways will be those who, due to low income, or high housing costs, need to count their nickels.

There is a good reason economists prefer to fight climate change with "taxes that reflect environmental externalities," such as a carbon tax, according to a report from the think-tank Canada2020.

It's the same reason why the much-vaunted powers of market forces don't step in to counter the economic damage climate change is doing to the world.

The problem is the disconnect between businesses that profit from producing carbon and the economic impact on those who are suffering from its effects. 

Here in Canada we can watch our oil stocks rise, crank up the air-con and stay indoors while, for example, farms in the Middle East, which is suffering a 14-year drought, turn to dust. We know there is a cost to burning fossil fuels, but economists would say the damage is "external" to the calculations of profit and loss for the businesses producing the carbon — the oil companies and their shareholders. 

Nasty, and costly, surprises

The purpose of a carbon tax is to bring those external costs, whether drought, loss of land to coastal flooding, disrupted Canadian weather patterns, or other nasty surprises, back into the business calculus of carbon-producing companies.

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The great thing about a carbon tax, instead of a government-imposed rule about exactly how much carbon a business should produce, is that businesses can weigh the cost of cutting carbon against other costs and make the most business-efficient choice about how and where to cut costs.

Will it wreck the economy?

Economists like that idea.

"Even with a $120 per tonne carbon price (a figure way beyond what any jurisdiction is currently considering), 90 per cent of Canada's economy would still be virtually unaffected by competitiveness challenges," wrote McGill economist Chris Ragan, head of the Ecofiscal Commission, a privately sponsored group promoting fighting climate change without wrecking the economy. 

All very well for businesses. But in an economy where there is an increasing gulf between richer and poorer, market pricing can have a different effect. 

For example, a standard complaint about road pricing for high-speed lanes on public highways is that people wealthy enough to pay the extra charge get to travel fast in their fancy cars while the poor schmuck in his rusty Civic is mired in traffic. It is like endlessly walking past the first-class passengers while heading for your cramped seat in the back.

Voluntary climate tax

Even in places like Vancouver, where gasoline sells for anything up to $1.20 a litre, carbon pricing has not been enough to interrupt the North American twin love affairs with gasoline and the SUV.

In fact, so far, it is prestige and not market pricing that has driven the move to electric vehicles such as Tesla and the newly revealed Karma Revelo. In that way, wealthier Canadians are paying a completely voluntary tax to move the economy into a low-carbon regime.

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While I do not plan to sell my house and buy a $200,000 Tesla Model X, I will smile and wave at the driver of the first ones I see in ordinary traffic. They will be a rich early adopters using their own money to subsidize the transition to a lower carbon economy.

Follow Don on Twitter @don_pittis

​More analysis by Don Pittis