Why Not Tax Carbon?

By Eric Rempel

Parliament is now again sitting, and a carbon tax is again being talked about. Premier Brad Wall of Saskatchewan seems to be leading the opposition to such a tax. Any opposition to such a tax is shortsighted, and one needs to ask why anyone would oppose a tax on the carbon. I can think of only two reasons. It could be a lack of understanding with respect to this tax. It could be an attitude that “I intend to look after myself, and I don't care about anyone else.”

Let's again look at the carbon tax. No serious proponent of a tax on carbon is saying it should be an additional tax. A tax on carbon needs to be a tax shift – that the revenue gained through a tax on carbon is offset by a reduction in income tax, or that the revenues be returned to the taxpayers as dividend.

Basic economics teaches that whenever anything is produced, there are always three inputs: labour, capital and land. Labour we understand. Capital are the machines we use. “Land” is the term economists use to designate stuff that we use, and by using it, it no longer is available to others. At one time it always was land, but today this refers to all extracted resources.

So imagine I am building a house. Of course, I will need labour. I will hire tradesmen to build the various house components: concrete workers, carpenters, electricians, plumbers, etc. I will need capital: the excavator to dig the basement, the trucks delivering building material, the machines used to harvest and mill the 2x4's and other building material, and the various electrical tools the tradesmen use. And I will need resources. The resources I will need are harder to identify, nevertheless they are being used. The most obvious is the fuel used by the excavator and the trucks delivering building materials. Then there is the fuel used by the machines harvesting and milling the trees and bringing them from the forest to the lumber yard. The manufacturing of cement is extremely energy intensive, and uses large quantities of natural gas.

Now let's assume that the finished house cost me $300,000. How much of that amount is tax paid to government? And what triggers the payment of that tax? I do not have hard data, but we don't need it to understand the effect of our current taxation system on building practice. Let's further assume that of the $300,000; $150,000 is for labour and that on average the tradesmen pay income tax at 30%. This means that of the $300,000 my house cost me, $45,000 is tax on labour. Any tax on capital and resources is negligible, so that's it!

In effect, the tax system imposes a $45,000 incentive for me to use less labour in the construction of my house. This is a significant incentive to replace labour with capital and resources. These days the main resources we consume when we do anything is oil and natural gas, so in effect the current tax system provides an incentive to use less labour and more fossil energy.

The Endeavour Centre in Ontario has attempted to quantify the amount of fossil energy going into the construction of different house shells. They found that it varied from a low of 2 tons of CO₂ for a 1,000 sq ft. house to a high of 12 tons of CO₂, depending on what building materials are used. In other words, I can choose to build my house using low amounts of fossil energy, or alternatively build the house using 6 times as much energy. The government could place a tax of this energy instead of on labour, and have a profound effect my choice of building material.

Our government needs the tax revenue. It can apply the tax to labour as it now does, or it could apply that same tax to fossil fuel. In this simple model a tax shift to carbon would not affect the price of the house, so there would be no suppression of economic activity. Surely it is evident which would, in the long run, be better for us and our children. We just need leadership from our government.