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Business Commentary Without the U.S.'s involvement, Canada’s carbon tax plan will be mostly futile

Prime Minister Justin Trudeau has cast his national carbon tax plan as an answer to catastrophic storms, floods and fires.

He is partly right. Many leading climate scientists say weather extremes are a manifestation of the effects of climate change in real time.

However, the notion that Canada, which accounts for less than 2 per cent of global greenhouse gas emissions, can make a difference on its own is naive.

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And it underscores a troubling dilemma for this country. Imposing a national tax on carbon when our much larger neighbour, competitor and polluter stubbornly won’t could prove economically damaging.

Ottawa insists the tax – to be imposed on four provinces without explicit emission reduction plans – will be revenue-neutral. But big polluters will inevitably try to pass along the cost of the tax to their customers. In many cases, that will render Canadian businesses less competitive in North America and globally. And for that, Canada will pay a price.

Predictably, small business owners are already clamouring for compensation. “Anything less than a full rebate of the new tax bill handed to small businesses will create an additional competitiveness challenge for Canadian firms competing with those in jurisdictions without carbon taxes, such as the United States,” says Dan Kelly, president of the Canadian Federation of Independent Business.

Federal Conservative leader Andrew Scheer hinted at the competitiveness challenge in a recent interview. “Are we better off if we displace jobs and investments to other countries and global emissions go up? I say, no,” he told CBC Radio.

Unfortunately, Mr. Scheer and the Conservatives have yet to offer an alternative, although they promise one is coming that will not include a carbon tax. Mr. Scheer has talked vaguely about bringing “production” back to Canada, where we can “make things more efficiently and cleaner.”

That is as unrealistic as Canada trying to save the planet on its own.

Canada risks becoming a victim of what Yale University economist and climate-change expert William Nordhaus calls the “free-rider” problem – countries taking the benefits of fossil fuels without paying for the environmental costs. “It makes no sense for countries with high existing taxes to add further penalties on top of existing ones before countries with subsidies or no penalties impose carbon taxes,” according to Mr. Nordhaus, who shared this year’s Nobel Prize for economics for his groundbreaking work on carbon pricing.

Taxes on gasoline in Canada are already much higher than the United States. Canadians pay an average of nearly 39 cents a litre in taxes at the pump; Americans just 16 cents, according to a 2016 comparison by the International Energy Agency. Mr. Trudeau’s carbon tax would add another 11 cents a litre by 2022.

And yet, Canadians are free riders compared with much of the rest of the developed world. Italians, for example, pay more in taxes on their gasoline – $1.44 a litre – than we typically pay in total.

Mr. Nordhaus has long argued that a global carbon price is the key to combating climate change. He even says that countries that refuse to go along should be hit with steep tariffs on their exports. His research shows that price is the best way to curb carbon emissions, compared with, say, using government regulation to limit auto or power plant emissions. That’s because higher prices encourage consumers and businesses to use less energy and seek out reduced or carbon-free alternatives. And it creates natural incentives to develop new low-carbon technologies.

A key question Canadians should ask themselves: What will the Liberal carbon tax accomplish? Cutting emissions a bit would be a small step toward the ambitious goal Ottawa set for itself at the Paris climate conference three years ago. Unfortunately, it will take a Hail-Mary play for this country to meet its stated target of cutting emissions 30 per cent below 2005 levels by 2030. As of 2016, Canada had managed just a 4 per cent reduction.

Clear progress toward that goal would make Canada a model for other countries. And if one assumes that the world will eventually see the wisdom and need for a global carbon price, Canada will have a head start. Among the notable outliers are the United States, Russia and most of the Middle East.

But a carbon tax won’t spare us from wild weather or significantly slow the destructive march of climate change.

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Only a co-ordinated global effort can do that.

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