What the US can learn from Canada's ambitious carbon tax plan

Canadian Prime Minister Justin Trudeau will require every province to adopt a carbon tax or develop a carbon trading system by 2018. The idea could prove an interesting model for the United States. 

Chad Hipolito/The Canadian Press/AP/File
Canada's Prime Minister Justin Trudeau speaks to assembled guests during a visit by the Duke and Duchess of Cambridge at the Legislative Assembly in Victoria, British Columbia.

Earlier this week, Canadian Prime Minister Justin Trudeau dropped a bombshell:  He’ll require every province to adopt either a carbon tax or develop a carbon trading system by 2018. Polluters in those provinces that don’t would be hit by a gradually increasing federal tax starting that year. The idea—particularly the provincial option-- could prove an interesting model for the U.S. 

Some of the most populous Canadian provinces have already moved towards pricing curbs on carbon. British Columbia has imposed a carbon tax, and Ontario and Quebec are developing  cap-and-trade systems, where government distributes emissions permits to companies, which they can then use or sell to one another.

Trudeau would allow the provinces that establish carbon taxes to keep the revenue, a huge financial incentive. Still, his plan has already generated enormous controversy. Premiers of Saskatchewan as well as the Maritime provinces of Nova Scotia and Newfoundland and Labrador immediately opposed the plan, though for different reasons.

Newfoundland and Labrador recently doubled its gas tax and may try to convince the federal government to treat that levy as a carbon tax. Nova Scotia says it already meets national standards for reductions in carbon emissions. While it opposes a carbon tax it may consider a cap-and-trade system.   Saskatchewan is a major energy producer with a conservative anti-tax government.

Trudeau made his move as Canada considers how it will meet the international emissions limits agreed to in Paris last year. The European parliament voted to ratify that accord this week and it is expected to take effect very soon. But signing an agreement and taking the steps necessary to actually reduce emissions are very different. The U.S. backs the pact but remains deeply divided over how to implement it.

Could a plan such as Trudeau’s take hold south of the border?  The Tax Policy Center’s Adele Morris hasargued for giving states flexibility in meeting emission standards. In such a model, a state could replace regulatory curbs with a tax or cap and trade system.    

Carbon pricing rules could be attractive to both conservatives and progressives.  Most economists believe that raising prices on carbon, either through taxes or a cap-and-trade system, is more efficient than regulation—the basic system currently used by the Obama Administration to limit power plant emissions.

Revenue from a carbon tax could also prove useful. It could buy down corporate tax rates, help reduce the deficit, benefit low-income households, or fund job training or other support for workers displaced by a shrinking market for coal. 

For all that, could the U.S. adopt the Trudeau model? Probably not soon. GOP presidential candidate Donald Trump has said climate change is a Chinese hoax. Democrat Hillary Clinton says she backs the Paris accords, but has proposed only modest measures to implement them.

Although her Democratic primary rival Bernie Sanders endorsed a full-blown carbon tax, Clinton pointedly has not.  And bipartisan opposition to energy taxes of any kind is so strong on Capitol Hill that just this week, the new head of the American Trucking Association told Politico (firewall) that he’s abandoning efforts to lobby for a hike in the gas tax to help fund new roads.   

Still, policymakers will watch the Canadian experiment closely. And if it succeeds—as the B.C. tax appears to be doing—don’t be surprised if a carbon tax gets a second look in the U.S.

This article first appeared in TaxVox. 

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