Here is a test for any proposed carbon tax: does it create an incentive for people to make environmentally responsible tomato purchases?

In winter, a Canadian faces two basic tomato options: hothouse tomatoes grown close(ish) to home, and field tomatoes imported from warmer climes, generally Mexico. Keeping a greenhouse at tomato growing temperature in the northern winter is energy intensive, but so is trucking tomatoes thousands of miles. A well-designed carbon tax should create an incentive for people to make a the best choice, be it greenhouse tomatoes, imported field tomatoes, or no tomatoes at all.

The simplest type of carbon tax is a tax on fuel. In Canada imposed a carbon tax, a greenhouse operation would face higher fuel costs, and thus higher production costs. Unless the firm can achieve cost savings by scaling back production, or has a cushion of profits that can absorb the higher costs, the firm will have no choice but to pass on the cost to consumers, or go out of business.

Consumers will respond to the higher cost of Canadian-grown hothouse tomatoes by looking for alternatives. If the price of local hothouse tomatoes increases, but the price of tomatoes imported from warmer climates is unchanged, one would expect some percentage of people to switch from hothouse tomatoes to trucked in tomatoes. In the long run, the greenhouse locations might even relocate a hundred or so miles south, to take advantage of cheap US fuel.  

The basic point is this: if goods produced in Canada are subject to carbon taxes, but the goods produced in the US and Mexico and imported are not, people will substitute cheaper imported goods for more expensive Canadian goods. The carbon tax will shrink Canadian production of goods and services, and increase imports. The transportation cost of importing goods will partially (or, conceivably, entirely) offset the environmental benefits of the carbon tax.

One solution is to tax imports: a tax on carbon equivalent to the carbon costs of their manufacture and transport. It's easy enough to say, but much harder to do.

The European Union doesn't have a carbon tax, it has a system of emission allowances, that restrict firms' carbon emissions. However they face a similar dilemma. EU law requires that European-based airlines not emit any more carbon than is permitted under their emission allowances. This potentially puts European airlines at a disadvantage when it comes to servicing routes such as Paris-New York, if they have to pay the cost of buying an allowance to cover their emissions. The EU is planning to level the playing field by requiring all airlines flying into Europe to comply with some kinds of carbon controls – but it has been able to get the implementation details worked out.

If the EU can't work out how to create a level playing field for domestic and international airlines, when aviation has a well-defined and well-known technological structure, how will we be able to create a level playing field for domestic and international tomato producers, when the carbon costs of a tomato vary so much depending when and where and how it's grown? 

To be continued…