Among failed climate change mitigation attempts, it is a heart-warming to find a success story right here in BC with the carbon tax it enacted in 2008. Hopefully, BC’s policy will serve as inspiration for Canada and the world.
In a lecture on Climate Change, the OECD Secretary-General Mr. Angel Gurría declared BC’s carbon tax to be “as near as we have to a textbook case” of good carbon policy.
Economists and news agencies hailed the tax as a “model of environmental and economic design” (Pollon). For example, Sustainable Prosperity, a research institute, praised BC as “a leader in North America on carbon pricing since it introduced the carbon tax in 2008”. In an article titled “We have a winner: British Columbia’s carbon tax woos sceptics,” The Economist explains that BC’s success shows that a “carbon tax can achieve multiple benefits at minimal cost.”
How does this so highly praised carbon policy work? And what makes it so successful? As climate change is an increasingly pressing matter, understanding these questions is important and will guide world leaders’ future decisions.
BC’s Carbon Tax
BC’s carbon tax started in 2008 as $10 (now $30) per tonne of CO2 equivalent emissions generated from burning fuel. Of course, since each fuel has a different chemical make-up, each fuel faces a different per litre tax. For example, the tax on gasoline is slightly under 7 ¢ per litre while the tax on diesel diesel is almost 8 ¢ per litre. BC’s carbon policy is North-America’s first broad-based, revenue neutral carbon tax. It is part of BC plan to reduce greenhouse gases by 33% below 2007 levels by 2010.
The Economics of Carbon Taxes
First, let’s discuss carbon taxes in general, as economic policy tools. Carbon taxes, together with tradable carbon permits, are considered “first-best approaches” because they directly price the negative impact and lead to efficient economic outcomes (Antweiler). The idea here is that the tax makes carbon emission more expensive, so that firms and individuals will reduce emissions in an effort to decrease costs. After adopting energy conservation and efficiency methods, further emission reductions become more expensive, until firms prefer the tax to further emissions reduction. At some point, it also becomes no longer socially optimal to reduce carbon emissions. For example, home heating during extremely cold weather is important despite carbon emitting. When the tax is priced appropriately (that is, when the tax is equal to the external cost of carbon emissions), firms and individuals will in the aggregate emit the socially optimal level of carbon.
Carbon taxes are also considered market-based instruments. Unlike emission standards, they have better “dynamic efficiency” in reducing emissions. That is, they provide persistent incentives for pollution reduction and for innovation in abatement technologies. By contracts, once an emission standard is achieved, there’s no further incentive to reduce emissions (Antweiler).
Key Characteristics & Reasons for Success
BC’s carbon tax was both politically and economically successful thanks to some keys characteristics.
First off, the tax is revenue neutral. That is, the government has the legal requirement to return the tax revenues to taxpayers through tax reductions. The government even distributed a one-time $100 per head ‘dividend payment.’ Further, the tax amount increased incrementally over the years, allowing individuals and firms time to adjust to the policy. Both of these features sustained the political support of BC residents. The New Democratic Party, which initially opposed the policy, later even said it should have supported it (The Economist).
A few characteristics make this carbon policy economically successful. First, as explained above, by directly taxing carbon emissions, the tax creates appropriate economic incentives. Further, administrative and compliance costs are minimal since the carbon tax is applied and collected in a similar way as motor fuel taxes. Moreover, the policy also addresses the concern that low-income families will be impacted the most, by providing additional tax credits to these families.
It is worth noting that the tax only covers 70% of carbon emissions, since, in BC, 30% of carbon emissions are not from fossil fuel. Nevertheless, BC plans to extend the carbon tax to emissions beyond fuel burning and integrate the tax with other climate action initiative.
The BC Ministry of Finance’s website indicates that the tax has the “broadest possible base” and that there are “no exemptions, except” (a choice of words I found interesting) a few cases for administrative reasons.
Impact/Results
According to the most recent Climate Action Progress to Targets report, “gasoline, diesel, natural gas, coal and oil have all gone down since 2007, and my more than the Canadian average.” The report also points to “high rates of clean technology sector growth, hybrid vehicle adoption, and construction of green buildings.” For example, BC’s hybrid car adoption was 2.1 times greater than the Canadian average rate. While BC reduced emissions at a faster paste than Canada as a whole, its population and GDP growth was above the Canadian average. These results indicate, as the report points out, that carbon policy and strong economic performance can be compatible.
While the results of BC’s carbon policies is overwhelmingly positive (at least according to the report), it is important to remember that the carbon tax is only one of the various BC programs aimed to reduce emissions. Therefore, it is not clear what portion of the success can be attributed to the tax. Further, these are short-term results; it will be more interesting to see whether they’re part of a long-term trend or only temporary. Moreover, using the rest of Canada as a benchmark can be problematic (even when looking at percent changes from a base year). BC’s economic performance and emission reductions may be due to BC-specific factors that are independent with the carbon policy. Therefore, the evidence in the Climate Action Progress to Targets report is not conclusive (but, nevertheless indicative of progress).
Going Forward
There’s still a lot more that BC can do. As BC’s Ministry of Finance explains, “the carbon tax will not, on its own, meet B.C.’s emission-reduction targets, but it is a key element in the strategy.” The carbon tax must also be extended to emissions beyond fuel burning.
Further, to change individuals’ and firms’ behavior, the tax must be more aggressive. 7¢ per litre of gasoline will not do much to reduce driving or incentivize people to buy more efficient cars, but it’s a start.
Overall, BC has set a good example for carbon policy that will hopefully inspire others to follow suit.
As a former resident of California, I was happy to see that BC’s climate mitigation policies have earned it the title of “the California of Canada” (The NY Times).
Works Cited
Antweiler, Werner. Elements of Environmental Management. N.p.: n.p., n.d. PDF. The book has not been published yet. It’s only available to Prof. Antweiler’s students.
British Columbia Carbon Tax Review. Ottawa: Sustainable Prosperity, Sept. 2012. PDF. http://www.sustainableprosperity.ca/dl891&display
Gurría, Angel. “Secretary-General – OECD.” Secretary-General – OECD. OECD, n.d. Web. 08 Mar. 2014. http://www.oecd.org/about/secretary-general/The-climate-challenge-achieving-zero-emissions.htm
Lake, Terry. Making Progress on B.C.’s Climate Action Plan. Vancouver: British Columbia, 2013. PDF. http://www.env.gov.bc.ca/cas/pdfs/2012-Progress-to-Targets.pdf
Marshall, Christa. “British Columbia Survives 3 Years and $848 Million Worth of Carbon Taxes.” Editorial. The New York Times 22 Mar. 2011: n. pag. Web. 08 Mar. 2014.
Pollon, Christopher. “The Tyee – Has BC’s Carbon Tax Worked?” The Tyee. N.p., 23 Nov. 2011. Web. 09 Mar. 2014.
“We Have a Winner.” The Economist. The Economist Newspaper, 23 July 2011. Web. 08 Mar. 2014.
“What Is a Carbon Tax?” Province of British Columbia. BC Ministry of Finance, n.d. Web. 08 Mar. 2014. http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm