The Green Shift - Slandering the Good Name of Economics

As a professional policy wonk, I delight in a rip-roaring policy debate. Sadly, it is rare that these debates occur within the sphere of electoral politics. The notion of a carbon tax seemed to have had the potential to inspire such a conversation on a topic that has long been one of my interests.

Imagine my disappointment when the Green Shift particulars (such as they are) arrived.

So, here we are during an election campaign - which is mercifully not a 4 year experience like our buddies to the South. Sometimes it is the tiniest tidbit that irritate, and the declaration from the Liberal and Green parties that "Economists" are solidly lined up behind their various income-to-carbon tax shift plans is one such appalling rhubarb. Electioneering via duplicity.

However, in the abstract sense, these claims are largely correct.

It is 100% correct to say that economists favour internalizing the costs incurred by negative externalities through application of a price on said externalities.

It is mostly correct to say that in order to reduce anthropogenic greenhouse gases, economists favour the taxation of carbon.
That said, it is a unicorn in the enchanted forest leap to say that Economists would endorse the Green Shift as it is currently structured.

As is costumary, we must first declare our assumptions, each of which is massively debateable, but for our purposes, acceptable. 1) That the reduction of anthropogenic greenhouse gases is a desirable objective, which will have a meaningful effect on climate change; 2) That a carbon tax implemented by a small open economy like Canada will not result in relocation of carbon productionto another untaxed jurisdictions; 3) That the negative impacts of carbon reduction to the social welfare function are zero or less than the positive impacts expected from their reduction.

One of the most basic mathematical concepts in economics is elasticity, which is a measure of the responsiveness of one variable to changes in another. There is an endless academic exploration of this concept, but for our use we need only discuss the basics, which we will consider from the demand perspective.

• Price elasticity of demand measures how much the quantity of demand for a good changes if its price changes. Energy in all forms is usually tracked as inelastic (i.e., the percentage change in quantity is less than the percentage change in price).

• Income elasticity of demand measures how the quantity demanded changes when income increases.

• Cross-elasticity shows how the demand for one good changes when the price of another good changes. Substitute goods have positive cross-elasticities.

Without having a solid estimation of the price, income and cross-elasticities for all energy goods in Canada, any selective carbon taxation scheme (like the Green Shift) would be at best a large-scale social experiment, at worst a needless and damaging shock to the Canadian economy.

The element of the Green Shift that provides the most insight into its true purpose is the fact that diesel is to be subject to a rather significant tax increase, whereas gasoline is to be exempt. Nevermind that diesel emits less carbon per unit of energy than gasoline, which means that the Green Shift price incentives between these substitute goods favours greater carbon emission.

Logically, should you wish to reduce carbon emissions, taxation on those goods with the highest price elasticity of demand would give you the most bang for the buck. Regardless of the exact figure, the vast majority of studies would seem to indicate that price does indeed effect gasoline consumption. Given its primarily industrial uses, diesel is likely to be more inelastic than gasoline. Pick a study, any study.

Secondly, Alfredo A. Romero, 2007. "Revisiting the Price Elasticity of Gasoline Demand," Working Papers 63, Department of Economics, College of William and Mary uses some very interesting estimation techniques to produce a range of estimates over time for both the price and income elasticity of demand for gasoline. Guess what, he found that there is a strong correlation between both. When price goes up, gasoline consumption goes down. When income goes up, gasoline consumption goes up.

The Green Shift taxes carbon to reduce its consumption, returning money in income tax cuts which will then increase consumption. A true carbon tax would not be offset by income tax cuts.

The Green Shift will be a very costly shock to the Canadian economy. Carbon emissions are positively correlated to GDP, and if the Green Shift is implemented it will likely reduce carbon emissions, not because of its pricing, but because it will impose enormous transaction costs on the Canadian economy, reducing its output. A deliberate measure to make us collectively poorer.

Despite the rhetoric, it is clear to me that this plan is a coldly calculated wealth redistribution plan wrapped up in green packaging. It is crass electioneering and greenwashing.

Its design does not match its stated objectives. Stick that green in your pipe and smoke it.