…environmental economics and the implications of environmental policy

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“Carbon tax bill in the mail”…share the carbon Love

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Now, this is getting interesting. As many had predicted, and as some teach to first year economics students (see here), consumers and not the regulated community are experiencing the “cost pass though”:

Gaz Métro passes it on $15 per year for residential customers… When the provincial government imposed the country’s first carbon tax last fall, it wanted producers to pay….[But Gaz Métro has] began charging 0.67 cents per cubic metre of natural gas that it sells to its 170,000 customers. It will then remit $38 million to Quebec this year for its new $200-million annual green fund, aimed at reducing greenhouse gases. The hike means about $15 more per year for the typical Gaz Métro residential customer.

(article here)

Is the firm worse off with this climate policy? Perhaps not, and in fact, if the total’s are not reconciled, they could be better off. And is the household worse-off? $15 is eight double-double’s at Tim’s, a weeks worth of coffee for the average Joe. Hmmmm, not so bad maybe. Can we afford this? So far it seems like a yes. Are we getting reductions? Probably not many, but let’s wait and see.

Perhaps it is better, after all, that consumers see the cost increase since carbon taxes are about reductions and not just revenue. In other energy markets, say gasoline, folks are insensitive to price increases, and carbon related increases may not stimulate reductions, but can raise revenue, as gas taxes demonstrate. In this case, the revenue can then be recycled back for any host of objectives, my favorite being reducing other taxes in a neutral shift or for investing in areas where markets fail, like R&D and some technology deployment.

But the big message from the article is that blanket assumptions that carbon costs will adversely hurt industry are clearly wrong. It all depends on the ability of the firm to pass on costs. Affordability is then the next question — can the firm or the consumer afford the cost increase? The only way to answer this question is to compare the cost with income (profits) or sales and determine if the Hit is large.

But in the case of the Quebec carbon tax, it is only Tim’s that will suffer since the value of carbon in Canada continues to be measured in “coffees lost” and not tonnes reduced.

Written by Dave Sawyer

January 29th, 2008 at 2:17 pm