Tax Policy and Global Warming

Abstract

The Canadian government announced its ratification of the Kyoto Protocol to the United Nations Framework Convention on Climate Change on December 17, 2002. Under this protocol, Canada has agreed to reduce annual emissions of greenhouse gases (GHGs) to 6 percent below 1990 levels during the period 2008-2012—a commitment that requires a 30 percent reduction relative to projected GHG emissions for 2010 assuming business as usual. In order to achieve this objective, the Canadian government has established specific reduction targets and proposed various policy instruments in its climate change action plan (CCAP) released in November 2002. Although the main policy instruments contemplated in the plan involve public spending, voluntary agreements, and public information programs, it also mentions tax measures—though these are not clearly spelled out. This article seeks to contribute to the CCAP by considering the role that tax policy can play in helping to meet Canada’s commitments under the Kyoto accord. The author first provides a general justification for environmental taxes and tax incentives to address environmental challenges, examining different rationales for these tax measures and their implications for the design of environmental taxes and tax incentives. He then reviews existing and potential tax measures in Canada and other developed countries that are directed at the problem of global warming, considering their likely effectiveness to reduce GHG emissions or enhance carbon sinks that remove GHGs from the earth’s atmosphere. Returning to the CCAP, the author suggests ways in which tax measures can contribute to each of the areas for which action is proposed under the plan: (1) transportation; (2) housing and commercial/institutional buildings; (3) large industrial emitters (including renewable energy and cleaner fossil fuels); (4) small and mediumsized enterprises and fugitive emissions; (5) agriculture, forestry, and landfills; and (6) international emission reductions. Finally, he offers general conclusions on the role of tax policy in reducing global warming.