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Some basic economics of Quebec's carbon tax

From Reuters:

Quebec province slapped the country’s first carbon tax on energy firms on Monday, as Canadian business leaders urged “environmental taxation” to rein in greenhouse-gas emissions.

The tax, proposed more than a year ago, is expected to raise C$200 million ($202 million) a year to fund the province’s plans to reduce emissions.

Basic enironmental econ lesson–the tax will reduce emissions.  If set properly, the tax can result in the efficient level of emissions.  So why are the revenues being used to “fund the province’s plans to reduce emissions”?  Is the tax set below the desirable level and more reductions are needed?  If so, then why not set the tax higher and then use the revenues for other stuff–like reducing inefficient labor taxes?

Read on for more Env-Econ 101… 

It [the tax] includes a per-litre levy of 0.8 Canadian cent for gasoline, 0.9 Canadian cent for diesel fuel, 0.96 Canadian cent for light heating oil, and C$8 a tonne for coal.

It wasn’t immediately known whether the oil companies, including Petro-Canada (PCA.TO: Quote, Profile , Research) and Imperial Oil (IMO.TO: Quote, Profile , Research), would pass along the cost to consumers.

Almost all output/production taxes get passed on to consumers.  The question is:  how much of the tax will be passed on?  It depends on how sensitive consumers are to price changes (we call this the elasticity of demand).  If consumers are very sensitive to price changes (elastic demand) then the companies will absorb the tax.  Passing it on to consumers will result in a big drop in revenues (sales)–bigger than the drop from absorbing the tax.  But, if consumers are not very sensitive to price changes(inelastic demand) then companies can pass the tax on to consumers with little effect on the bottom line.  So ask yourself–are consumers sensitive to price changes for energy?  If not, then yes, companies will pass the tax through to the consumer.  Who’s fault is that?

Separately, the Canadian Council of Chief Executives said Canada should become “an energy and environmental superpower,” and suggested higher energy prices to help cut emissions, the Globe and Mail newspaper reported on Monday.

Companies calling for taxes?! Hmmmm…why might that be?  My guess is that the companies know carbon policy is coming and taxes–for the reason I outlines above among others–will have the least impact on their profits. 

Since 1990, greenhouse-gas emissions in Canada, a net exporter of energy, have risen more than in any other leading industrialized country, data submitted by the Group of Eight rich nations to the U.N.’s Climate Change Secretariat shows.

And they call us greedy.  I always knew there was something fishy about those Canadians, eh?

Quebec has pledged to meet its targets under the Kyoto Protocol on climate change.

Unfortunately, Kyoto will be obsolete next year.

Canada has signed on to the agreement, which calls for a 6-percent cut in emissions from 1990 levels by 2012, but Prime Minister Stephen Harper has said that target is impossible to achieve.

Instead, the minority Conservative government aims to cut emissions from greenhouse gases — the key contributor to climate change — by 20 percent from current levels by 2020.

Anyone know how a 6% cut from 1990 levels compares to a 20% cut from today’s levels?

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