LIBERALS LAUNCH "GREEN SHIFT" CARBON TAX

UNCLAS SECTION 01 OF 02 OTTAWA 000833 SENSITIVE SIPDIS E.O. 12958: N/A TAGS: PGOV SENV ENERG CA SUBJECT: LIBERALS LAUNCH "GREEN SHIFT" CARBON TAX ¶1. (U) Summary. Liberal leader Stephane Dion rolled-out his long-awaited carbon tax in a splashy launch on Parliament Hill on June 19 to a cheering, and highly partisan, crowd, kicking off a summer campaign to sell the plan to Canadians. The "Green Shift" Plan will be the centerpiece of the Liberal campaign in the next election and represents a significant political gamble. Dion has essentially staked his leadership on it. Although a bold gesture on climate change will appeal to many Canadians, Dion's ability to sell it effectively is questioned even by many within his own party and the Conservatives have the advantage of the simpler message that the tax is a job and wallet killer. Both Liberals and Conservatives believe that the carbon tax issue will be their winning ticket in the next election. One of them is wrong. End summary ¶2. (U) The timing of Dion's announcement, on the second to last day of the spring parliamentary sitting, reportedly owed less to environmental symbolism than to Liberal nervousness last week over the communications plan and the leader's ability to articulate it. Senior Liberals reportedly feared that fumbled messaging would doom the complex Plan. The Plan was immediately ridiculed by Dion's political opponents who are setting up to make a carbon tax the defining issue of the next election campaign. In a sign of the no-holds-barred opposition Dion can expect in coming months, the New Democratic Party (NDP) deliberately forced an impromptu procedural vote in the Commons that caused automatic bells summoning members to vote to ring throughout half of Dion's forty-five minute televised speech. Nonetheless, although occasionally struggling in English, Dion gave probably his best speech since becoming Liberal leader. He is clearly passionate about the issue and it is a good fit for him, as well as having the advantage of shifting the focus from him personally to policy where he is more comfortable. A FUNDAMENTAL TAX SHIFT ¶3. (U) The 48-page plan entitled "The Green Shift: Building a Canadian Economy for the 21st Century, " is unexpectedly heavy on economics, as was Dion's speech, which amounted more to a budget presentation than to a political stump speech. Dion deliberately portrayed his plan less as a carbon tax than as a fundamental shift or "fiscal reform" of the Canadian tax system, dovetailing the Green Shift with a Liberal anti-poverty plan announced earlier this spring. Rather than paying more, Dion stated, Canadians would pay differently. Dion insisted that Canadians are ahead of their politicians, are looking for leadership on climate change, and are "ready to do the right thing" for the environment and for the economy. He dismissed naysayers whom he said had told him that putting a price on carbon was good policy but bad politics. Saying that he is "utterly convinced" of the need to take action on climate change, he declared that "the Liberal Party must do this because others will not." A FOUR YEAR PLAN ¶4. (U) The carbon tax would be applied at the wholesale level on all fossil fuels based on their level of emissions. In the first year after the plan's enactment, the tax would be set at $10 per ton of "greenhouse gas emissions," rising to $40 per ton in the fourth year. (Comment: While unspecified, we presume the plan would target CO2 equivalent emissions over the fuel's production and combustion life cycle. End comment) Consumers would also pay carbon taxes at the point of sale for some products, apparently in acknowledgement that purveyors will pass along to consumers whatever taxes they pay Qthat purveyors will pass along to consumers whatever taxes they pay at the wholesale level. By the fourth year of the plan, consumers would pay taxes of 7 cents per liter for diesel, 11.3 cents per liter for light fuel oil, 12.4 cents per liter for heavy fuel oil, and 10.2 cents per liter for kerosene, for example, and taxes would also apply to propane, natural gas, and coal. ¶5. (U) Curiously, the plan would not impose carbon taxes at the pump for gasoline, because the federal government already collects an excise tax of 10 cents per liter on gasoline sales (the equivalent, according to the plan, of $42 per ton of GHG emissions). Overall, the Green Shift's carbon taxes should bring the government $15.3 billion in the plan's fourth year, which would be offset by over $15 billion in personal and corporate tax cuts and other benefits for lower income groups, seniors, and rural and northern Canada residents. ¶6. (U) Green Shift does contain two other elements that would promote greater efficiencies: an accelerated capital cost allowance (accelerated depreciation, essentially) for green technologies, and better incentives (in the form of tax credits) for private R&D. While the details remain to be fleshed out, the plan suggests that additional measures to boost home retrofits, greater use of energy-efficient appliances and vehicles, and other low-carbon practices will be forthcoming. WAR OF WORDS ¶7. (U) Now that the Plan is in the public arena, the battle to win over voters and a skeptical media can begin in earnest. PM Harper OTTAWA 00000833 002 OF 002 wasted no time, attacking the Plan as "crazy economics," and arguing that Dion could not be believed when he rejected a carbon tax during his Liberal leadership bid in 2006, and he should not be believed now. Reprising the tag line of recent Conservative anti-Dion attack ads, Harper alleged that the Liberal carbon tax was a "Tax on Everything," an unprecedented revenue grab imposed on Canadians already struggling with high energy costs. For their part, the NDP, who are competing for the same center-left voters as the Liberals, lambasted the Plan for its lack of targets and limits on GHG emissions. They dismissed it as an attack on ordinary Canadians rather than on corporate polluters, and little more than a tax "shell-game" that would not "get the job done" on climate change. ¶8. (SBU) Comment: The roll-out of the Green Shift Plan is a relief to Liberals who can now begin to answer Conservative attack ads that preceded the launch. However, the Plan's complexity is a major challenge, given Canadians' anxiety over the economy and rising fuel prices. Moreover, it is not readily apparent how the Green Shift would make a significant impact on consumer behavior and there appear to be a number of internal inconsistencies. At the level of the individual consumer, the biggest continuing decision is over driving, and the pump price of gasoline would not change, according to the plan, dampening its impact on gasoline consumption. And while the plan postulates that tax reductions and benefits for low income and rural dwellers would cushion the impact of carbon taxes, the most likely impact of the plan on the average Canadian is higher prices for energy, the consumption of which in Canada's often harsh climactic conditions and huge geographic expanse, has so far proven to be relatively price inelastic. ¶9. (SBU) Continued comment: The Liberals must also square their Plan with the provinces, including British Columbia and Quebec, which are about to impose their own carbon taxes. That the twin strongholds of Liberal support -- Atlantic Canada and Ontario -- are among the heaviest consumers of home heating oil and already face some of the country's highest hydro bills will also not go unnoticed. Additionally, the tax shifts -- while significant for low income earners -- are relatively modest for the middle class which will carry the freight for higher energy taxes. In the end, however, some Canadians will like the Plan and others will not, and much will depend on which party has the best spin, making its ultimate impact on the political climate uncertain. End Comment WILKINS