The Simple Solution

"Pollution must have a price tag. It is currently too cheap to pollute and too expensive not to."

-Don Drummond, Chief Economist, TD Bank (March 7, 2007)

The debate on the various ways to put a price on carbon - a goal now endorsed by a wide range of think tanks and NGOs, from the National Round Table on Environment and Economy to the Canadian Council of Chief Executive Officers - needs to take place in a proper factual context.

A carbon tax is a policy response to two crises: higher energy prices brought on by declining reserves of conventional, accessible oil; and the gathering storm of climate instability. Before plunging into the rationale for carbon taxes, one thing needs to be clear: Doing nothing is not an option. Energy prices will continue to climb if we do nothing. And the ultimate costs of the climate crisis - as estimated by Sir Nicholas Stern, former senior economist to the World Bank - will be in the trillions. We are faced with nothing less than a catastrophic threat to our children's future.

In order to bring down greenhouse gases at anything like the rate recommend by the Intergovernmental Panel on Climate Change, we will need a wide array of programs and regulations. We will also need to harness the market to send a meaningful pricing signal to the economy. In this regard, the most popular mechanisms to harness the market are cap-and-trade and a carbon tax.

This need not be an either/or proposition. The Green party believes a cap-and-trade system - of the type advocated by the NDP, for instance - can help bring down emissions from the largest polluters. In particular, such an approach might be used in certain sectors - allowing coal-fired electrical plants to trade carbon credits amongst one another, for instance, as the cap goes down on their collective emissions.

But to bring down emissions in the nation as a whole, and provide the fiscal flexibility needed to significantly reduce the tax burden and alleviate energy poverty, we also need a carbon tax.

A carbon tax has the advantage of minimal new bureaucracy. It can be implemented quickly, and most economists see it as the most effective approach. As The Economist magazine put it in a 2006 editorial: "Ideally, politicians would choose the more efficient carbon tax, which implies a relatively stable price that producers can build into their investment plans." In contrast, cap-and-trade has high transactional costs and a greater risk of fraud. It is likely best reserved for targeted sectors.

The essence of the Green party plan is the Green Tax Shift. We propose a tax of $50/tonne on carbon. This would be applied at the tar sands and at the pumps. Our carbon tax would bring in $40-billion to the federal treasury every year -- thereby allowing significant decreases in income and payroll taxes, as well as income-splitting within families.

The funds also would allow us to raise the minimum level at which our lowest-earning taxpayers start paying income tax, as well as increasing income supports to seniors and the poor. Any carbon-reduction plan also needs to exhibit regional sensitivity, for the benefit of rural Canadians who are reliant on fossil fuels as we also want to buffer effects for those who use fossil fuels to earn a living, like farmers and fishers.

It is nonsense to claim that consumers can be shielded from price increases under either cap-and-trade or a carbon tax. But the benefit of the tax shift I advocate is that cuts to income taxes and payroll taxes will reduce the pain of rising fuel prices. In fact, most Canadians will be better off. They will also make sensible decisions, such as getting a more fuel-efficient vehicle or a home energy audit.

Such a plan must evolve. Over time, a carbon tax would have to rise as the amount of carbon being used shrinks. Eventually, over decades, with carbon virtually eliminated, another tax shift will be needed.

As noted recently in these pages, some Canadians are skeptical that a government would ever keep the carbon tax revenue-neutral by returning the newly levied funds to the taxpayer. One advantage of the Green party approach is that, with the generation of $40-billion in new revenue, no government could get away with failing to use such an enormous cash influx to improve Canada 's economy.

Overall, our Green Tax Shift is all about cutting taxes while cutting greenhouse gases.

Elizabeth May, O.C., is leader of the Green Party of Canada .

This article was first published in the National Post on Wednesday, June 4th, 2008.

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