Carbon Taxes

One of the most talked about areas for potential environmental taxation is the so-called carbon tax. Advocates of a carbon tax argue that it would -- by raising the price of burning fossil fuels -- provide an incentive for producers or service providers who burn carbon fuel, to seek ways to become more fuel efficient, thereby emitting fewer pollutants.

In addition, under normal conditions of supply and demand, it is argued that the tax would be passed on by the producer or service provider through the price system, making the product or service more expensive (to reflect its environmental cost), encouraging people to switch to products or services that are less harmful to the environment. However, there are a host of issues which first need to be understood.

A Global Problem

Because global warming is international in scope, it requires an international response. The effectiveness of a carbon tax introduced only in Canada would depend on actions taken in other countries. A recent study of foreign approaches to mitigating environmental impacts, conducted for Transport Canada, concludes that regardless of progress in curbing emissions in the OECD countries, global emissions of both traditional pollutants and greenhouse gases are expected to increase, primarily as a result of the industrialization and motorization of the Third World.

Competitiveness

Imposition of a carbon tax implies significant adjustment problems for a number of key Canadian manufacturing and other industries (such as trucking) which are tightly integrated into the mid-continent manufacturing sector. In markets where Canadian employers must compete with foreign suppliers, the imposition of carbon taxes here, but not in other industries (or at least trading regions), would place domestic companies at a significant competitive disadvantage. This means that domestic jobs would be lost.

In order to ensure that Canadian competitive position was not impaired, and to ensure that a carbon tax was having its intended environmental effect, it would be essential that such a tax was revenue neutral (other taxes on an industry would need to be reduced, so that total tax bill would remain constant or be reduced). And, all funds collected would not go into general revenue, but would accrue back to the industry that paid them, to invest in research and technology aimed at improving that industry's environmental performance. Industry and consumers would not tolerate the further introduction of taxes that are perceived as a further tax grab. Of course, these features of the tax would likely increase the costs of compliance and administration for government.

Further Work Needed

Many of the above issues appear to have been recognize by some groups looking at the issue of carbon taxes. For example, even the Ontario Fair Tax Commission's Working Group on Environment and Taxation, in their December 1992 final report urged that further research needs to be done, focusing on macro-economic and distributional impacts. The group cautions against the introduction of such taxes to bolster general revenues, and identifies the problem of unilateral introduction by Ontario. The Working Group recommended that if, for whatever reason, Ontario acted unilaterally, carbon taxes should not be used as the sole mechanism for achievements in energy efficiency; reflect considerations for sectoral economic impacts through low tax rates, special provisions for the most energy/carbon intensive industries, and the use of revenues to offset other taxes; reflect considerations for the advancement of energy efficiency gains and reductions in emissions; reflect considerations for regional and income disparities. In its 1993 final report, the Ontario Fair Tax Commission reiterated many of these concerns and stated "we are sensitive to the substantive competitiveness concerns raised by the introduction of carbon tax in Ontario". The Commission further suggested that a carbon tax be introduced at a moderate rate, coinciding with decreases in other business taxes. However, the Commission also stated that a moderate rate of tax, on its own, would not have much effect on emissions.

Shifting Freight

With respect to freight transportation services, when one talks about modifying behaviour, or purchasing decisions, through a carbon tax, often they are of the belief that introduction of such a tax will lead to a shift of traffic from one mode (trucks) to another mode which they may believe is more fuel efficient (rail). But, different measures provide different answers to the question of which mode is more environmentally friendly. And, what many people fail to understand is that, regardless of the measurements used, industry-wide comparisons on fuel efficiency between trucks and rail lack meaning because the service that each mode provides is vastly different. Trucks essentially serve the short distance, small shipment market, while the railways dominate the long distance, bulk commodity market.

Trucks and rail really only compete on a very small percentage (less than 10 per cent) of total freight. For most shipments, rail is not an alternative, and price is only one factor. Where alternatives do not meet market needs, the environmental impact of a carbon tax is likely to be ineffective.

A recent study (Nix 1992) finds that long distance trucking (defined as freight movements of more than 500 kilometres, which is generally where truck-rail competition begins) is a very minor contributor to the total production of emissions. So minor, in fact, that even if trucking were eliminated completely from this market, the impact on total emissions would be virtually unnoticeable. (The study estimates that long distance trucking accounts for .08% of emissions of CO, .12% of HC/VOC, 1.02% of N0x, .06% of PM and .24% of C02.) The taxpayer suggested that a carbon fuels tax may also not cause any shift from one mode to another. However, the negative impact on the provincial economy would be enormous.

A 1993 study of Intermodal Optimization of Intercity Transportation in the Quebec City-Windsor corridor for Transport Canada also found that diverting 20% of long distance truck traffic to rail would have a negligible impact on emissions of NOx and VOCs in Canada. In the end, all that would be accomplished would be an increase in the cost of transportation for Ontario shippers and manufacturers, which would impact again on their competitiveness.

OTA does not support the imposition of a carbon tax by Ontario. The province's competitiveness would be impaired and little, if any, environmental enhancement would take place. Suggestions that a carbon tax be set at a moderate rate and be accompanied by reductions in other business taxes have merit, but are only a start. Such a tax would need to be revenue-neutral, with all funds accruing back to the industry that paid them -- in order to invest in research and environmental technology -- and not to general revenues. A tall order, likely rendering this type of tax administratively impractical.