Dion on gas prices and carbon taxes

2008-06-20

in Canada, Economics, Politics, The environment

Bulldog puppy at eleven weeks

Asking a politician to defend climate change policy in courageous moral terms may be asking too much. Just today, Stephane Dion had to go to great lengths to argue that the carbon tax being contemplated by his party will not increase the cost of gasoline. Designing the tax in such a way may be politically necessary now, but what it fails to communicate is the basic rationale behind taxing carbon at all. It isn’t something the government does to raise revenue. Rather, it is an intelligent intervention to correct a market failure. Even with gasoline at current prices, consumers are not paying the full costs associated with their choices. They are paying for oil exploration and the expansion of expensive alternative fuel options. They are paying to outbid increasingly affluent and fuel-thirsty people in rapidly developing countries. They are not paying the costs associated with the huge risks greenhouse gas emissions pose for future generations.

If we are to deal with climate change, there must be a profound societal acknowledgement of two things: that present-day lifestyles are profoundly harmful to others and that people do not have the right to impose such harm, even when they have been mindlessly doing so for a long time. That moral case is at the very heart of carbon pricing and climate change mitigation in general. Pretending otherwise cheapens the debate, as well as making it shallower. Carbon taxes now may indeed be a useful vehicle for encouraging people to make smart investments in the face of rising fuel prices, but that is not and should never be the core of the justification for them.

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{ 31 comments… read them below or add one }

. June 20, 2008 at 10:06 am

Tax the “bads” not the “goods”
Thursday 19 June 2008 at 5:43 pm – Julia Langer

The country is abuzz about the “tax shift” concept put forward by Stephane Dion today. It is absolutely fantastic to have climate change – solutions to climate change – being top of the news, discussed in coffee shops, and probably a key topic in the next election, whenever that comes.

The notion of a carbon tax was more or less out on the street before the formal announcement, but now we have a better look at the details.

. June 20, 2008 at 10:06 am

“The proposal is to tax wholesale fossil fuels (which covers about 75% of Canada’s emissions) and return the revenues as income and corporate tax cuts and special credits. The tax rate starts at $10 per tonne of carbon (the higher the carbon content of the fuel, the higher the tax, which means coal highest, natural gas lowest, wind, solar, hydro free). It escalates to $20, $30, and $40 in the next years. Given the political hot-potato of rapidly rising gasoline prices, they’ve counted current taxes as part of the tax, meaning no new tax on gasoline until the fourth year.”

. June 20, 2008 at 10:31 am

A double and confusing message
From Friday’s Globe and Mail
June 20, 2008 at 8:49 AM EDT

After a Parliamentary session dominated by scandals and slurs, Stéphane Dion deserves some praise for his efforts to switch the political channel to environmental policy. In a major speech, along with a 48-page booklet, the Liberal Leader has outlined an intricate carbon tax that is purportedly revenue-neutral, trimming income taxes to compensate for new levies on most fossil fuels.

It is a daring and perhaps foolhardy move, distracting public attention away from the Conservatives’ blunders, with a Liberal redesign of the tax system. And contrary to the claims in a Conservative ad campaign, this is a serious proposal to cut $15.4-billion from income taxes in its fourth year, while “putting it in law that every dollar that is raised from carbon pollution will be returned to Canadians in tax cuts.”

Many Liberals, however, may come to rue Mr. Dion’s unfortunate timing, as fuel prices soar. The plan was made public a few hours after Statistics Canada declared that gasoline prices were up 15 per cent last month from May, 2007, pushing the Consumer Price Index to its sharpest monthly increase in 17 years. Although oil prices dropped yesterday as China raised its fuel prices, they remain near historical highs

Tristan June 20, 2008 at 12:07 pm

A carbon tax raises the price of fuel. If the price of fuel is artificially high (speculation), then the extra cost a carbon tax would have added has already been added by the market.

Carbon tax is only effective because it increases the price of fuel, encouraging people to take other choices than single occupancy cars. The price of fuel has risen a higher proportion in the last year than ever, discounting the opec crisis.

It seems the only reason to add a carbon tax to fuel is ideological – to make the point that we need to also include the climate change component in the price of fuel – but what difference to people’s behavior will another 3 cents make, when fuel has already gone up 50 cents?

I don’t think it matters either way, a carbon tax on fuel would add 1 or 2 percent to the cost of fuel, pretty negligible. Political expediency is more important here.

Anonymous June 20, 2008 at 12:28 pm

I am not sure how smart it is to mingle climate and social policy.

The Green Shift plan includes benefits for children, disabled people, etc. While that may be laudable, it distorts the simple notion of paying for your pollution. It may make for good politics – causing ‘new’ taxation to seem less objectionable – but it risks eventually yielding a system as hopelessly complex and unwieldy as the actual tax code.

