First R1, everyone take it easy on me so my room-mate doesn't have to listen to me cry all night. After Canada formally introduced our carbon tax legislation, we saw the usual round of conservative commentators griping. Here, my target will be Terence Corcoran with his column "We get 'Carbon Tax for Dummies' because they think we're dummies" in the Financial Post.

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The first half of the article more or less just goes over some of the pro-carbon tax commentary he's arguing against, so I'll go ahead and skip it to here:

There’s the flaw in the beer analogy. The objective of the carbon-tax model is to reduce carbon emissions by imposing a tax to offset carbon’s “social costs.” In the beer case, the equivalent would be a tax on alcohol to offset the social costs of drinking.

So far so good...

But her beer analogy is flat out of logic. The social cost of an alcohol tax, as with a social cost of carbon tax, would apply to all beers — Keith’s, Canadian, craft, imports — and all other alcohol...But no one has stopped buying beer.

I skipped some of the details for brevity, because I'd rather not get too caught up in the details of the analogy. But let's analyze this. Do people still buy alcohol in spite of taxes? Yes, of course they do, I have an irresponsible amount of it in my cabinet right now. But they buy less of it. And a meta-analysis of 132 studies on the topic found this to be true - finding a 1% rise in price correlates to a 0.5% reduction in consumption. Another meta-analysis found an even greater price elasticity (between -0.46 for beer and -0.80 for spirits). The fundamental concept that the demand curve slopes downwards is in fact, not broken. Repeat bad analogy with cigarettes.

In short, people respond to incentives.

And if every Canadian got an annual tax rebate of $100, meant to encourage spending on alternatives to alcohol, people would still buy beer. Maybe more beer.

This part deserves an R1 of it's own. We've already established that alcohol will still be bought - just significantly less of it. But here Corcoran appears to imply (via this analogy) that since the carbon tax is revenue-neutral, it might actually increase emissions.

By what mechanism he proposes might cause this is beyond me. What Corcoran doesn't understand is that the carbon tax and the carbon rebate work independently of each other. Whether the money is returned directly to households or not does not change the incentive it places to avoid emitting. The amount you pay to the carbon tax is tied directly to your GHG emissions, the value of the dividend is fixed.

Tobacco and alcohol tax regimes are the failed demonstration models for carbon pricing.

More over, jumping back to carbon pricing itself, Corcoran ignores evidence from within Canada, which found that British Columbia's (then) revenue-neutral carbon tax (which only escalated to $30/ton, compared to $50 in the more comprehensive federal plan) reduced emissions in the province by between 5 and 15 percent.

Harvard economist Greg Mankiw, in his best-selling Principles of Economics textbook, talks about how “the invisible hand will ensure that this new market efficiently allocates the right to pollute.” But the hand is not quite invisible, guided as it is by what Mankiw refers to as the “benevolent social planner” who will set the production level of a product at the point where “the demand curve crosses the social cost curve.”

An excellent 101-style explanation by a respected economist. No complaints here.

Looks great in a textbook, not so great in the real world, and even worse in the unreal world of carbon science and economics. A new commentary this week from Texas economist Robert P. Murphy describes how the work of Nobel Prize winner William Nordhaus (the economist cited by Clean Energy Canada) actually fails to support a carbon tax in the context of the latest report from the UN’s Intergovernmental Panel on Climate Change.

According to Murphy, the work that won Nordhaus the Nobel demonstrates “quite plainly that the UN’s special report on climate change is full of proposals that are ludicrously expensive.” After Nordhaus accepted his prize, he diplomatically stated that the UN’s 1.5-degree-Celsius maximum warming target is impossible to achieve at this point. Murphy takes it further: “Nordhaus’s work shows that such an aggressive goal would make humanity much worse off than if we simply adapted to climate change with no government measures.”

Instead of analyzing this in the context of the IPCC, let's analyze it in the more relevant context of Canada's carbon tax. It's true that Nordhaus's work determines a social cost of carbon (SCC) that would allow for significantly greater than 1.5 degrees of warming. However, Canada's carbon tax isn't in line with a 1.5 degree warming target either. Using the most recent work from Nordhaus, I did some napkin math to compare his estimates of the SCC (converted to CAD using PPP and then nominal values) with the Canadian legislation. Values might be off a bit due to out-dated PPP numbers, but it gets the general idea across at least:

Carbon Taxes in Canada

(All estimates are nominal CAD, 2% annual inflation assumed)

Additionally, official Environment Canada estimates of the SCC would place it around $51.43 in 2020 (again, adjusted to nominal value). So according to these estimates, Canada's carbon tax would actually price carbon quite appropriately - but if anything, would very slightly under-price carbon.

Corcoran's criticism might present a reasonable critique of a theoretical massively higher carbon tax or a guidance for the optimal level of a carbon price, but does not provide any refutation of the carbon tax Canada is actually implementing. So unless Corcoran is actually saying "Great job Justin, but keep the carbon price right there near the optimal level", this criticism is mute in Canada.

It's also worth noting that Nordhaus's SCC estimates, although respected, are far from universally agreed upon. New York University completed a survey of economists and used the results in Nordhaus's DICE model. The result was a SCC far higher than Nordhaus's own estimates. By this estimate (which would be over $100), Canada is significantly under-pricing carbon even at it's peak level of $50.