The Conservatives’ new carbon tax is badly designed

Earlier today, the Conservative Party of Canada published a policy brief that introduces new environmental policies in anticipation of the next federal election. This brief includes a carbon pricing scheme, a zero-emissions vehicle mandate, and tax credits for carbon capture, among other policy proposals.

While much of the discussion of the brief has centered around the Conservatives’ apparent abandonment of their longstanding commitment to get rid of the carbon tax, it is worth pointing out that their carbon pricing proposal is essentially unworkable as described and is a clearly worse policy than the Liberal carbon tax.

The proposal 

As detailed in their policy brief, a future Conservative government would introduce “Personal Low Carbon Savings Accounts” for each Canadian (and small businesses). These accounts would be introduced alongside a carbon pricing system (essentially a tax) that would start at $20/tonne. 

This tax would be assessed at the point of purchase and revenues from the tax would fill these accounts. Currency in the accounts could only be used to buy “things that help [people] live a greener life”. The policy brief provides transit passes, bicycles, efficient furnaces, and electric vehicles as examples of items that could be purchased with this currency. 

The Output Based Pricing System for large emitters would remain in place. 

This proposal has the following issues in my view:

Difficulty and expense involved in implementation

Although this is not specifically detailed in the plan, the Conservatives have indicated elsewhere that the plan would basically work with a loyalty card type scheme, where individual purchases are registered to an account that accrues value, much like a grocery store might have. As value is accrued in the account, money can be spent out of the account on whitelisted purchases only.

Users are required in the Conservative policy to keep track of a new account system that accrues value according to certain purchases (which consumers may have to earmark themselves by swiping a card) and can only be spent on a limited variety of goods. This is a very complex system relative to traditional carbon tax implementations, which typically provide a rebate directly to the individual or tax unit and do not require any management on behalf of the user.

There is another major implementation issue with this scheme. Currently, individual transactions are not priced out such that carbon-based fuels are separate. For instance, you could pay $200 in electricity bills to an electricity provider, with half of the electricity coming from hydro energy and half coming from coal. It would be difficult or impossible to disaggregate the carbon-based fuel and other parts of this expense, at least as they are currently recorded.

Worse still would be the expenditures from retail outlets; if someone goes to a large retail outlet and purchases some gas for a barbeque and some household items, how would those items be disaggregated? Dealing with this issue may involve additional hassle for the consumer, such as sorting and scanning fuel purchases separately.  

In addition to the administrative issues for the end user, this policy will be administratively expensive to manage. Typical administration costs for tax-and-transfer programs are about 1% of program expenditures or lower, but this program is very complex relative to those systems. It is also suggested that private companies may be used to administer the program, companies that will try to make a profit and further increase expense.

The amount of account credit generated by this system would also be low relative to the administrative hassle for the user. Given that the carbon credit as described only applies to purchases of carbon-based fuels, the average credit amount generated would initially be around $100 per person per year. Based on current prices, users would get about 0.4% of the dollar value of gasoline purchases returned to their accounts, which is not much considering the annoyance of managing the card and account system.

Loss of redistributive aspect 

One of the key aspects of the current carbon tax as administered by the federal government is that it disproportionately distributes rebates to lower income people. The goal of the program is to place more of the burden of the carbon tax on higher income people, people who can more easily afford higher expenditures. 

The Conservative proposal has no such redistributive aspect. Instead, people get out of the system an amount that is pegged to the amount they pay into the system. This makes it so that the costs of moving to a low-carbon economy (as represented by the tax) are borne both by low income and upper income, instead of being slanted towards upper income people with greater ability to pay. 

In short, I doubt that the proposal would be implementable as described. Even if it was made to function effectively, it would be worse than the existing federal carbon tax for distributive reasons.