Jean Baptiste Colbert was a wise French finance minister to Louis XIV, who surmised that the 'art of taxation is in so plucking the goose as to get the most feathers with the least amount of hissing. 'These words ring loudly in politicians? ears right now, as governments struggle for the least painful carbon pricing policies while knowing that any approach will be complicated, complex and economically costly. Of the options, carbon taxation looks the best of the lot. Recently, cap-and-trade systems have been given a boost with Quebec and Ontario agreeing to develop a carbon trading system. The approach, also touted in the Lieberman-Warner bill introduced in the U.S. Congress last week, requires companies to bid for carbon credits made available by those companies that are able to produce fewer emissions than permitted. The advantage of a cap-and-trade system is that it provides certainty in reaching targeted reductions by big emitters. The disadvantage is that carbon prices will vary from year to year depending on both demand and supply conditions for carbon credits. Many businesses fear that such price uncertainty makes it much more difficult to plan costly long-term investments. To reduce these risks, cap-and-trade proposals often include maximum and minimum prices.

The burden of cap-and-trade systems unfairly falls on big emitters who are political targets for politicians looking to avoid voter backlash. It doesn't take a genius to figure out, however, that the cost of carbon permits will be shifted forward onto other businesses and consumers. A cap-and-trade system therefore misallocates resources from efficient producers to other sectors of the economy. Carbon taxation has three advantages over cap-and-trade. As prices, carbon tax rates are set with some certainty, making it easier for business to plan investments. The taxes are also applied comprehensively and are therefore more efficient. As a new revenue source, carbon taxes reduce other harmful taxes in the economy, especially taxes on investment, saving and work effort.

British Columbia recently adopted a full blown revenue-neutral carbon tax that applies to all fossil fuels according to their carbon content with the revenue returned as persona land corporate income tax cuts. As a targeted 'tax' regime, Alberta imposes a levy if companies do not reach a certain target with offsets given for money spent on carbon-reducing technologies. The latest proposal is to restructure the federal fuel excise tax on gasoline and diesel into a full blown carbon tax with the revenue returned to the public as tax reductions. With sky-high energy prices these days, it would be important to understand what extra mileage is obtained with a carbon tax. A carbon tax could create greater demand for non-coal generation of electricity, increase consumer interests in purchasing hybrids and encourage businesses to adopt new technologies to reduce carbon. All this will depend on both the rates and application of the tax.

Once introduced in the interest of curbing oil imports, the federal fuel excise tax has become a tax grab for the federal government, which until recently had no reason for being other than funding a politically-driven transfer to municipalities. Nancy Olewiler of Simon Fraser University and Iestimate that a restructured fuel excise tax on all sources of carbon, holding the gas tax unchanged, would yield $12- to $15-billion inadditional revenues. Such revenues could be used to offset higher fuel prices for Canadian consumers and businesses, as well as to fund investment tax credits in carbon-reducing technologies. While a restructured federal fuel excise as a carbon tax has many advantages both for economic and environmental reasons, it is far from a slam-dunkin policy terms. Two issues are critical.

A carbon tax would substantially affect competitiveness of energy-intensive industries since fuel prices would sharply increase. This would lead to demands for exporter exemptions and an impossible-to-accurately-levy carbon tariff. Further, if the U.S. adopts a cap-and-trade system, Canada might prefer to use the carbon tax for only those sectors not subject to the cap-and-trade system. Federal policies would also need to be co-ordinated with provincial efforts to avoid double taxation of some sectors of the economy. A federal carbon tax could serve as a floor for provincial policies just as would a federal cap-and-trade system. The advantage of federal tax is that it could deal with trade issues more readily, although some provinces could be harmed ' particularly Alberta, Newfoundland, Nova Scotia and Saskatchewan ' if they do not receive sufficient revenues from the federal tax as an offset. The carbon tax seems like good ideain economic and environmental terms but much needs to be sorted out ifthe least hissing is to be heard.