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Recommendations
for Budget 2005 Pollution Dividend for Health Care & a 21st Century Economy Summary A portion of all revenue from fuel excise tax would be invested in the health care sector, with an emphasis on preventative health care. Another portion would be used to establish a 21st Century Economy Fund. This fund would support the deployment of technologies and infrastructure that is environmentally restorative and strengthens Canadian competitiveness such as renewable energy, energy efficiency and public transit. This dividend and investment arrangement would have the double benefit of moving towards fuel prices reflecting the true costs, and putting in place mitigative and remedial programs to address the health and environmental costs of burning fossil fuels. Revenue Benefits for Canadians
Background
and Rationale Notably, this arrangement would help address the growing environmental health crisis, driven in large measure by exposure to air contaminants including mercury, sulphur, nitrogen oxides, particulate matter and ozone — all from fuel combustion. Air pollution kills more people annually in Canada than traffic accidents or breast cancer.1 In Ontario alone, air pollution is responsible for in excess of $1 billion annually in direct costs such as hospital room admissions and absenteeism and another $9 billion in indirect costs, such as mortality.2 Over the past 15 years, many OECD countries, including Finland, Denmark, Germany, Norway, Sweden, the Netherlands and the UK, have introduced ecological tax reforms to promote economic growth while reducing air pollution including carbon dioxide emissions.3 Sweden has quite a comprehensive regime for taxing fuels based on carbon, energy use, nitrogen oxide, and sulphur.4 In 1998, the report of the Technical Committee on Business Taxation to the Department of Finance recommended specifically that the federal fuel excise tax be restructured to correspond “to the user pay principle.” The report’s recommendation for environmental tax reform concluded: “The restructured tax would include other sources of pollutants and ensure that polluting activities by businesses — and by all Canadians — bear a more appropriate charge for the use of air, water and land”5 In actual fact, the Department of Finance has already started to reform fuel taxes, to take into account ecological considerations, by removing the excise tax on ethanol. This is in order to promote fuel switching towards a more climate friendly fuel (which, unfortunately, is only true with certain types of ethanol). Nevertheless, as a general rule the level of taxation does not reflect health and environmental costs.6 The federal gasoline tax is 10 cents per litre, and there are a number of other fuels that include an excise tax: aviation gasoline: 11 cents per litre, unleaded aviation gasoline: 10 cents; diesel fuel: 4 cents; aviation fuel: 4 cents. However coal, the dirtiest fuel, does not even have a federal excise tax applied to it7 (while at the same time most provinces apply a sales tax to coal).8 The current level of taxation on gasoline should be considered the benchmark for initially phasing in taxes. Most of the new revenue could, therefore, be generated from tax increases on the other fuels. The largest source of new revenue would come from including a modest excise tax on coal. The public recognizes that burning coal is bad for the environment and human health and, hence, would be responsive to investing this revenue in health care and sustainable industry development. Assessments of environmental tax shifting policies in Europe, which include the introduction of carbon taxes, have shown that the effect on the economy is minimal or even somewhat positive, through lower costs in labour-intensive sectors, energy substitution and increased energy efficiency. In addition, there is no evidence that environmental measures, including carbon taxes, have had a negative impact on the international competitiveness of firms.9 Given the fact that energy prices are low and energy use per capita is significantly higher in Canada than in United States or Europe, there is enormous potential for low-cost energy conservation measures, which will mitigate the negative impact, if any, that new environmental fuel taxes will have on the economy. The burden of environmental taxes on the economies of countries where they have been introduced, has been minimized by introducing taxes at low levels and implementing gradual increases according to a set schedule so that firms have been able to adjust their investment decisions according to phased-in tax increases. Also, countries have granted exemptions or tax rebates to firms in energy-intensive sectors in exchange for commitments to meet increased energy efficiency targets.10 Environmental taxes are globally recognized as a cost-effective means of reducing pollutants since firms are given the flexibility to decide how and to what extent they will reduce their emissions. Germany’s “ecotax” on fuels is considered a decisive factor in reducing the country’s greenhouse gas emissions by 18 per cent and, in particular, flattening transportation emissions (1990-2001). Because the revenue was used to reduce state pension contributions, the tax shift yielded double dividends: i.e. reduced pollution and reduced tax burden. Environmental taxes on fuels have the additional benefit, over many regulated emissions standards, of providing on-going incentives for increasing efficiency, fuel switching and ultimately reducing emissions. It
is essential that clear criteria be established for spending money from
the 21st Century Economy Fund. Much climate protection spending to date
has been invested in voluntary programs and some very capital-intensive
technological fixes with limited success in reducing emissions, e.g.
carbon storage. Clear criteria have to be established to ensure investment
is focused on practical, cost-effective technologies that, with relatively
small investments, will enter Recommendation Alternative
and Complementary Policies
The Large Final Emitters system — if designed correctly — will also reduce consumption of fossil fuels and in turn air pollution and greenhouse gas emissions.12 As in Europe where emissions trading will begin in earnest in 2005 alongside environmental taxes found in many jurisdictions, these two regimes can complement one another. Because the LFE system will primarily cover the oil, gas, mining and manufacturing industries, the burden of the pollution dividend would have to be considered in the design of both regimes. In Europe, many of these industries are either exempt from paying ecological taxes or eligible to receive tax rebates in exchange for making commitments to meet energy efficiency targets. Nevertheless, the pollution dividend has the advantage of passing on the external costs to all fuel consumers, and importantly it begins to incorporates all emission costs, not just carbon. The
pollution dividend on fuels is complemented by other efforts to strengthen
the energy efficiency of the Canadian economy, for example: improved
standards for consumer goods such as appliances and cars, incentives
for manufacturers to produce more energy efficient products, and investments
in alternatives to automobile use like public transit. Moreover, as
the efficiency of the economy is improved and consumers have more energy
efficient choices, the federal government can phase in, with least disruption,
increased levels of tax on the various fuels, including gasoline. This
phased increase can be done in such a way to ensure that net spending
on energy remains relatively stable. Contact
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