There is nothing invisible about carbon taxes. We should bite the visible hand and axe the tax
Carbon pricing is not a market-based policy
Canada would not be embroiled in a political carbon tax crisis today were it not for the background endorsement of economists who argue that a carbon tax is a principled market mechanism that can be used to correct a “market failure” such as climate change. In the words of a now-famous 2019 statement signed by 45 market-oriented economists, including former U.S. Federal Reserve chairs Alan Greenspan and Paul Volcker, a carbon tax is a sound market-based solution to a global problem. “By correcting a well-known market failure, a carbon tax will send a powerful price signal that harnesses the invisible hand of the marketplace to steer economic actors towards a low-carbon future.”
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Since 2019, the statement has been signed by more than 3,600 economic thinkers and is described by the Climate Leadership Council as “The largest public statement of economists in history.”
Many colleagues who contribute to FP Comment share the view that a carbon price, even if imposed via government policy, is a thing of beauty. The tax, seen as a price on carbon, transfers to all Canadians decisions that would otherwise be assumed by command-and-control authoritarianism.
In the recent words of William Watson on this page in defence of carbon taxation: “That is the beauty of the price system. It’s anonymous and decentralized. It grinds through the calculations and comes up with the adjustments, almost like a form of AI, one that harnesses all the human intelligence each and every one of us has.” Jack Mintz made similar arguments in his recent column. “The market will figure out the best and cheapest way to reduce” greenhouse gas emissions.
I would like to challenge — not for the first time — these and other arguments that claim carbon pricing by government is grounded in free-market economic principles. The market-mechanism justification for carbon pricing is based on a misrepresentation of the function of prices in an economy.
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The “invisible hand” mentioned in the economic statement gives the impression that a carbon tax is aligned with the ideas that enlightenment economist Adam Smith and others — from liberals to neo-liberals to libertarians — have championed over government control and planning. The economists’ endorsement of invisible hand principles in the context of a carbon tax is, at minimum, misleading.
The imposition of a carbon price by government — such as Canada’s $170 a tonne target — is nothing but a government price-fixing scheme. In a market economy, prices are not the starting line for economic activity nor are they the means to control supply and demand as implied by proponents of carbon taxation. Prices are the end point of economic activity. In a market economy prices are the product of supply and demand based on the multitude of individual and corporate choices that lead to final transaction prices.
Carbon pricing is not a market-based policy
The dynamic of supply and demand determines price, a process that takes place outside the knowledge and thought processes of the economic actors. “Every money price of a good on the market, is determined by the supply and demand schedules of the individual buyers and sellers, and their action tends to establish a uniform equilibrium price on the market at the point of intersection.”
So wrote the late Murray N. Rothbard in “Man, Economy and State: A Treatise on Economic Principles.” Another giant of free-market economics, Friedrich Hayek, described the invisible hand process in his 1946 essay “The Use of Knowledge in Society.” In a market economy, no one person or power determines pricing. “It is more than a metaphor to describe the price system as a kind of machinery for registering change, or a system of telecommunications which enables individual producers to watch merely the movement of a few pointers, as an engineer might watch the hands of a few dials, in order to adjust their activities to changes of which they may never know more than is reflected in the price movement.”
Using tax power to set a price to force a market movement stands the economic system on its head and gets the process backwards. With carbon taxation, the state is imposing a visible hand in an extreme and unprecedented way. For one thing, no participant in a market economy driven by the invisible hand would or could raise prices so as to ultimately reduce demand to zero.
Price does not determine supply and demand. Supply and demand determine prices. Pretending that the imposition of a visible hand is equivalent to the function of the invisible hand runs up against other practical problems all too typical of command-and-control economic structures.
The idea that high and rising carbon prices can be used to remove carbon from the economy runs up against the fact that carbon-based fossil fuels are currently part of the foundation for most economic activity. They are essential today, to the point where industry and consumers cannot do without them. They are, as economists say, price inelastic. A doubling or even a quadrupling via taxation will not end demand for fossil fuels without killing economic activity.
According to the 3,600 economist backers of carbon taxation, this little problem can be overcome by returning all the revenue from the carbon taxes to taxpayers “to maximize the fairness and political viability of a rising carbon tax.” The Trudeau Liberal plan for Canada follows that advice.
There is nothing invisible about carbon taxes. They are a perversion of free-market economic theory. We should bite the visible hand and axe the tax.
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