Tax Overview

The carbon tax of British was effective on July 1, 2008 cross BC province at a starting level of $10/tonne, and designed to increase by $5/tonne every yearly till $30/tonne at July 1 2012. The B.C’s Ministry of Finance estimated that this tax would reduce CO2 emissions by up to three million tonnes yearly in 2020 – equivalent strategy of taking off 800,000 cars from the road each year. [1]  It is a “Revenue Neutral Carbon Tax”, which means that all the carbon tax revenue would transfer back to tax payers via reductions in other taxes, such as personal income tax.  According to the government report, “no further increases or expansions are planned at this time”.[2] This tax would be based on greenhouse gas emissions (GHG) generated from burning fuels, as general case, puts a price on purchasing or using each tonne of GHG emitted.  Intuitionally, increases the emission price, then reduce the emissions via market itself and form an automatically functioned incentive mechanism to encourage the R&D of fuel usage.

The application and collection method of this tax is almost the same way as motor fuel taxes[3] currently applied and collected, except for the natural gas – collected at retail level. This is a minimum administration cost for government and compliance to those tax collectors on behalf of provincial government. Table 1 shows the selected carbon tax rates by fuel.

 

Table 1. Selected Carbon Tax Rates by Fuel
	UNITS FOR TAX	TAX RATE JULY 1, 2012
Gasoline	¢/litre	6.67
Diesel (light fuel oil)	¢/litre	7.67
Jet Fuel	¢/litre	7.83
Natural Gas	¢/cubic metre	5.70
Propane	¢/litre	4.62
Coal – high heat value	$/tonne	62.31
Coal – low heat value	$/tonne	53.31

*Data source: http://www.fin.gov.bc.ca/tbs/tp/dimate/A4.html
**For more carbon tax rates: http://www.fin.gov.bc.ca/tbs/carbon_tax_rates_by_fuel_type_from_Jan_2010.pdf

To summarize here, the object for this carbon tax is: i) to reduce CO2 emissions, ii) to archive the goal of “Revenue Neutral Carbon Tax”. In general tax case, there should be a third goal – reducing the market distortion.

 

 

Tax implementation

Reduce CO2 Emissions

Usually, the reduction of CO2 emissions could be measured by the fuel consumption.  The government supplies an attractive saving matrix on their website as suggestions to British Columbians. The research outcome on fuel consumptions shows that this tax is environmental friendly strategy.  The table 2 below shows a  briefly statement of consumption and emissions data.

Table 2  Brief of consumption and emissions data
	B.C	Rest of Canada
Fuel Consumption per head	Dropped by 4.5%	Declined, but less than 4.5% individually
Petroleum fuel usage	Dropped by 15.1%	Declined by 16.4%
Greenhouse gas emissions	Dropped by 9.9%	Declined by 4.9%

*Data source: http://www.carbontax.org/progress/where-carbon-is-taxed/

 

Revenue Neutral Carbon Tax

The carbon tax is designed as a resource of fund supported tax cuts in B.C., for individuals, families and business. The figure 1 below shows the revenue of carbon tax and reduction tax revenue on personal tax and business tax cuts. In calculating this table, the governmental department use the same material assumptions and policy decisions underlying it when they design this report. The only material assumption needed to specify for this report is that the cost of revenue reductions increasing with the upward trends of personal income tax revenue yearly, due to the personal income tax rate cuts.

Through this table, it is easily to see that in 2010/11 real data and 2011/12 forecasted data, the carbon tax revenue is 741 million CAD and 960 million CAD, both less than the total tax revenue reduction, which is 865 million CAD and 1,152 million CAD respectively, i.e. the revenue neutral carbon tax has been achieved.   And in the report, the forecasted carbon tax revenue for 2013/14 and 2014/15 is $1,241 and $1,261 million, and break even with tax revenue reduction respectively.

Thus, this goal has been achieved. And the report shows that this tax is socially efficient as well. I would illustrate this topic in following part.

Fig. 1  Revenue Neutral Carbon Tax Report 2010/11 and 2011/12

 

 

*Data source: http://www.bcbudget.gov.bc.ca/2012/bfp/2012_Budget_Fiscal_Plan.pdf, p.66
**For the material assumptions on revenue: Budget and Fiscal Plan 2012/2013-2014/2015, p.132-p.136

 

Socially Distortions Reduction

Usually, the government controlling is needed when market failure happens. The government has different options at CO2 emissions controlling, such as cap and trade, motor tax, purchased tax on fuel used commodities, etc. And within taxation, there are two kinds – one is on price, the other is on units, which is volume in fuel market. Tax on price would raise the prevailing price in market, which would result in additional cost for consumers and tax payers.

This carbon tax should be supported because it is a unit’s tax – they tax on volume not on price. It helps to lower the price fluctuation.  Why the fuel price volatility is so important? Because the fuel price is one of important indicators of inflation rate, or price level in a country.  If fuel price raises, the cost of production industry would increase as well, then the price of goods, especially non-durable goods would increase.  The government put a tax in order to put the social cost to firms’ private cost, such that they could reduce the production of pollution. However, if the market price increases, the firms would have enough space of revenue to offset the higher cost. Then things would not be big difference.

The fuel price in B.C. increases with the world fuel price, but no higher add-ups. And according to the yearly report, the inflation rate of B.C. tends to be stable.

What we need to notice here is the unemployment rate. As we discussed above, the tax would increase the cost of fuel usage. To firms, it would be a big shock. Let’s take car companies as examples. Besides the increasing of producing cost, the revenue would decrease because of lower consumption on cars – more people would choose to walk or public transportations instead of car driving.

The B.C.’s carbon tax does a good job on this side, through a yearly increasing amount of tax. And the report released on time for firms to made their plan, and allowed them some periods to adjust to this policy. If not, the higher tax rate would be a very big random shock to industries. The firms would do all they can to reduce the cost.

As to the distribution effect, I would think that there exists some effects but may be offset by another effective policy simultaneously.  This carbon tax is as a supported fund to personal taxes, one of these is benefit to low income person. Lack of the clear data for the income increasement of poor and the average price level, especially the price level for necessary goods, I could not be 100 percent sure about the distribution effects. But according to the paper I searched, B.C. has a low income tax rate compared with rest parts of Canada.

 

 

Reference:

1. Budget and Fiscal Plan 2012/2013-2014/2015 , p.66 – p.68, p.132-p.136    http://www.bcbudget.gov.bc.ca/2012/bfp/2012_Budget_Fiscal_Plan.pdf
2. 2.       A Carbon Tax is More Viable than Cap and Trade, Richard Matthews
   http://globalwarmingisreal.com/2012/07/25/a-carbon-tax-is-more-viable-than-cap-and-trade/
3. 3.       Where Carbon is Taxed, Carbon Tax Center
   http://www.carbontax.org/progress/where-carbon-is-taxed/