Gordon Campbell’s Liberals hurled themselves headfirst into the climate change game in 2008 with the introduction of North America’s first revenue neutral carbon tax[1]. At a time when the BC Liberals were making headlines for social conservatism and support for offshore gas exploration, being a first mover in the climate change game was an unanticipated move.
2007-2008: The political climate.
Climate Change was on the tip of everyone’s tongue in 2008. Al Gore had just won the Nobel Peace Prize (in conjunction with the International Panel on Climate Change) and the Kyoto Protocol’s first commitment period was getting underway, albeit without the support of big players like the U.S. and China. Big business was also making public about faces, with Exxon Mobil CEO Rex Tillerson publicly stating support for a carbon tax[2] and withdrawing company funding for climate change deniers.
In keeping with this spirit, the BC government passed the Greenhouse Gas Reduction Target Act into law in November 2007. This act legislated targets for emission reductions at 33% below 2007 levels for 2020, and 80% below 2007 levels for 2050.[3] In addition, the act legislated that the BC government become carbon neutral by 2010.
The carbon tax, the central pillar of the BC government’s climate change strategy, was formally announced in the 2008 budget. It was a pioneering attempt to put a price on carbon that has made BC the poster child for carbon tax, even earning accolades from the OECD as a ‘textbook example’ of good climate policy.[4]
Keeping your friends close, and your enemies closer
The announcement of BC’s carbon tax united an unlikely front with big environmental players like the David Suzuki Foundation and Sierra Club throwing their support behind Gordon Campbell, along with notable BC academics and big business. The political landscape was ripe for a dramatic policy move as it was a two party system pitting the right of center BC Liberals against the definitively left NDP. It has been argued that since the Liberals faced no threat of losing votes to the right, they pursued the carbon tax to endear themselves to center-left voters,[5] and it seems to have worked.
Implementing the academic model
BC followed the textbook carbon tax model to the letter. It began as a token tax at a mere $10 per tonne of CO2 that would increase at a rate of $5 per tonne of CO2 per year until 2012 at which point the tax would be subject to a government review. The initial price bump at the pumps was about 2.5 cents, hardly noticeable to everyday consumers, and more than offset by the $100 carbon dividend paid out to every adult British Columbian in the first year to help ease the short run financial burden due to demand inelasticity. The dividend and low introductory carbon price undoubtedly helped to secure public support for the tax in the first few years.
The Tax
The carbon tax was unanticipated as cap-and-trade systems were dominating climate change policy discussion and BC was an active participant in the Western Climate Initiative. The tax however offered BC some clear benefits.
BC was in an unusual emissions position with only 2% of C02 emissions coming from electricity (compared to 17% in Canada), while 36% of emissions came from transportation (compared to 27% in Canada).[6] The transport sector was an easy target since carbon emissions from different fossil fuels can be estimated with reasonable accuracy and the calculated emissions can then be taxed on a per volume basis thereby setting a stable carbon price against which consumers can weigh their options of abatement. The intent was not to stop people from driving, but was rather a gentle nudge in the right direction made palatable to society and business by the initial low carbon price and kickbacks (dividends and tax revenue redistribution).
The carbon tax offered no exemptions in its first 5 years and any person or business who generated emissions by combusting fossil fuels was taxed at the same rate. This all encompassing tax satisfies the equimarginal principle and allows society to reduce emissions at the lowest possible cost. The stable carbon price and the government’s credible commitment to not only keeping the tax, but also to raising rates over time, not only allowed firms and individuals to analyze the costs and benefits of abatement over a long time horizon, but also stimulated innovation. Furthermore, since administrative infrastructure was also already in place to collect gas taxes and fuel levies, expanding that infrastructure to collect a carbon tax was simple and cost-effective.
In 2013, the government granted permanent carbon tax respite to greenhouse growers. Although this does not exempt them from paying the carbon tax, it does provide them with a permanent grant which “will be set at 80 per cent of the carbon tax paid on natural gas and propane used for heating and CO2 production.”[7] In principle, since the growers still have to pay the tax they are still incentivized to reduce emissions, however the special status does threaten the ability of the tax to achieve emissions reductions at the lowest possible cost since users now face different carbon prices.
