I’ve long been a fan of market-based solutions to solve large societal problems.
Creating the economic incentives to push societies to make different purchasing decisions is much more efficient than subsidy programs or boutique tax cuts or tax increases, as it limits paperwork and bureaucracy.
Being able to make that economic incentive zero-sum for the consumer is the big win and keeps the change from being labelled a tax — but that balance rarely ever happens and certainly managing carbon production has failed miserably in this regard.
Put simply, if you are being forced to pay more for something, or because you do something, then there needs to be a transparent and relatively simple pathway to getting a reliable return for your good behaviour.
Carbon management can’t be the same as a “sin” tax put on alcohol and tobacco. We don’t need beer or smokes to survive and thrive (although some days…). We do need fuel in its various forms to heat our homes, propel our transportation and our economy to build wealth.
Making people pay for carbon use is an area where manipulating market forces make sense. The problem is, there’s such a convoluted and complicated route to leveling out the extra cost that no one wins, and people just feel like they are being taxed. If you pay more for fuel, then you should be paying less for something somewhere else (in income taxes for example).
Providing the funds generated by carbon taxes to focused groups in the form of subsidy programs as happened in Ontario with the Green Energy Fund rarely works. Few people feel the benefit, and in fact those who are in non-compliance get the subsidy. Those who already made the changes and investments don’t get the benefit.
The prime minister gets the basics of this calculation. That’s why he said recently that Ontario citizens will get back all the money they’ll pay into a carbon tax he’ll impose now that the new Progressive Conservative government is winding down the province’s Cap and Trade system that creates a market for carbon credits. What the prime minister seems to miss is the route back to the consumers in the province is so long and skewed, no one sees the value.
Here’s a simple example of where a user pay system worked. In South Huron where I once lived, the local council decided to charge for each bag of garbage that went to the curb. There’s a marginal amount of inefficiency introduced into the system as citizens had to buy garbage tags that had to be printed and distributed to retail outlets.
But where the municipality got it right is that they gave a tax cut for the value of the previous garbage collection system that was then to be paid for by usage. Sounded good to me. We produced less garbage than neighbours, my taxes were cut and I should have ended up with more money over the long run because of making the decision to recycle and compost, things we were already doing.
It also produced some competitive options for larger garbage producers (businesses will produce more garbage). Instead of paying a flat rate on their taxes, they could go to the private sector for garbage disposal, if it was cheaper than paying the municipal user fee.
However, few attempts to manage the market to influence behaviour work well and clearly, which is why most governments just resort to direct taxation to drive behaviour.
The outcome from garbage bag tags is simple — here’s a tax cut, produce less garbage, pay less. Managing carbon is not.
I had hopes that it might be, and when I first started writing about carbon markets many years ago, there were indications that it could be a net benefit to farmers. Unfortunately, there have been no workable mechanisms developed to make a simple payment to farmers for farm practices.
Decision makers didn’t prioritize a reward for carbon reducers on a mass scale, they just penalized the over-producers and the money went into a black hole of general revenues and subsidy programs. For carbon pricing to have been successful, the government needed to be minimally involved.
Pricing carbon in the form of exchanges is workable for larger businesses and organizations. They have the wherewithal to manage carbon credits and to make the trades they need to meet government requirements, even if it is a pain and inefficient.
The problem is that those companies just pass the costs directly down to consumers, who then see little benefit from the extra “tax” they pay because of their behaviour.
We’ve ended up at the place we are today, where consumers see little benefit, financially or environmentally to carbon pricing, and governments need to own the failure.