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.
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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.
That makes the Liberal case for exempting heating oil even weaker. For home heating, the shift away from oil to natural gas or propane is a major improvement in terms of reducing carbon emissions. That should be encouraged. Even in Atlantic Canada, only about 30 per cent of homes still use oil. From a carbon emissions perspective, oil should be more heavily taxed, prompting some to switch to natural gas, where available, or propane. It is natural gas or propane which should be taxed less, as once a home uses either, there are limited affordable options to do anything different. The government has now chosen to do the exact opposite.
All of this assumes that the carbon tax is not intended to raise revenue for the exchequer. That, too, is part of the philosophy of the carbon tax, that it will be rebated so that many, if not most, will be better off — rebates will exceed carbon tax payments. That means that while relative prices change, giving an incentive to move away from carbon fuels, overall well-being should not decrease.
However, if that were really true, there would be no need for the home heating oil exemption. Even assuming that it was true, the rebates would remove the incentive to shift from oil to natural gas or propane. Given that demand for heating oil is inelastic, it would seem that the whole scheme would be ineffective in reducing carbon emissions.
That may be why the government abandoned it. If it does not do what it is supposed to do, and has a political cost, why continue?
As the Liberals are now discovering, the same arguments apply even more strongly in other parts of the country.
And that is even before it really begins to snow.
National Post
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