Economic Overview of the Carbon Policy in British Columbia

The BC’s revenue-neutral carbon tax was first initiated in July 2008 and since then the tax has increased gradually. The last such increase in tax happened last year and no future expansions are on the table at the moment. The carbon tax policy was drafted by the Liberals government under the premiership of Gordon Campbell and is based on the following five principles:

• All carbon tax revenue will be recycled through tax reductions to the tax payers.
• The tax rate would increase gradually allowing citizens to adjust to changes. (The last proposed tax hike occurred in 2012)
• Low income individuals will be protected and a separate plan will be designed for them.
• The tax will be broad and will cover almost all emissions from fuel combustion in BC.
• The tax would be integrated with other measure in future.

How does it work?

The methodology by which this tax works is very simple and is similar to other emissions taxes that we see around the world. As of July 2012, the tax rate is based on $30 per tonne of CO₂ equivalent emissions. Different types of fuels emit different levels of greenhouse gases (GHGs), and so the tax amount is dependent on the amount of carbon that each fuel constitutes.

Carbon tax vs. cap and trade:

The economists around the world have developed consensus that pricing carbon (like the current BC Carbon tax policy) is the most economically efficient approach to reducing carbon emissions. Putting a tax on carbon has three major advantages against the traditional ‘command and control approach’ to carbon regulation. According to Ibid and Stavins, carbon taxing is the most economical approach for the following three reasons. Firstly, it provides incentives to reduce carbon emissions without favoring any other approach. Secondly, this method can achieve maximum reductions with minimum costs. Thirdly, it rewards people who reduce emissions, similar to the “double-dividend” affects – discussed later in the blog – of the BC’s carbon tax that the government representatives keep advocating.

Carbon tax over cap and trade is also beneficial because it allows for easier and comprehensive coverage. Moreover, a leading voice on economic environment policy, William Nordhaus, strongly favors carbon tax and gives the following reasons for his view: [carbon taxes provide] “administrative simplicity and frugality (it uses existing public and private tax administration infrastructures), speed of establishment, low transaction costs, price certainty (critical for investment decisions) and transparency to consumers (critical for influencing behavior).”

Where it stands now?

The government scheduled a review of the policy in 2012, aiming to analyze its impact on individuals and on various sectors of the society. The review has become controversial overtime as there are rumors that the liberal government will put the aggressive carbon policy on hold for some time. Critics have strongly criticized the fact that the current liberal budget has not allocated enough towards climate action plan. Rob Fleming, from the opposition party NDP, believes “the carbon tax review raises red flags around whether the government is going to formally abandon any pretense to achieve its climate action goals”. It is pertinent to mention here that NDP opposed the tax plan when the tax bill was tabled, and in many ways the climate action plan is used as a political vehicle by politicians to strengthen their vote banks. Also relevant here is the emissions target that was set by the government in 2007, and according to the memo the Liberals had decided to reduce Greenhouse gas emissions to one-third by 2020.

Environmentalists: The proposed climate action plan was initially received well by the environmentalists but they have raised concerns towards the liberal government’s inability to do more as part of their climate action plan. The David Suzuki Foundation has stressed the need for the government to have a clear vision for climate change.

Businesses and Industries: The rising tax payments have not fared will among the BC industrialists, especially those in the agricultural sector. The business community believes that most of the BC’s industries are exports based and with high carbon taxes they face a higher cost of production. This obviously leaves the BC producers at a disadvantage in the global market where competitors, with low costs of production, are able to reap more profits.

Independent evaluations of the BC carbon policy:

International Institute for Sustainable Development (IISD) based in Winnipeg, Manitoba, conducted the efficiency and effectiveness analysis of the BC carbon policy and concluded that the policy “performs really well” against the five principles that it sets out to achieve. The IISD further concludes that “British Columbia will face significant challenges to its greenhouse gas mitigation efforts in coming years, with economic growth, a lack of U.S. mitigation policy, natural gas expansion, regulatory constraints and an unresolved position on emissions trading all having the potential to influence both policy and emissions.”

Another policy analysis conducted by the Ottawa based policy network Sustainable Prosperity, commends the BC government on the revenue neutrality of the tax system. According to the report, it is not only politically attractive but is also great at eliminating distortions in other taxes. This “double-dividend” – providing both economic and ecological benefits – nature of the tax is also likened by the OECD as their research work has also concluded that the carbon tax can yield positive employment effects if revenues from environmental taxes are utilized to finance reductions in income taxation. Therefore, a positive growth in GDP should be seen during this process, and this indeed has been the case for the BC’s economy in last couple of years.

Personal View:

I had the good fortune of hearing the senior economic advisor of the BC Climate Action Secretariat speak as a guest lecturer in my environmental economics policy class. During the lecture she stressed quite a bit on the leadership role that BC has demonstrated by being one of the first regions in North America to implement a carbon emissions plan. From her talk, it did seem that the government considers environment and ecology to be the two important tenants of the climate action plan. However, what still lacks is a clear vision for future, and the current liberal government hasn’t charted out a policy to carry forward the progress that has been made in terms of emissions reduction to date. In my opinion, the Liberals should not be wary of any adverse economic impacts of the current carbon policy, as researchers around the world have shown a positive correlation between environmental regulation and economic growth. Since, keeping BC’s economy flourishing is an important consideration for the Liberals; they should revive their faith in the climate action plan as it will guarantee higher economic returns in the coming years. In addition, I believe the current government is carefully weighing their options in the wake of the upcoming provincial election, which are slated for March this year, and perhaps the carbon policies of all major parties will be formed with more of a political outlook than an economic one.

References:

–          http://www.fin.gov.bc.ca/tbs/tp/climate/carbon_tax.htm

–          http://www.fin.gov.bc.ca/tbs/tp/climate/A4.htm

–          http://www.huffingtonpost.ca/2012/02/22/bc-carbon-tax-reviewed_n_1292906.html

–          http://www.iisd.org/media/press.aspx?id=227

–          http://www.sustainableprosperity.ca/dl891&display

–          Ibid, and Stavins, Robert. November 2001. “Experience with Market Based Environmental Policy Instruments.” Resources for the Future

–          William D. Nordhaus, Economic Issues in Designing a Global Agreement on Global Warming, keynote address.

–          OECD, Environmentally Related Taxation in OECD Countries: Issues and Strategies. (Paris, France: OECD, 2001).