Detailed Response to Contradictions
Canadian Cap and Dividend takes a tiny step to resolving Contradiction A (direct tax on Canadians) by pushing the cost as far away from the consumer as possible. In fact, because the permits are pushed upstream to the point fossil carbon enters the economy, the costs are, in fact, even farther removed from the consumer than the Cap and Trade mechanism which the NDP supported. In theory, imposing the financial burden early in the production cycle encourages efficiency throughout the economic system and minimizes the burden to the consumer, so in that sense, this proposal improves on the NDP model and satisfies the NDP complaint in point 7 (directly taxes Canadians).
If, however, the underlying NDP concern in point 7 is interpreted to be a worry that vital necessities such as home heating, electricity and transportation to work could potentially be priced out of range for vulnerable Canadians, then pushing the costs upstream doesn't necessarily help. This is the heart of Contradiction B (vulnerable citizens). These fundamentals are not directly taxed by the Cap and Trade model that the NDP proposed. It is imperative that we do not suddenly impose an impossible financial hurdle on Canadians living in energy poverty. The NDP are correct in insisting on this point.
Here's an analysis of the NDP concerns as regards these vital necessities:
With regard to electricity, it's important to note that this proposal would have a substantially lower impact on the Canadian consumer than a Cap and Trade mechanism as supported by the NDP. Both plans would target power plants that burn fossil fuels. However, by focusing the market mechanism on just half the economy, the cap on that portion of the economy would have to be stronger, driving up the costs, so the electricity from burning coal for generation would be driven up more by relying on Cap and Trade as opposed to an economy-wide mechanism. There are additional benefits to taxing upstream, which would tend to increase efficiency along the line and minimize consumer cost increases.
If the excise tax on gasoline is stripped away, that burden on taxpayers is effectively removed. Under the Liberal Carbon Tax plan, this guaranteed that the new tax shift would not further burden Canadians who depended on cars to get to work. Because Canadian Cap and Dividend is based on a cap rather than a tax, emissions reductions are guaranteed as the NDP demanded, but prices are not. It is theoretically possible that the associated costs could rise higher than the excise tax. This seems to be a risk the NDP are willing to take for the sake of a guaranteed cap, but it is something to watch for. What remains is a residual concern about home heating. The NDP hoped to bring down the demands for fossil fuels in home heating through a retrofit programme prior to introducing any market incentive.
This NDP plan should be adopted in tandem with this proposal, and it is hoped that this will encourage the NDP to support this plan, especially if renters and low-income owners are specifically targeted through incentive programmes. The concern about home heating is of tremendous concern, not just because of climate change but because of resource scarcity as well. This issue is addressed in a corollary recommendation along with a more robust response to the issues of threats to vital necessities.
The reality is that we do not have time to retrofit Canadian homes prior to enforcing reductions of fossil fuel use for home heating. If we continue to retrofit homes at current rates and require every single retrofit in Canada to involve a conversion to non-fossil heating and cooling (which would involve a great deal more work than the average retrofit today), it would take us 40 years to convert existing building stock, virtually all of which is inadequate for a post-carbon future.
It should be noted, however, that for most Canadians, and especially for low-income Canadians, all of these cost increases should be more than offset by the dividend cheques that all Canadians will receive.
Because this is a monetary compensation that the NDP Cap and Trade plan did not offer, Canadian Cap and Dividend is far more generous to vulnerable Canadians than the NDP's proposed plan, and offers Canada's most vulnerable the means to shift to a more energy efficient lifestyle.
Underlying both Contradiction A and Contradiction B is a reluctance by the NDP to accept a market-wide mechanism. The reasons for this opposition are unclear. The stated concern about consumer harm is hard to understand, since a number of economists concluded during the election what should have been obvious to all – that a revenue neutral approach is far more likely to be gentle on the consumer than the NDP's approach which would have used funds for promoting a green shift but would have done little for those living in energy poverty. It's important to offer the NDP a plan that unequivocally addresses its stated concerns so that the party can promote it as a real solution to the problems it identifies. However, it is imperative that the plan adopted be market-wide in nature. This was the real promise of the Liberal Carbon Tax plan, it is what environmental groups are advocating for and what the Liberals should demand in a consensus. It is hoped that the NDP can be prevailed on to soften their stance somewhat on the issue of adopting a market-wide approach. There are a number of reasons why the NDP should be willing to do this.
The first reason is that the NDP have had historically good relationships with environmental groups and will want to cultivate them. The Sierra Club issued report cards for the various political parties during the 2008 elections and made it clear that they favoured the economy-wide Carbon Tax to the more limited Cap and Trade, and doubted that necessary emissions targets could be achieved with just Cap and Trade. Greenpeace offered its qualified support for the Liberal tax shift. The Pembina Institute and Sierra Club issued a joint assessment favouring the carbon tax. The Suzuki Foundation has favoured the carbon tax throughout. Furthermore, it is apparent that a good part of the reason why ENGOs support the Carbon Tax is precisely its economy-wide nature. If the NDP hopes to regain a claim as an environmental leader, it needs to offer a better plan, and it must be an economy-wide plan.
