Monday, July 28, 2014

Opinion: Economist Vs. Prime Minister

During Australian Prime Minister Tony Abbott’s recent visit to Canada, Prime Minister Stephen Harper commented on climate change: “No matter what they say, no country is going to take actions that are going to deliberately destroy jobs and growth in their country. We are just a little more frank about that.” Mr. Abbott, having abolished Australia’s carbon tax, added: “I’ve always been against a carbon tax or an emissions trading scheme because it harms our economy without necessarily helping the environment.”

These two prime ministers were saying that a theory we economists have studied all our working lives, based on knowledge that has been accumulated for a century, is all wrong.

In 1920, the great economist Arthur Cecil Pigou argued that when an economic activity creates external disservice (such as pollution), a properly designed tax improves, not worsens, resource allocation and makes an economy better. Perhaps the two prime ministers know of empirical evidence that economists have ignored.

I’ve examined the performance of a number of countries that are known to rely heavily on environmental taxes: Sweden, Norway, Denmark and the Netherlands. I also looked at the average performance of the OECD area (a collection of 34 developed countries), the United States and Canada. To evaluate performance, I looked at the following:
  • A number of environmental indicators that include the share of environmental taxes in total taxes, the environmental taxes to GDP ratio, the energy and materials intensity of production and consumption, and the growth of greenhouse gasses over the period from 1990 to 2012;
  • Two economic variables, the level of per capita GDP as an indicator of the current standard of living and labour productivity growth over time, as an indicator of potential growth in living standards in the future. I also included income distribution across income groups using the Gini coefficient, which captures income inequality.
In total, I have eight indicators and seven jurisdictions. This is what I found, using standardized data from the OECD.

Canada’s reliance on environmental taxes is the lowest among the group, along with the United States. On average, OECD countries rely significantly more on environmental taxes than Canada does. Each of the four European countries in our sample has carbon taxes, as do a number of others in the OECD. Given this, one would expect that Canada would use energy resources and materials much more heavily than others in production and consumption activities, and that is indeed the case.

Canada’s performance in curbing GHG emissions is the worst in this group.

We find as well that the performance of the countries with high environmental taxes, while the best in our sample for environmental outcomes, is better as well for both economic and social outcomes than Canada’s. On GDP per capita, Canada is above average, with Norway at the top. On labor productivity growth, Canada is the second worst, with Sweden and Norway at the top. On income inequality, Canada and the United States are at the bottom, while Denmark and Norway are at the top.

The picture that seems to emerge is that Canada is not doing well in relation to any of the six jurisdictions for environmental, economic or social outcomes. To get a better overall picture, I added the rankings on the eight indicators: With seven countries, the worst possible score would be 56, if a country were at the bottom for each of the indicators. The best possible score would be 8. In this ranking, Canada scores 48, worst of the group. The U.S. scores 44. The best of the group is Denmark, at 20. Even if we were to concentrate on outcome indicators alone – greenhouse gasses, the two economic indicators and income distribution – Canada continues to rank at the bottom.

Let me be clear about what this evidence does and does not show. The evidence does not establish causation – that environmental taxation generates better economic and social outcomes. It does show, however, that environmental goals are achievable at the same time as economic and social goals. I believe that intelligently designed policies would let us realize the outcomes that economic theory predicts.

So, with due respect to Mr. Abbott and Mr. Harper, economic theory is alive and well, and there is evidence to back it up.


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