Growing the economy with carbon taxes

Another freely available policy article from the journal Canadian Public Policy, this time from 1997. University of Guelph prof Ross McKitrick looked at the effects of different options for recycling the revenue from a carbon tax. The conclusion - if you recycle tax revenue the right way, you end up increasing overall welfare and GNP beyond the business-as-usual model, even without taking any benefits of climate change mitigation into account. I.E., we would be better off with a revenue-neutral carbon tax even if global climate change didn't exist.

So how do you recycle tax revenue "the right way"? By reducing the most distortionary of your existing taxes. As long as the tax being replaced/reduced is more distortionary to the market than a carbon tax, you will increase net economic growth and/or overall welfare simply by collecting government revenue in a more efficient way. As an added bonus, carbon taxes are already increasing net welfare by bringing an externality into the market, i.e. making polluters pay for the costs caused by their pollution.

Which is the best tax to reduce in Canada using carbon tax revenue? McKitrick modelled five recycling options: a lump-sum payment to all households; reducing the GST; reduced corporate income taxes; reduced personal income taxes; and reduced payroll taxes. All except payroll taxes reduced aggregate consumer welfare by 0.3%, and reduced GNP by 0.3 to 0.9%. Payroll reductions, on the other hand, had no effect on consumer welfare and boosted GNP by 0.6%. Note that none of this takes the benefits of reducing GHG emissions into account, so the effect on aggregate welfare is actually much less.

Link to the article

My comments: First of all, I recommend the article to anyone interested in the double dividend idea simply for the clear and concise overview of work on the concept. I had heard the idea many times before but the one thing I hadn't heard argued was that a carbon tax could be a good idea even without the climate change problem. I'd love to see a political campaign that actually conveys this idea to the public - its frustrating to read again how carbon taxes are a key and almost cost-free (or profitable) policy, and then see the idea so marginal in mainstream political debate.

A note on McKitrick - he's a global warming skeptic, has written a prize-winning critique of climate change science (Taken by Storm, 2002) and more recently coordinated the Fraser Institute's just-released Independent Summary for Policy Makers, an alternative summary of the fourth IPCC report. As the wikipedia article linked above indicates, his critiques have been also criticized (and no doubt counter criticized, etc...) Guess this side of things wasn't yet on his mind back in 1997?