Will carbon tax freeze prompt a chilly walk in the snow for Trudeau?

National Post, 05 November 2023

Trudeau the Elder took his famous pre-resignation walk 40 years ago on Feb. 29. Is history about to repeat itself?

Sen. Keith Davey, campaign strategist and backroom dealer during the reign of Trudeau the Greater, was nicknamed the “Rainmaker.” Now Sen. Percy Downe, quondam chief of staff to prime minister Jean Chrétien, wants to be the Snowmaker.

This past week the prominent Liberal called for Trudeau the Lesser to resign the leadership. Pierre Trudeau took his melodramatic “walk in the snow” on Feb. 28, 1984, so that he could resign the next day, Feb. 29 in what was a leap year. Next year brings the 40th anniversary of that 29th of February in another leap year. Symmetry, drama and filial devotion may prompt the snowflake prime minister to do as his father did. Sen. Downe urges so. Let the snowflakes fall.

All of this has been brought on by Justin Trudeau’s spectacular flip-flop on what he long professed to be the deepest desideratum of his heart, the carbon tax. The abandonment of his principles for partisan political advantage has inflicted a deep blow on his own credibility.

Leave aside the political analysis, and whether the Liberals should or will follow Downe’s advice. Trudeau’s decision to exempt home heating oil — but not natural gas or propane — from the carbon tax invites another look at the economics of the measure itself.

It’s been more than four years since I last examined Pigouvian taxes this column, so I trust I will not try readers’ patience by slipping into classroom mode again.

A Pigouvian tax is aimed at changing behaviour by raising the price of some good. The reason is because equilibrium supply and demand do not take account of some other external cost. Pollution is the usual example of an “externality” not captured by the private actors involved. The government calls carbon dioxide “pollution,” which it certainly is not — anyone breathing today? — but the principle still applies. The tax on carbon is meant to encourage less use of carbon fuels.

But as I tell my economics students, the tax only works if the demand for the product is “elastic,” meaning sensitive to price increases. Put a high tax on coffee, and it is likely that people will drink less or switch to something else. Put a high tax on cigarettes, and the effect is less so. Addictive behaviours are less likely to change. Put a high tax on cancer treatments, and it may have no effect on demand at all. People will borrow to meet catastrophic health expenses — which is why that industry is insurance driven.

If the goal of the government is to decrease carbon emissions by means of a carbon tax, demand for fossil fuels needs to be elastic. But because carbon is energy, and energy is life — home, transport, work — energy is not as elastic as other goods.

Take gasoline: the price goes up and down more than many other goods, independent of the taxes. Drivers do adjust their decisions, but how much? Not driving to work may not be an option. Perhaps a driving vacation may be sacrificed.

The case of home heating is similar. Higher prices on heating fuel may adjust behaviour; lowering the temperature at night, or when out of the house. But there are limits; the house has to be heated. And alternatives are neither easy nor inexpensive. Converting an oil-burning system to natural gas or propane, or replacing the latter with heat pumps, is expensive. In some places it may not be possible. In any case, it is not like driving less. It is difficult to adjust behaviour. So carbon taxes on home heating fuels — oil, natural gas, propane — were always limited in their justification. Demand for heat in the cold Canadian winter is simply inelastic.

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