Cap-and-dividend is a simpler way to make it clear that the proceeds of a carbon price are being returned to taxpayers.

Anonymous June 20, 2008 at 12:29 pm
Milan June 20, 2008 at 1:38 pm

If the price of fuel is artificially high (speculation), then the extra cost a carbon tax would have added has already been added by the market.

First, we have no reason to believe that high costs are the result of speculation. In the short term, at least, oil production has been pretty flat and demand has been growing. Rising prices are simply the market working properly.

Of course, the market working properly will not incorporate the social costs of carbon. That is the point I was trying to make above in arguing that the premium people are paying for gas now is not the same as a carbon tax premium. That is both a matter of justification and of who is getting the money. A carbon tax would either get recycled to taxpayers or spent on green investments. The bulk of the benefits from today’s oil price book are accruing to states like Russia and Saudi Arabia.

Yes, the oil companies are making huge profits. At the same time, if we are to delay drops in output, they also need to undertake massive investments. Building floating cities that suck oil from the seabed is hugely expensive. So is having your multi-billion dollar project arbitrarily expropriated by the government of Russia or Venezuela.

Carbon tax is only effective because it increases the price of fuel, encouraging people to take other choices than single occupancy cars.

This isn’t true for several reasons. First, we could invest a portion of the proceeds of a carbon tax in low-carbon infrastructure investments. Secondly, a carbon tax sends a clearer signal. People may still be hoping that gas prices will fall in the medium term. A carbon tax that rises slowly from year-to-year is easier to factor into purchasing decisions.

Political expediency is more important here.

This is quite probably true. That being said, the policy could be communicated better. Right now, it says: “Working Canadians need to drive, so we are going to help them out with high gas prices.” It should be saying: “The present structure of the economy requires driving, so we are allowing some time for transition. Be advised, however, that such breaks are not going to be around forever.”

Milan June 20, 2008 at 1:42 pm

I am not sure how smart it is to mingle climate and social policy.

I am of two minds about this.

On one hand, it is good to see climate change incorporated into the very heart of mainstream government policy. It is only when it gets enmeshed into all areas of private and government decision-making that a rapid transition to a low-carbon economy will become possible.

On the other hand, you are right about complexity and distortions. Tax-and-dividend systems are very appealing because of how easy they make it for any individual to calculate the effect the policy is having on them. That could be an effective inducement to change.

All that said, this is probably a case where the best is the element of the good. What is necessary is a price on carbon, alongside a suite of other policies on efficiency and infrastructure. Any policy that helps to kick off the changes required would be welcome.

T June 20, 2008 at 4:09 pm

“First, we have no reason to believe that high costs are the result of speculation.”

You are right if you replace “speculation” with “false speculation”. Certainly prices are high, to some extent, because investors puchase futures on oil. Whether this “speculation” is true or not cannot be known in advance – certainly the investors think it will turn out in their favour.

To some extent, it doesn’t even make sense to talk about true or false speculation, because the truth value in regards to which speculation guesses is to some extent produces by the activity of speculation. Re: self fullfilling prophecies. However, to some extent, (the extent to which the speculation is speculation about external factors and not speculation itself), it can be called true or false in retrospect.

However, it is nonsense to say the high prices of oil is not being caused by speculation. Buying low in advance to sell high is the meaning of speculation. I “speculate” that the price of oil will continue to rise, so I buy futures.

Milan June 20, 2008 at 7:52 pm

Tristan,

I admit that I don’t have a full understanding of financial markets, but I think bets on the future price of oil need to be balanced. If I want to bet that they will rise, someone needs to bet me that they will fall.

As such, it is a bit hard to see how a substantial portion of the overall price could be inflation caused by betting.

Milan June 20, 2008 at 7:54 pm

Investment can flood into the oil market without driving up prices because speculators are not buying any actual crude. Instead, they buy contracts for future delivery. When those contracts mature, they either settle them with a cash payment or sell them on to genuine consumers. Either way, no oil is hoarded or somehow kept off the market. The contracts are really a bet about which way the price will go and the number of bets does not affect the amount of oil available. As Mr Harris puts it, there is no limit to the number of “paper barrels” that can be bought and sold.

That makes it harder for a bubble to develop in oil than in the shares of internet firms, say, or in housing, where the supply of the asset is finite. Ultimately, says David Kirsch of PFC Energy, a consultancy, there is only one type of customer for crude: refineries. If speculators on the futures markets get carried away, pushing prices so high that refineries run at a loss, they will simply shut down, causing the price to fall again. Moreover, speculators do not always assume that prices will rise. As recently as last year, the speculative bears on NYMEX outweighed the bulls.”

Tristan June 20, 2008 at 7:57 pm

So, your saying no one is hording oil? That might be true, but it seems absurd.

