Design principles for a Yukon carbon tax

Although they didn't mention it in their budget-response speeches, when pressed by doughty newshounds from this newspaper, NDP leader Liz Hanson and Liberal leader Sandy Silver confirmed they are considering a carbon tax.

Although they didn’t mention it in their budget-response speeches, when pressed by doughty newshounds from this newspaper, NDP leader Liz Hanson and Liberal leader Sandy Silver confirmed they are considering a carbon tax.

So let’s look at the design questions for a Yukon carbon tax. The big ones are how high the tax should the be, who it should apply to, where the money should go and under what conditions should we implement it.

How high should a carbon tax be? The B.C. carbon tax is $30 per tonne of CO2, which works out to about 7 cents per litre of gasoline. However, 7 cents is not likely to significantly change business and consumer behaviour. This of course is the point of a carbon tax, since we need to reduce how much fossil fuel we burn. A recent report by the parliamentary budget officer in Ottawa refers to a variety of studies that suggest a tax in the $100 per tonne range would be needed to really get people’s attention. This would be about 23 cents per litre.

So one option is to set a tax at the $30 per tonne rate, then raise it by $3.50 per year until 2035. This would provide a small immediate incentive, plus tell people to start planning for a world where fossil fuels will be much more expensive.

Consider a Yukon family with an older oil-heated house, which needs about 2,000 litres of heating oil per year, and who fill up their car’s 50 litre gas tank every week. They would pay $325 per year at first and $1,025 when the tax was fully implemented.

According to Myclimate’s air travel carbon emission calculator, a return trip to Vancouver by air for this family would cost an extra $72 in the near term and $240 in the long run (assuming four people in the family).

A Klondike placer mine that used 100,000 litres of diesel per year would pay $7,000 per year at first, and $22,300 in 2035. If you think 100,000 litres is a lot, remember that D9s have an 800-litre diesel tank for a reason.

Or take a big mine. The 2013 feasibility study for Casino talked about a 125-megawatt natural gas power plant. The business case’s line item for power is almost $100 million in year two of the mine. Depending on various technical assumptions, that might generate $5-10 million in tax revenue at first, or perhaps almost $30 million at the higher $100 per tonne rate.

The next question is who should pay. Liz Hanson mused about a carbon tax that targeted industry instead of individuals. That might be politically popular, although environmentalists would point out it gives regular Yukoners no incentive to reduce their driving and home heating oil use. Others would argue for mines to be exempt, fearing that investors would choose projects in non-carbon-tax jurisdictions if Yukon mines had to pay a tax that mines in Alaska or Saskatchewan did not have to.

What is definite is that any plan that is selective in its application will address only part of our carbon footprint and be especially unpopular with those lucky few who get to pay it.

Then there’s the question of where the money should go. In 2012, Yukoners burned 139 million litres of fossil fuels according to Statistics Canada. Assuming the rate for gasoline is close to the average for other fuels, the carbon tax described above on that volume would net almost $10 million in the near term and $32 million by 2035.

Option 1 would be for the Yukon government to just add the cash to the territorial kitty. Option 2 is also for the government to keep it, but promise to spend it on renewable energy projects. Both of these represent a sizeable new tax on Yukoners and a growth in government, which some will like and others will loathe.

Option 3 is a revenue-neutral approach, which is what Sandy Silver mentioned in his post-budget comments. However, he didn’t give any more details. These are important, since a tax can be revenue neutral on average, but still have major winners and losers.

Option 3A is to take the revenue, say that $32 million I mentioned above, and give an equal share of around $850 to each Yukoner. That family of four would get a cheque for $3,400. You can guess how happy the placer miner above would be to pay $22,300 and know that her money paid for cheques to 26 bike-riding, downtown-living environmental activists in Whitehorse.

Option 3B is to do something similar to what B.C. did, and spread the money around. They paid some to lower-income citizens, and used the rest to reduce a variety of other business and personal taxes.

In any of these scenarios, a big mine will make a major new transfer to the territory. Accountants and land-claim negotiators will have to figure out later how this affects royalty formulas and payments to First Nations. In a way, a carbon tax on big mines is a backdoor way to create an Alaska dividend. The more big mines we have, and the more carbon they spew, the bigger the cheques to citizens under option 3A above.

Finally, we have to decide on the conditions for implementation. Would the Yukon go ahead regardless of what the rest of North America did? Or would we say we were on board with the idea, but would only implement it when a pan-Canadian deal was signed? Or would we wait until our mining competitors in Alaska and the other U.S. states were part of a comprehensive North American deal (which might be a very long time coming)?

These are important questions, but also tricky ones. It will be interesting to see what the NDP and Liberals have to say about them in the run up to the election, especially as the Yukon Party stakes out its position firmly against such a tax.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won the Ma Murray award for best columnist in 2015. You can follow him on Channel 9’s Yukonomist show.