Most economists agree that a carbon tax is the best policy instrument to reduce emissions. It is relatively quick and simple to implement, easy to explain to the public and seems to work (i.e., actually achieves emission reductions). And it could raise a fair amount of money. The Ontario government stated very clearly in 2013 that a carbon tax wasn’t on the table (.pdf), but let’s imagine that it is.
We can only speculate on the design of a carbon tax in Ontario, but let’s make a few assumptions in order to estimate the magnitude of the revenues that could be raised. If Ontario’s hypothetical carbon tax was set at the same level as that of British Columbia ($30/tCO2e – tonne of carbon dioxide equivalent), and covered the same companies that now report their annual greenhouse gas emissions to the province (facilities that emit more than 25,000 tCO2e), then the tax would conceivably raise about $1.5 billion per year.
That’s a lot of money. There are many ways the carbon tax revenues could be used, depending on the priorities of the government. There are trade-offs between the various ways to use the revenue – some are more popular with the public than others; some are more economically efficient, and so on. Not everyone will agree on the best way to spend this large sum of money, but how the government chooses to use the revenue matters.
In British Columbia, an early adopter in North America of a carbon tax, the tax was made revenue neutral in order to gain approval from the public. Revenue neutrality means that all revenues from the tax are returned to individuals and businesses through reductions in other taxes, i.e., the money does not go into general government revenues to fund other programs or reduce deficits. People get used to the personal and corporate tax cuts, making it more challenging for future politicians to eliminate. And, it puts that money right back into the economy where it belongs.
Research has shown that public support for a carbon tax hinges on how the revenue is used. In one American poll, the public supported a carbon tax most when the revenues would be used to fund renewable energy.
Other revenue use options include: investing in or subsidizing technological solutions that reduce emissions (e.g. public transit, building insulation, energy efficient appliances, and low-emission vehicles); investing in adapting to climate change; issuing lump sum rebates to lower-income households (who would be most adversely affected by the carbon tax); or reducing the deficit. As in B.C., corporate and personal tax rates could be reduced, although Ontario’s corporate tax rate is already competitive with other provinces (.pdf). Other taxes could be targeted, including taxes on capital investment (corporate taxes or personal income rates on interest, dividends, or capital gains) or consumption. The economic effects of various carbon tax revenue use options has been modelled, at least in the United States, with the most economically beneficial option being reducing other taxes. Of course how the revenue is used has political ramifications, so the most economically efficient use is not always the one chosen.
I support a price on carbon, as I have previously noted, and would like to see Ontario implement some sort of carbon pricing soon. A carbon tax should be back on the table as a viable option. The revenues would provide a boost to the economy, and engage the public on climate change.