Canadian Manufacturing

Carbon tax offers best option for GHG emissions reduction: report

Authors from University of Calgary find carbon tax on energy inputs more efficient than any standard

CALGARY—A new report from the University of Calgary’s School of Public Policy says the most effective approach to reducing greenhouse gas emissions in Canada is through carbon tax on energy inputs.

“Policy-makers seeking an approach to lower greenhouse gas emissions, with minimal impact on economic efficiency and productivity, should look no further than the flat tax,” authors Jennifer Winter and Trevor Tombe write.

The authors refer to the carbon tax as a flat tax because it is neutral across industries and firms.

Regardless of where they operate—or what they produce—firms would face the same tax rate on their energy, Winter and Tombe propose.

The authors also evaluate the effectiveness of “intensity standards,” or limits on emission intensity, and their impact on the economy.

Essentially, these standards would place a ceiling on a firm’s emissions per dollar of output.

While these standards can take many forms, the authors say they all have something in common: they place different costs on different firms.

This distorts firms’ incentives, having the perverse effect of increasing the economic cost of environmental improvements.

The authors find that a carbon tax on energy inputs is more efficient than any form of standard.

Winter and Tombe admit a flat tax on energy is a tough political sell, and say if politicians are unwilling to pursue this route, a second-best option would involve a combination of setting intensity standards, allowing firms to pay fines for surpassing these standards and offering compensatory measures to prevent overburdened firms from shutting down.

This approach “may well be the policy approach they can persuade the public, and industry, to accept,” the authors write.

Winter and Tombe’s report, The importance of policy neutrality for lowering greenhouse gas emissions, can be found on the School of Public Policy website.

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