This post features excerpts from Choose Wisely, Canada’s Ecofiscal Commission report on the options and trade-offs for recycling carbon pricing revenues. It’s an excellent and timely report which I recommend to all BoomerWarrior supporters.
The primary and most important objective of pricing carbon is to reduce greenhouse gas emissions. Signatories to the Paris Agreement have set emissions-reduction targets designed to keep global warming below 2C. Carbon pricing will be one of the tools nations will need to implement to reach their respective goals. (Editor for BoomerWarrior—Rolly Montpellier).
Recycling Carbon Pricing Revenues
Standard YouTube Licence
Published April 5 2016
Carbon pricing creates financial incentives for households and businesses to adjust their current consumption, production, and investment patterns, and also to adopt and develop new and less GHG-emitting technologies in the future.
At the same time, carbon pricing policies—whether through a carbon tax, a cap-and-trade system, or a hybrid of the two—can generate substantial revenue for the provincial governments involved. [The report explores] six options for revenue recycling.
Image credit: Canada’s Ecofiscal Commission
Transferring Revenue to Households
Governments can give carbon pricing revenues directly back to individuals or households. These transfers could be distributed, for example, by issuing cheques of equal value to all residents of a province. If all revenue is recycled in this fashion, the policy amounts to what is often called a “carbon fee and dividend”.
Transferring revenue to households is a progressive way of recycling revenue… The impact of a full carbon dividend is clear: households directly receive equal shares of the total carbon revenue. This approach is highly progressive, because dividend payments would make up a proportionally larger share of income for lower income households… transferring revenue to individuals or households may also be fair in the broader sense that all individuals have equal ownership of the atmosphere; therefore, each should be compensated equally for emissions added to it, as long as each also pays for their own emissions.
An approach in which all revenue is transferred to households is also highly transparent: carbon dividends are obviously a direct function of the carbon tax. Without the carbon price, the transfers would not exist. Such an approach is also explicitly revenue neutral for the provincial government.
Reducing Income Taxes
Governments could recycle revenues by reducing personal or corporate income taxes. Under this approach, the carbon pricing policy would be a tax shift without a net increase in the overall tax burden. This approach is used with British Columbia’s carbon tax, in combination with targeted transfers to low-income and rural households.
The core argument for using carbon pricing revenue to reduce existing income taxes (either personal or corporate) is the economic benefits that follow from such tax reductions. Income taxes affect behaviour by changing incentives. Lower personal income taxes provide incentives for greater work effort and greater saving, both of which influence long-run growth. Lower corporate income taxes provide incentives for more investment and innovation, which also drive long-run growth. Of all approaches to revenue recycling, reducing personal and business income taxes is likely to be the one most likely to improve productivity and economic growth
Recycling revenue by reducing personal and corporate income taxes will likely stimulate consumption, production, and investment. Some of this increased economic activity will be associated with greater GHG emissions. But the carbon price itself provides a powerful economic and financial incentive for all new growth to be “cleaner”—expenditure on goods and services that are less emitting, and production of goods and services that rely on low-emitting energy sources and other inputs.
Investing in emissions-reducing innovation and technology
Governments can recycle their carbon pricing revenues so as to provide additional incentives for reducing GHG emissions. Government can support the adoption of existing low-carbon technologies; it can support the improvement of emerging technologies; and it can assist in the development of wholly new technologies…. these developments could also lead to opportunities in international markets for Canadian businesses; as other jurisdictions introduce or increase carbon prices, global demand for emissions-reducing technologies will continue to increase.
Complementarities between carbon pricing and technology investments can also lead to environmental benefits. As discussed above, successful investments in low-carbon technology can lower costs of abatement. This in turn can allow pricing policy to achieve deeper emissions reductions at a given price. It can also make more stringent policy possible by lowering the costs of achieving a given level of emissions reductions.
Investing in critical public infrastructure
Governments could use carbon pricing revenue to invest in public infrastructure, thus reaping the direct long-run benefits that typically come with such investments… Depending on the nature of the specific investments chosen, economic and environmental benefits might result. Investments in public transit, for example, could drive both economic and environmental benefits. In contrast, new bridges might improve mobility and trade, but are unlikely to reduce GHG emissions.
Perhaps the strongest argument for recycling carbon pricing revenues into infrastructure investments is that such investments can spur economy-wide productivity improvements that enhance long-term economic growth… Low emissions public transit, high-speed electric rail, and charging networks for electric vehicles are examples of investments that would have a long-run effect of facilitating greater emissions reductions.
Reducing government debt
In cases where public indebtedness is already very high, the economic case for debt reduction is quite powerful—as it was in Canada during the early 1990s…[However] debt reduction also lacks an intuitive connection to GHG emissions reductions and the primary objective of the carbon price. The intangibility and long-term nature of the benefits from debt reduction explain why it typically garners little public support. Future generations—namely, those currently too young to vote, or perhaps not even born yet—will accrue the largest benefits of debt reduction, but are not surveyed in today’s public opinion polls. Pure self-interest suggests that today’s voters might prefer a different approach to revenue recycling.
Providing transitional support to industry
Governments could use carbon pricing revenues to ease the transition for the firms and industries whose competitiveness is most affected by the policy… an effective form of support might involve the government forgoing revenues— for example, by providing free permits in a cap-and-trade system or by offering rebates of a carbon tax. In both situations, the support provides the firms in question with financial resources that reduce the average cost of compliance with the policy. At the same time, however, the firms still face a carbon price and thus continue to have an economic incentive at the margin to reduce GHG emissions.
Policies of transitional support raise a concern if the perceived availability of free allocations or tax rebates leads to widespread lobbying of government by various groups seeking to receive special treatment.
All the revenue-recycling approaches….have clear benefits. Providing dividends to households can improve the fairness of carbon pricing, and can also build public support for the policy. Reducing existing taxes can generate significant overall economic benefits and can also make the policy more politically durable. Investing in clean technology can drive additional emissions reductions, complementing the carbon pricing policy to make it more cost-effective, especially in the longer term. Investing in critical public infrastructure can boost long-term productivity, and may also enable additional emissions reductions. For jurisdictions with high public indebtedness, reducing government debt can generate long-term economic benefits and also improve fairness for future generations. Providing transitional support to industries can directly address the challenge of business competitiveness and improve support for the policy within the business sector.
Based on 2013 greenhouse gas emissions and a $30 per tonne carbon price, the provinces of British Columbia, Alberta, Ontario and Quebec could respectively collect $1.4-billon, $5.8-billion, $3.8-billion and $1.8 billion annually. “These are serious numbers,” says Ecofiscal Chair Chris Ragan
Rolly Montpellier is the Founder and Managing Editor of BoomerWarrior.Org. He’s a Climate Reality leader, a Blogger and a Climate Activist. He’s a member of Climate Reality Canada, Citizens’ Climate Lobby (Ottawa) and 350.Org (Ottawa), the Ethical Team (as an influencer) and Global Population Speakout.