One definition of an economist is someone who takes something that works in practice and wonders whether it would work in theory. I think its a great description of the dismal science and I find myself falling into this stereotype from time to time. Most recently, its B.C.s carbon tax that has caught my attention. It's been in place for a few years now and while its working well enough in practice, there are some theoretical implications that really have me scratching my head.
Carbon taxes are intended to reduce carbon consumption. Just as other "sin" taxes, such as on tobacco and alcohol are intended to lower consumption of those respective activities, a carbon tax should do the same to carbon emissions. However, due primarily to its role in energy production, there is embedded carbon use in pretty much every good and service we produce and consume. While B.C. taxes carbon directly produced within B.C.'s borders, much of the carbon impact of our consumption decisions takes place outside borders. This produces a number of counterintuitive effects.
Let's look at cement. Making cement is an energy, and therefore carbon, intensive process. Its also fairly price inelastic, meaning the demand for it is not affected much by changes in price. Since B.C. introduced the carbon tax, cement production has dropped significantly. So on the face of it, the carbon tax is working. However, cement consumption in B.C. is more or less the same as imports have risen to replace domestic manufacturing. These imports due not pay the B.C. carbon tax. So total carbon emissions are more or less unchanged while the B.C. economy has suffered.
How about the forestry industry? There is a lot of talk about the need for "value added: in the forestry sector in order to create good paying jobs. I couldn't agree more. But is subjecting our softwood lumber manufacturers to a carbon tax on their production going to achieve that? No, it won't, because the carbon tax is effectively a tax on processing which is another term for value added. In fact, what this might encourage is the export of raw logs to places like Washington and Oregon where they can be processed carbon tax-free and then reimported to be B.C. where they compete unfairly with domestically manufactured lumber. Again, not only are we not reducing carbon emissions, but we are putting the B.C. economy at a competitive disadvantage.
I am in favour of shifting from income based to consumption based taxes. I also think that a carbon tax has at least the possibility of being an efficient mechanism to reduce carbon emissions. However, there are some unintended consequences associated with B.C.'s imposition of the carbon tax that should have us all concerned. In next week's column I will lay out some suggested improvements. Stay tuned.