One hand taketh, one hand giveth back
Despite the misinformed rhetoric that dominates public forums claiming that the carbon tax is nothing more than a tax grab, the carbon tax is in fact revenue neutral by design and every dollar generated by the tax is returned to BC residents. Carbon tax generated tax reductions equaled $260 million in 2012/13.[8] The government implemented the non-taxable low income climate action tax credit to help mitigate the inherently regressive nature of a consumption tax (regressive meaning a tax that has a disproportionally negative effect on low income individuals) and the Northern and Rural Homeowner benefit which pays up to $200. Carbon tax revenues also allowed BC to lower the personal income tax rate (BC now has the lowest tax rate in Canada for individuals earning up to $122,000), and BC small business income taxes have fallen by 44%. Tax cuts to business (large and small) were also designed to dampen reduced competitiveness attributed to operating in a carbon tax environment, and in this sense redistribution addresses more than just regressiveness.
The race to the top?
BC’s carbon tax has been a success but BC’s overall climate strategy has a long way to go if BC is to achieve its emissions targets. The David Suzuki Foundation estimates that the carbon tax rate needs to rise to about $75/ton by 2020[9] to achieve emissions targets, something that will not happen given the government’s current tax review which froze the tax for the next 5 years. If we are serious about leading the race to the top (which I don’t think we are!) we need to combine carbon tax increases with a cap-and-trade system to cover non-fossil fuel combustion related emissions. Throw in the the development of the LNG industry, which is extremely carbon intensive, and you have a Province who will not be meeting their emissions targets. Emission estimates for one large LNG plant are 21million tonnes of CO2 per year (based on the equivalent of Shell’s plant buildout at full capacity), a very large number given BC’s target emissions are 40 million tonnes of CO2 for 2020, and 12 million tonnes of CO2 by 2050.[10] Carbon emission from gas venting are not covered under the carbon tax.
That being said, BC has shown that a government can implement a carbon tax and still win an election (although they did win the election after the HST fiasco, so I am not sure that this isn’t simply reflective of a very forgiving electorate), and that is a feather that BC should proudly wear in our hat. Once other Provinces, States and Countries start to follow suit with their own carbon pricing mechanisms, thereby making competitiveness and carbon leakage less of a problem, I suspect we will see more aggressive government action on climate policy, even if it is only to woo the environmental vote.
References:
[1] Harrison K, (2013) “The Political Economy of British Columbia’s Carbon Tax” OECD Environment Working Papers, No 63. OECD Publishing. P. 8
[2] Exxon Mobil Climate Policy Debate Web. Accessed March 9, 2014 http://corporate.exxonmobil.com/en/current-issues/climate-policy/climate-policy-debate/overview
[3] Government of BC. 3rd Session, 38th Parliament. Bill 44 – 2007: Greenhouse Gas Reduction Targets Act
[4] Partington, P.J. Pembina Institute http://www.pembina.org/blog/757 Web accessed March 9, 2014.
[5] Harrison K, (2013) “The Political Economy of British Columbia’s Carbon Tax” OECD Environment Working Papers, No 63. OECD Publishing. P. 11
[6] Government of BC Livesmart BC Website http://www.livesmartbc.ca/learn/emissions.html Web Accessed March 9, 2014
British Columbia Ministry of Finance Myths and Facts about the Carbon Tax. Web Accessed March 9 2014. url: http://www.fin.gov.bc.ca/tbs/tp/climate/A6.htm
British Columbia Ministry of Finance Balanced Budget 2008 Backgrounder. Web Accessed March 19, 2014 url:http://www.bcbudget.gov.bc.ca/2008/backgrounders/backgrounder_carbon_tax.htm
[7] British Columbia Newsroom Website. April 9, 2013. Web accessed March 9, 2014 http://www.newsroom.gov.bc.ca/2013/04/permanent-carbon-tax-relief-for-bcs-greenhouse-growers.html
[8] British Columbia Ministry of Finance Climate Action Secretariat. Web accessed March 9, 2014 http://www.fin.gov.bc.ca/tbs/tp/climate/A4.htm
[9] David Suzuki Foundation BC Carbon Tax Reality Check/Media Backgrounder Reality Check PDF. June 2008. Web accessed March 10, 2014http://www.davidsuzuki.org/media/news/downloads/BC_Carbon_Tax_Reality_Check.pdf
[10] Partington, P.J. Pembina Institute Blog 757. Web accessed March 9, 2014 http://www.pembina.org/blog/757