Carbon pricing is not a market-based solution

Published on August 06, 2016
In a recent column (“Conservatives are dismantling their credibility in economics by campaigning against carbon pricing,” August 1), Stephen Gordon accuses Conservatives of “frittering away the remnants of their intellectual capital in economics” by opposing a federal carbon tax or cap-and-trade system. A market-friendly party should, in his view, instead promote these “market-based policies.” I beg to differ.
First of all, there is a huge confusion about the meaning of words here. It is true that putting a price on something and then letting market participants adapt to the change in the way they see fit is a more flexible and less intrusive way of intervening in markets than intrusive regulation that tells them exactly what to do and how to do it. But that doesn’t make it a “market-based policy.” No more than imposing a minimum wage is a market-based policy simply because the government lets businesses decide how many people to fire or hire at the new wage level instead of imposing quotas.
A cap-and-trade system is a hugely complicated artificial market whose basic features are all determined by government intervention. When the quantity of something is arbitrarily determined by bureaucrats, or when you can lobby the government to get an exception or a better deal for your industry, we’re very far from a market.
In the same way, when the “pricing” mechanism is a tax, it should be more than obvious that we’re not talking about a real pricing mechanism based on private property and free markets, but about a government measure. Almost everything about a carbon tax is determined by the government, from its arbitrary level which can change in ways unrelated to supply and demand, to what it applies to and what to do with the revenues it generates.
So, proponents of carbon pricing should stop pretending that these policies are necessarily congenial to a free-market conservative approach and call a spade a spade. Instead of market-based policies, let’s talk about various government-imposed measures to deal with carbon emissions, some of which may be more intrusive and others more flexible.
Now, there is no way of establishing property rights on the world’s atmosphere, and a real market-based way of pricing the externalities that constitute carbon emissions will thus never arise. A government-imposed measure is probably the only way to deal with carbon emissions, just as we dealt for example with acid rain and ozone depletion. But that doesn’t mean that adopting such a measure at the federal level is the best way to go.
Let me give Mr. Gordon a few reasons why a market-friendly Conservative would not want that to happen.
The first and most important is that to really have a substantial impact on people’s behaviour and ultimately on Canadian carbon emissions—which would still have barely any effect at the planetary level, given that Canada is responsible for only 1.6% of global emissions—a carbon tax should be a lot higher than 20$ or $30 a tonne. And if it is significantly higher, it will very negatively impact Canada’s economy and Canadians’ standard of living.
That alternative between inefficiency and disastrous economic consequences is something proponents of carbon pricing never openly recognize when they give us this rosy picture of a market-friendly measure. It’s just supposed to help us reach emission reduction targets without being too costly and while necessitating only a modest adaptation to our way of life. I frankly find this stance hypocritical.
Our prosperity is, and will remain for decades to come, dependent on fossil fuels to a large extent. Apart from extremist green activists, very few Canadians want to see their standard of living significantly reduced to contribute in a negligible way to the global fight against climate change. And it’s perfectly logical to want to grow our economy as much as possible to better deal with the consequences of climate change rather than hurt our economy now and jeopardize our ability to adapt in the future.
A second reason is that provinces are already experimenting with various ways to reduce emissions. Some have a carbon tax, others have a cap-and-trade regime, still, others are focusing on carbon capture or direct regulation. Several also have programs to subsidize electric cars or renewable energy that only seem to waste money and drive up costs to businesses and consumers.
We’ll see over time what model is most effective in reducing emissions and least detrimental to the economy. But there is no reason for Ottawa to impose another layer of government intervention on an already complex and costly series of measures whose effectiveness has yet to be demonstrated.
A third reason is that the transition to other sources of energy is already taking place, as companies respond to consumer demand for more environment-friendly products. The federal government should help it along by reducing taxes, barriers to innovation and competition, and ineffective and costly regulation. This is a real market-based policy that Conservatives should support.
- Maxime Bernier