With global warming all the rage in government, the media, and the scientific community; and the recent introduction of the new Liberal carbon tax plan, a lot of talk has focused on the issue of who should be footing the bill for our increasing energy use. Whereas proponents of the bill think that Canadians have to start paying attention to our levels of carbon emissions, opponents of the bill point to the fact that Canadians are already burdened with high energy costs and require relief, as opposed to increased taxes, at this time.

First: a few facts. We know that there are a number of externalities from carbon emissions. Global warming has more or less been universally accepted at this point in time, and we know that the effects will range from moderate to severe harm to our environment. Even if you don’t believe in global warming, you probably still acknowledge that combustion processes, that are the source of most carbon emissions, are significant contributors to smog and other pollutants. These things are both bad for our health and for our environment. We also know that, currently, these costs are not factored into the price of using fossil fuels and other carbon-emitting power generating processes. As a result, we grossly underestimate the cost of using these energy sources, and neglect to factor in the environmental and personal harm that we inflict when using them¹.

As previously discussed, while proponents of the carbon tax generally recognize that it is our responsibility to mitigate the above mentioned harms, critics don’t believe that the average Canadian citizen should be punished via increased energy costs. Some people don’t believe we should be paying these costs at all, but this is clearly not a [long-term or sustainable] solution. So if the Canadian citizen isn’t footing the bill for these costs, who should be the one to do it? Big corporations? Distributors? Producers?

Taxation tends to be misunderstood. If you levy a tax against a big corporation, nobody seems to care, but levy the same tax against your citizens and there is a big outcry. The truth of the matter is that no matter who is taxed, the consumer is always the one who will end up paying for it². Why is this the case?

The economic principles behind this phenomenon are rather simple. In an ideal (closed) free market economy, businesses are driven by two distinct mechanisms:

1. Profit Maximization: Businesses will always try to maximize their profits through minimizing expenses and maximizing the price of its products.
2. Competition: Consumers will choose to purchase the cheaper of two (or more goods), assuming comparable function and quality, businesses will compete to try and achieve a larger portion of the consumer market, and thus competition will drive businesses’ prices down.

These two factors work together to develop a market equilibrium where a company’s revenue will equal its expenses. By taxing the business, all you are doing is adding an extra expense that the business must factor in to their prices. Just like every other expense, this helps decide the price of the product that is sold to consumers: Raise the costs of production, and you will also raise the final price of the product. This will result in a new state of equilibrium, where consumers are paying more for the same product. The same process happens regardless of what stage of production you add the tax; it is factored in as an extra cost, which is then passed on to the consumer. People don’t care as much when the tax is added on earlier in the process. Just because you don’t directly observe the price increases from a business being taxed (unlike seeing the sales tax being added on when it comes time to pay for something), it does not mean that you aren’t paying a higher price because of that tax.

Obviously we don’t live in an ideal free market economy, but the principles are more or less the same. The result is that there is virtually no difference between taxing a business and taxing the consumer. Of course, in a more complicated system, where you have to compete to retain business and jobs on an international scale, whom you tax becomes more important. However, the fact remains that taxing will ultimately affect the consumer. So remember: the next time the government decides to tax a big, greedy corporation, and give the money to honest, hard-working citizens, that corporation is just going to turn around and pass that expense onto the consumer³.