What about Hedging fuel? i.e. when an airline/bus company buys its fuel in advance for a preset price. Does that not push up the price of fuel?

. June 20, 2008 at 10:17 pm

Dion’s carbon tax would ‘screw everybody’: PM
CAMPBELL CLARK
From Saturday’s Globe and Mail
June 20, 2008 at 8:14 PM EDT

OTTAWA — Prime Minister Stephen Harper said Friday the Liberals’ so-called green shift would “screw everybody across the country,” comparing leader Stéphane Dion’s carbon tax to the national energy program of the 1980s.

After previously labelling Mr. Dion’s plan “insane” and “crazy,” Mr. Harper continued to firebomb the Liberal proposal with indelicate language.

. June 20, 2008 at 10:18 pm

But Liberal deputy leader Michael Ignatieff scoffed Friday, saying Mr. Harper had sunk to undignified lows.

“This man is the Prime Minister of the country. It’s undignified and it’s an insult to the intelligence of Canadians,” he said. “We’ve had the grease spot, we’ve had attack ads, and now we have ‘crazy,’ ‘insane’ and ‘screw.’ This is not the language of debate, this is the language of insult.”

Emily June 21, 2008 at 11:26 am

What about the puppies??? Will someone PLEASE think about the puppies!!

. June 21, 2008 at 5:51 pm

Ford ‘to make fewer big vehicles’

Car giant Ford has said it will cut its production of large trucks and large sports utility vehicles (SUVs) in favour of more fuel efficient models.

It will also delay the introduction of its new pick-up truck by two months.

The US economic slowdown has reduced sales and soaring fuel prices have put consumers off buying bigger vehicles.

. June 21, 2008 at 5:52 pm

Can Saudi summit lower oil prices?

By Andrew Walker
Economics correspondent, BBC News

It will be, according to the summit’s own website, a momentous event.

Saudi Arabia has invited senior figures from energy producing and consuming countries to discuss what to do about oil.

. June 23, 2008 at 10:52 am

What is keeping oil prices so high?

Despite an emerging global consensus that oil prices are dangerously high, there seems little chance of the cost of oil falling significantly in the near future.

Analysts say measures agreed at Sunday’s crisis summit in Jeddah are unlikely to have a dramatic impact on market trends.

But what is keeping prices close to record levels of almost $140 a barrel?

. June 23, 2008 at 11:28 am

Because if the current oil price is indeed a bubble, it’s a good bubble…

What do I mean by a good bubble? There’s an interesting little piece by Sumit Paul-Choudhury in this week’s New Scientist. He talks about American journalist Daniel Gross’s 2007 book, Pop! Why Bubbles are Great for the Economy. In the book, Gross argues that bubbles aren’t necessarily a bad thing. They leave financial carnage, but they create the infrastructure of the future. For example, the internet boom and bust left us with a global fibre-optic network that would never have been built without the irrational exuberance of the dot.com era.

Paul-Choudhury quotes physicist-turned-risk specialist Didier Sornette’s argument that “it is only during the reckless abandon of bubbles that individuals and companies take the foolhardy risks needed to develop technologies with large social impacts but low financial returns.”

. June 23, 2008 at 6:31 pm

Pure speculation
By Free Exchange | Washington, DC

BARACK OBAMA, the presumptive Democratic presidential nominee, has proposed new measures to rein in financial speculation in commodities markets which, we are to assume, has been generating recent, stunning commodity price increases. What to make of this? Is speculation behind the commodity boom?

Milan June 23, 2008 at 6:33 pm

Tristan,

There seems to be a very active debate about the degree to which speculation is causing current high oil prices.

That being said, I definitely think physical and economic fundamentals favour continuing oil price increases over the medium term.

Milan June 23, 2008 at 6:34 pm

I am definitely feeling less and less confident about our bet.

. June 25, 2008 at 11:02 am

Barrel Fever

Does anyone know how much oil there is in the world?
By Yves Smith
Posted Wednesday, June 25, 2008, at 6:54 AM ET

For starters, take OPEC, which is estimated to control two-thirds of the oil reserves and to provide 36 percent of oil production and is largely unresponsive with IEA inquiries. And cooperation doesn’t always translate into insight. For instance, Iraq recently claimed it has as much as 350 billion barrels of oil, triple its proven reserves and more than even oil kingpin Saudi Arabia has. Is this claim completely crazy? No one knows for sure; Iraq is underexplored, with only 2,000 oil wells versus more than 1 million in Texas.

Here’s how arcane the oil guessing game can get. Saudi’s Ghawar oil field is the world’s largest; it’s been pumping out oil since 1951 and holds 7 percent of the world’s proven reserves. Overall Saudi production has been falling since 2005, yet the number of rigs in use has tripled since 2004. Why is that? Some analysts believe the increased rigs are intended to compensate for declining production from Gwahar. Others argue that the Saudis are operating strategically, shutting their most productive wells as prices rose and opening smaller wells to better manage supply.

