British Columbia’s Carbon Policy: a curious case of leadership loneliness

Political Origin

In May of 2009, against daunting odds and a historically low voter turnout, the incumbent Premier of BC – Gordon Campbell – led the Liberal Party into a third term. In an article on the politics of that election in Macleans (1), Andrew Coyne argues that although it was widely unpopular at first, the NDP’s strident opposition to the tax during the election campaign may have overwhelmed their own commitment to environmental sustainability (2). In this setting, carbon tax being a bold, risky conviction may have actually led to the Liberal victory.

On July 1, 2008 when it was implemented, BC became the first North American jurisdiction to have committed to such a carbon tax regime. Originally slated at $10/tonne greenhouse gas emissions (GHGs), the tax was designed to rise incrementally each year, until it hit $30/tonne in July 2012. Phasing it in was intended not only to allow British Columbians to adapt to a low carbon footprint, but also for other jurisdictions to follow their lead (3). The situation today is that the tax has reached $30/tonne as expected, 57% of British Columbians support it, but BC is still the only jurisdiction in North America to have it in place. A discussion of the distributional and economic effects of this policy follows in this article.

How it works 

Traditionally, there are two instruments of reducing emissions. The first is a quantity-based Cap and Trade system, whereby a total abatement level is fixed (or emissions are capped) at a certain level by the government, and emissions permits are auctioned (or given away) among the highest emitters in the market, who can then buy or sell them based on their individual needs. The guarantee of emissions reduction, and the economic efficiency generated from the trade of emissions credits are some of the positives of such a scheme. Additionally, government revenue can be increased by a competitive auctioning process, which can then be put towards minimizing the adverse distributional impacts of the policy. However, it is argued that by penalizing industrial polluters, not only will local industries become disadvantaged, but also there may be little incentive for individuals or households to switch to energy-efficient solutions.

The second mechanism is a carbon tax, which puts a price on each tonne of GHG emissions, raising the price of the fuel to reflect the true social cost of emissions (i.e. accounting for the externality of pollution). This is done to elicit a market response in order to reduce emissions. The advantage of this system over cap and trade is that it covers all polluters and fuels equally. However, it is argued that such a policy disproportionately hurts the poor whose demand for fossil fuels is inelastic, and who do have not enough income to adapt to newer technologies.

In this context, British Columbia has adopted a “revenue-neutral carbon tax” which is championed as reaping “double dividends”: emissions reductions as well as the removal of distortions. The policy stands on the following five pillars (4):

• All carbon tax revenue is recycled through tax reductions (that is, all carbon tax revenue will be returned to tax payers through tax reductions, rather than being used to fund government programs)
• The tax rate started low and increases gradually (to allow time for adaptation)
• Low-income individuals and families are protected (through tax credits)
• The tax has the broadest possible base (covering nearly all fuel combustion as captured in Environment Canada’s National Inventory Report)
• The tax will be integrated with other measures (such as cap and trade)

 

Tax rate for individual fuels is determined by the amount of GHG released from burning it. Moreover, practically, this scheme is relatively simple to administer, as the tax is collected in much the same way as motor fuel tax (with the exception of natural gas, which is collected at the retail level).

My two cents: Cost-effectiveness and Distributional Effects

The effectiveness of the tax at reducing emissions has been observed since its implementation in 2008, whereby the average emissions for BC are lower than that of Canada as of 2013. It is projected that in the absence of all other GHG reduction strategies, the carbon tax alone could cause a reduction in British Columbia’s emissions in 2020 by up to three million tonnes CO2 equivalent annually (5).

However, the sustainability of this scheme can be questioned, because of its potential to slow economic growth. For instance, as the government itself reports, the tax returns that the revenue-neutral scheme promised have actually been $192 million in excess of what was collected by the policy in 2011/2012 (6). It is therefore no surprise that there is wide buy-in for the policy. However, this only means that lower government revenues are available for other government services, which is a cost that needs to be accounted.

Moreover, as long as other jurisdictions in Canada and the U.S. do not subscribe to some form of emissions reductions scheme, British Columbia’s relatively higher-cost industries (thanks to the tax) will continue to face an unfair disadvantage in the national or world market (particularly against industries in Alberta) (7). This may lead to individuals and businesses migrating to other provinces to resume their operations and stay competitive.

Therefore, must leadership in carbon policy be by example? Perhaps it would be more effective to push for a regional or national reductions plan than treading solo. Although the government has accounted for distributional inefficiencies by making the tax revenue-neutral, long term data on economic growth will reveal whether this is a truly effective and sustainable reductions regime.

References
1. http://www2.macleans.ca/2009/05/26/a-new-coalition-a-different-politics/
2. http://www.carbontax.org/progress/where-carbon-is-taxed/
3. http://www.bcchamber.org/advocacy/policy/provincial_gov/finance/bcs_costly_carbon_tax.html
4. http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm
5. http://www.fin.gov.bc.ca/tbs/tp/climate/A4.htm
6. http://www.fin.gov.bc.ca/tbs/tp/climate/A2.htm
7. http://taxpayer.com/blog/03-10-2012/bc-carbon-tax-unfairness-continues-hamper-economy