The Broadbent Blog

Polluter-pay policy: a debate worth having


Earlier this week, Andrew Jackson, senior policy advisor to the Broadbent Institute, wrote a thoughtful and constructively critical analysis of the Ecofiscal Commission’s first report.  My first response is: thank you, Andrew.  Jackson’s piece epitomizes the much-needed evolution of the debate around climate policy in Canada.  It moves us squarely to the discussion we should be having:  not if we need better policies, but how they should be designed.

Jackson takes us directly to one of the most important how questions central to ecofiscal reform: namely, how should governments use (or “recycle”) the revenues generated by polluter-pay policies?  As the Commission states in its report, and as Jackson is sure to agree, there are many options.  Among them:  lowering personal and/or business income taxes, supporting the development of technology, financing critical infrastructure, and lessening the burden on the most vulnerable families.

One of the great strengths of ecofiscal policy is this richness of choice. Not only does pollution pricing present households and businesses with the incentive to make the choices that best fit their own circumstances, it allows different governments facing different economic contexts to pursue their different priorities. It is exactly this richness of choice that leads to the cost-effectiveness of pollution pricing as a means of reducing pollution; and also to the economic benefits that come from the best recycling of the associated revenues.

Jackson’s significant point of concern is the use of these revenues to reduce personal and business taxes, as was done in B.C. through the introduction of its carbon-pricing policy. He claims that the economic benefit of tax cuts is small, or perhaps absent altogether. Furthermore, he finds compelling the argument that governments can play a very effective role in directing resources toward the development of new technologies and programs that hasten environmental solutions. It is therefore logical, at least given his reading of the evidence, that his preferred manner of recycling ecofiscal revenues is to increase public spending on infrastructure and technological development.

Yet Jackson’s position does not stand unopposed. There is a large body of empirical evidence, from a large group of developed economies, showing a close relationship between a country’s long-run growth rate and its rate of investment as a share of national income. There is also much evidence that the after-tax cost of capital is one of a few key determinants of business investment. These two together suggest very strongly that reductions in income-tax rates, especially for business income, can be expected over the long run to generate significant improvements in investment, productivity growth, and thus eventually to higher material living standards. In this view, using ecofiscal revenues to finance reductions in income taxes may well be the most growth-friendly policy available.

There is also a healthy and sensible debate over whether governments really are as adept as Jackson suggests at directing public resources toward the development of better technologies and innovation. For each of the many examples where government support to business has been good for the overall economy, there is an equally valid case in which government efforts to support industrial or research champions have ended in failure – with significant loss of scarce taxpayers’ funds. There is more than a grain of truth to the quip: “Government’s are poor at picking winners, but losers are very good at picking governments”.

Here is not the place to settle these debates; our two short articles just skim the surface of these central issues. It is important, however, that these issues get debated fully, sensibly, and with recourse to all kinds of evidence and interpretation. It’s for that reason that I not only welcome Jackson’s critique, I hope to see more of them—from him and from others who are ready to roll up their sleeves and give serious thought to how we achieve better economic and environmental outcomes for Canada. 

This is how we move beyond the past.  This is how we move into the future.

Chris Ragan is Chair of Canada's Ecofiscal Commision.

Photo: Shannonpatrick17. Used under a creative commons BY-NC-2.0 license.