…environmental economics and the implications of environmental policy

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Yoda advocates a carbon tax….he wants a level playing field cause he is smart

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David Suzuki today released a carbon pricing and revenue recycling report today authored by Nic Rivers and myself (suzuki-carbon-report-en-web.pdf). In the report we apply a carbon price of varying levels within a general equilibrium model of the Canadian economy and then test alternative revenue recycling and tax shifting options. We find that with smart revenue recycling that the GDP impact can be halved if other taxes are reduced. How much? Well lots actually.

At $100 per tonne, the Government’s Turning the Corner target is more or less achieved with a GDP loss in 2020 ranging between 1.3% and 0.5%. If taxes are reduced like payroll or income, the GDP impact is lower, and in the range of 0.5%. With a carbon tax or fully auctioned permits, but with no recycling, the GDP impacts are higher, and could double the cost of attaining the same target. Again design matters to the efficiency outcome.

What else happens?

The economy continues to grow. Even with carbon pricing, the Canadian economy will continue to grow and expand;

Income taxes could be halved from an average rate of 22% to 13% (not the marginal rate)

Exports fall but so do imports and thus Canada’s balance of trade actually improves.

And Canada’s exchange rate improves.

So, lots of outcomes to explore, but I think the most interesting finding is that even with carbon pricing the costs of the policy can be very different. And if we implement regulations as the primary policy, I suspect all bets are off, with very high costs indeed.

What this report really does is highlight that with carbon policy there are more questions than answers. I am just glad folks like Dr. Suzuki are asking questions.

Written by Dave Sawyer

February 25th, 2008 at 4:25 pm