Having attacked the Carbon Tax specifically, it would be very difficult for the NDP to support another version of a Carbon Tax. The hope is to offer the NDP a plan they can rally around.
The other reason NDP leaders should embrace a market-wide mechanism is that their claim that Cap and Trade wouldn't affect consumers was not accepted by economists and analysts. The costs of large final emitters are inevitably passed down to consumers. If Cap and Trade were to be as effective as the Carbon Tax, as the NDP claimed, the large final emitters would have had to cut enough carbon to make up for the whole rest of the economy. The costs would be especially high because more expensive emissions reductions strategies would have to be resorted to. Restricting the market mechanism to certain sectors dramatically increases costs. All these costs would have been passed down to the consumer.
Furthermore, because the NDP hoped to collect revenues by auctioning off emissions credits and keeping them for enhanced government services, consumers would not have seen the monetary relief they would have enjoyed under the Liberal plan, so the financial burden on most Canadians would have been greater under the NDP plan than under the Liberal plan. While some of these burdens might have been alleviated by the spending the NDP proposed for promoting fuel efficiency and home retrofits, none of this spending would have addressed Canada's most vulnerable – the unemployed moms in leaky rented apartments.
The distribution system in Canadian Cap and Dividend is extremely generous to Canada's most vulnerable. Emissions are closely correlated with income, so the consumer costs of a market mechanism for emissions reductions will be borne disproportionately by the wealthy. The real concern for lower income Canadians is that they can ill afford any increase in costs at all. To a tremendous degree, it is the way that revenues are redistributed that determines the overall impacts of any market mechanism.
The tax shift proposals of the Liberal Party and the Green Party both relied on complicated redistribution schemes that reduced tax rates differentially in different tax brackets and added additional funds for vulnerable Canadians such as elderly, rural and northern Canadians. While care was taken to make sure that most low income Canadians would not be adversely affected, a higher income earner would generally have received a slightly higher rebate than a lower income earner.
Canadian Cap and Dividend begins with an assumption that the climate is part of a shared global commons. We all need it for our survival and we all suffer when it is harmed. While it is correct that bigger polluters should pay more, the proceeds should be distributed evenly, so that every Canadian is compensated equally for the damage done. A higher income earner should not be entitled to a higher share of the revenues collected because he is not more affected by climate degradation. In fact, he is in a better position to address the problems that climate chaos brings.
It's theoretically possible to allocate revenues so that low income Canadians collect even more dollars than higher income Canadians. It's even possible to allocate all revenues from a market mechanism to the lowest income Canadians.
The reason Canadian Cap and Dividend specifies equal distribution is that it is emotionally satisfying to know that everyone gets an equal share. If established as a principle, the distribution won't be subject to constant political haggling. It is a distribution that has a sound basis, in that it stems from a principle that no Canadian has any more or less inherent right to a safe climate. And because wealthier Canadians will contribute more to the revenues and still get the same amount, we can be reasonably certain that most low-income Canadians will benefit rather than being hurt by this proposal.
Contradiction C (revenue-neutrality) involves an interpretation about whether the Liberal tax shift was truly revenue neutral. Whatever the answer to this particular question, the reality is that any scheme that pools revenues from an emissions reduction strategy with general revenues can never be demonstrably revenue neutral. Revenues vary from year to year based on a number of economic factors. Revenues from an emissions reduction mechanism will also go up and down. In a very short time, it will simply become part of a big pool and the details of how much income tax reduction is attributable to the revenues from a Carbon Tax won't matter anymore and won't be remembered. Only the inexorable rise in the price of carbon will be obvious to all. If we want to demonstrate that a mechanism is revenue neutral, it's best to have the revenues funneled through a separate, arms-length agency that simply transfers the funds wholesale to Canadians.
There is another reason to do this. The Carbon Tax is a sin tax, as is any system that raises the costs of emitting fossil carbon. When we rely on a sin tax for general revenues, we have a perverse incentive to maintain that revenue stream. It hurts government services when Canadians reduce their use of fossil fuels. Separating out the revenues from our emissions reduction mechanism means that Canadians will get compensated for precisely the amount of carbon that we've put in the air.
The concern about relying on a sin tax is especially acute for mechanisms that are based on a cap rather than tax-based systems. A tax based system has a relatively reliable income stream directly related to the amount of fuel used, which changes relatively slowly. Cap based systems can produce significant price volatility and the resulting revenues can vary dramatically. Basing government programmes on such wildly varying revenues challenges and threatens those programmes.