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Tuesday, August 2, 2016

Matthew Lau: Why the right price for carbon is probably zero dollars

Recently, Canadians for Clean Prosperity published what it called the “Conservative Case for a Carbon Tax.” The organization, led by Mark Cameron, a former policy director to Stephen Harper, exists primarily to convince conservatives of the virtues of a carbon tax. To their credit, Canadians for Clean Prosperity does advocate that carbon taxes should be offset by equivalent cuts to corporate or personal income taxes and that they should replace — rather than add to — other regulations aimed at reducing emissions.

Where Canadians for Clean Prosperity goes wrong is in the price it wants to put on carbon. It advocates a minimum price of $30 per tonne, which would increase to $100 by 2030. The logic is that $30 is approximately the “social cost of carbon” (the supposed present value of damages caused by future climate change, per tonne of emissions today) as modelled by the U.S. Environmental Protection Agency (EPA). The group argues that taxes must eventually rise to $100, however, to ensure Canada reaches its emissions targets.

But ongoing uncertainties in the climate science prevent the social cost of carbon from being measured with much precision, and these estimates can be drastically changed simply by tweaking the discount rate used to convert future climate damages into present day value. The U.S. government’s Office of Management and Budget (OMB) states that government agencies performing regulatory analysis should provide estimates using discount rates of both three per cent and seven per cent. The latter figure is actually the default since seven per cent is “an estimate of the average before-tax rate of return to private capital in the U.S. economy.”...

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