Will carbon tax get more New Brunswickers off oil?

Do you think this is true? – “The price of oil will go down if we use significantly less of it.” The law of supply and demand indicates that if supply is relatively fixed, then demand will determine whether price goes up or down. So how are we going to use less? Maybe all of your neighbours will buy a hybrid or a diesel car and you won’t have to change a thing in your life.

Perhaps we can wait for the market to give us even higher prices and then we will conserve. That’s the philosophy of our energy minister Jack Keir and he’s not entirely wrong. However, in a case of inelastic demand and fixed supply or worse, then the market will raise prices until demand is destroyed. A friend told me that even when it costs $300, he’s going to fill his gas tank. Naturally, those who have the means will be able to maintain their lifestyle. The price of gas has almost doubled in the past year but how many people have really changed their driving habits to conserve?

The market can be rough on fishermen, farmers, and truckers who use large quantities of fuel and who sometimes get squeezed between rising fuel and low prices for their products. We can expect to hear screaming from those sectors in the near future. Unfortunately, the average Jack and Jill will have to make unpleasant choices in the near future, and that may include parking the car.

With the recent increase in gas prices, Canadians are feeling a little economic stress. We’re paying $55 billion more per year (or $1700 more per capita) for oil based products since last year. That means less money for consumers to spend on restaurants, vacations and other discretionary items.

Historically, the price of carbon based energy has been cheap and has been taxed at a low rate in North America. Economists argue that the market price for fossil fuels doesn’t account for external factors such as pollution and CO2 gases. Carbon taxes are intended to rebalance the business equation – to add a penalty for pollution, discourage greenhouse gases, make renewable energy more competitive, and also encourages conservation of fuel.

What would be the impact of a carbon tax and is it necessary?

British Columbia is the first in North America with a comprehensive consumer based policy, starting with a 2.4 cent increase at the pumps and $10 per tonne of CO2. These amounts will gradually increase until 2012 at which time the gas tax will be 7.2 cents and the CO2 will be $30 per tonne. The tax is revenue neutral although the provincial budget has increased expenditures to reduce the effect of climate change. The cost to the consumer at the gas pumps is expected to vary between $20 and $65 dollars per year based on vehicle efficiency.

The BC legislation increases the cost of gas only 2% initially with a total of 5% when fully implemented in 2012. The Green Party suggests a more aggressive 12-cent hike as their policy. To put this into perspective, a 10-cent increase in the cost of diesel happened in mid May in New Brunswick. After a few days of discontent, it was back to business as usual for most people.

Quebec introduced a carbon tax in 2007 on oil and gas companies at the wholesale level to finance a green fund to reduce CO2 emissions. As the majority of electric power in Quebec is from hydropower, there is little effect on electric prices.

Carbon taxes have existing in Finland and Sweden since the early 90’s and those economies are doing well. It has been demonstrated by the European example that higher fuel prices help people choose vehicles that have excellent mileage. Fuel including taxes in Europe are about $2.10 a liter as opposed to $1.32 in Canada.

The BC Liberals, federal Liberal, or Green Party have implemented or propose systems that are revenue neutral (easier to sell). This means that for every $100 in new tax, $100 is returned to Canadians in reduced personal, corporate tax, or other method. Prime Minister Stephen Harper seems to skip over the revenue neutral part and paints a carbon policy as a tax grab. His approach to reducing emissions has been to build a regulatory environment so complex and mysterious that greenhouse gases will give up out of frustration – far in the future, of course. The NDP is opposed to a carbon tax and favours the cap and trade model. Ontario and Quebec just announced a plan to implement a cap and trade system for their two provinces, which was immediately denounced by the federal minister, John Baird.

So we have ideas floating all over the map. Perhaps we need have a reasoned discourse on the subject of greenhouse gases and peak oil and determine what we need to do to be effective. Taxes at the right level are only a small part of the solution. I like the simplicity of a carbon tax and believe that as proposed, it is harmless to the economy but won’t do much for peak oil as well. “Much ado about nothing” as Shakespeare would say.

We haven’t seen the last of the energy file. Next stop will be panic driven interventions in energy conservation and off-oil efforts. Fatih Birol, chief economist of the International Energy Agency urgently recommends to the world “leave oil before it leaves us. The really important thing is that even though we are not yet running out of oil, we are running out of time.”

Do you think we’ll be ready?


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