. June 26, 2008 at 1:51 pm

Speculating about speculators

By Jon Rynn

There seems to be a disturbing tendency in the progressive community to blame speculators for most, if not all, of the increase in oil prices. In its most extreme form, the implication seems to be that the supply of oil is virtually limitless, and that only financial manipulation is to blame. Ironically, this mirrors the views of many mainstream economists, who have what is sometimes called a cornucopian view of the world. Julian Simon was the ultimate spokesperson for the idea that technological innovation and unlimited resources would allow for virtually any level of population and consumption.

. June 30, 2008 at 11:40 am

The Grits’ green shift will be a hard sell. It leaves deep, troubling questions. Their leader has flip-flopped on carbon taxes. They have been bracing for some bad polls. But if, in the short term, it bites, in the long run, the Liberals are getting out front on the transformative issue of our time. Few saw Stéphane Dion as a pacesetter. They’re starting to change their minds.

. July 7, 2008 at 10:15 am

A very different path to introducing carbon taxes has been pursued by another Liberal Party – the government of British Columbia. Its carbon taxes kicked in on Canada Day, uncluttered with the redistributive paraphernalia proposed elsewhere. B.C.’s policy has compensatory measures that mainly offset the carbon taxes borne by various households, although it, too, does not provide full relief for the highest earners.

Fighting poverty and creating a more egalitarian society are worthy goals, but debate over the best policies and financing should not be obscured within carbon tax proposals. Once the public understands the redistribution in these proposals – and that many people would be significant net losers – support for essential climate change policies could be at risk.

. July 7, 2008 at 10:46 am

More importantly, neither index funds nor other speculators ever buy any physical oil. Instead, they buy futures and options which they settle with a cash payment when they fall due. In essence, these are bets on which way the oil price will move. Since the real currency of such contracts is cash, rather than barrels of crude, there is no limit to the number of bets that can be made. And since no oil is ever held back from the market, these bets do not affect the price of oil any more than bets on a football match affect the result.

. July 14, 2008 at 3:29 pm

With one exception—I’ll come to it—I am not persuaded. I struggle to understand how speculation is supposed to be both profitable and destabilizing all at once. Profitable speculation requires buying low and selling high. Destabilizing speculation requires the opposite: short-selling shares in a trough, thus deepening the trough, and betting that frothy shares will become frothier. In other words, destabilizing speculation means selling low and buying high. If that is a recipe for profit, I am missing something.

Profitable speculators, in contrast, are veritable philanthropists. When they think oil is going to become more expensive, they buy and hoard oil, or they buy oil futures, encouraging others to buy and hoard. This raises oil prices when they are relatively cheap and lowers them when they are relatively expensive.

. September 18, 2008 at 5:58 pm

Could Canadian politics matter?
Canada has its own elections, which may shape future of a carbon tax
Posted by John McGrath (Guest Contributor) at 3:03 PM on 18 Sep 2008

Canada is two weeks in to its third election in four years, and environmental issues have been … well, not quite front-and-center, but definitely somewhere in the foreground. And that could be a very bad thing for the chances for a carbon tax in the U.S.

The election has been pretty dull, even by Canadian standards. Aside from an argument over whether the televised debates should have four or five party leaders on stage (take that, America!) there have been very few sparks. The governing Conservatives have a campaign message centered around making Stephen Harper look less like an android and more like he wears sweater vests and demonizing the Liberal leader Stephane Dion as a “risky” choice.

Milan November 18, 2008 at 12:49 am

Here is Morty (the dog in the photo above) in November 2008.

Apparently, he will double in size once more before reaching maturity.

. March 29, 2010 at 10:25 am

“The chill came in the afternoon, when panelists, egged on by former Toronto Star columnist David Crane, told the gathering that the most sensible way to green the Canadian economy was to impose a carbon tax.

It was exactly that proposal that many blame for the defeat of the Liberals in the last election. It would be a courageous party, in the Yes Minister sense of the word (i.e., politically suicidal), to propose it again.

After a jittery opening day, participants here are feeling better about the forums and discussions. Most of the real idea-swapping happens in the antechamber outside the ballroom, where the speeches and panels take place. Inside, things are often pretty dull. Outside, the discussion is lively.

If the people here have any say in the matter, the Liberal Party will seek to redefine itself as a party committed to social policy and the environment. There is nary a word about the deficit, about keeping taxes low, about fostering international trade.

The question for Michael Ignatieff and his team will be to what extent the party sticks to that platform going into the next election. To the extent it does, Canadians will be offered a clear choice: focusing on getting the books back in balance, or focusing instead on new investments to make the population healthier, better educated and more secure.”

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