OTTAWA – Economists from one of Canada's big banks have thrown their support behind taxing industries and consumers who contribute to global warming, saying that government needs to attach a cost to pollution if any fundamental progress is to be made.

In a report released today by the TD Bank, economists argued that industry and consumers will not change their behaviour as long as it's cheap to pollute. They advocate a policy that combines emissions regulations, taxes, subsidies and a trading system for emissions credits – a varied approach they say would mitigate the impact on the economy.

TD's chief economist Don Drummond said he's found it "bizarre" that the government and the business community haven't engaged in a more thorough public debate over such a major economic issue.

"When you think about most major initiatives we've had in Canada, whether the fate of the deficit or the free trade agreements where there wasn't consensus, there were fairly fulsome debates and different perspectives were put out . . . but I don't see that happening," Drummond said in an interview.

Any mention of a carbon tax – or taxation in general – is a taboo word among many politicians. Liberal Leader Stephane Dion raised the possibility last week, and then quickly backtracked a day later.

But Drummond says taxing those who actually pollute creates an incentive to change behaviour.

He suggests that the tax should be applied when the pollution is created. Thus, the consumer would pay for car pollution, and industry would pay for pollution associated with the production process.

The revenues would be shifted into cutting taxes in other areas or to finance subsidies that further help the environment.

"You'd recycle every single cent," said Drummond. "You can recycle it in an indirect fashion through cutting other taxes such as income taxes or you can recycle it directly within the energy area."

An emissions trading system would be another key component of a ``polluter pay" system, something the TD says has "proven benefits."

In such a market, companies that reach their emissions targets can sell credits to other companies who can't seem to lower their greenhouse gas output. While Drummond acknowledges that joining an international system might not appeal to Canadians at the moment, Canada should get involved in a domestic emissions trading scheme soon with an eye to connecting to the bigger markets later.

"You might be more successful at getting the buy-in if we started domestically."

The crux of the problem – or "market failure" in economist-speak – is that clean air is considered a free commodity. Simply legislating emissions cuts, Drummond says, only masks this problem and doesn't create long-term conditions for industries and consumers to cut down on their emissions.

Taxing consumers for their auto emissions, for example, would cause them to seek more fuel efficient cars, and in turn force industry to do more research and sell cleaner vehicles.

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