Carbon Tax in British Columbia

As the economy of the world has increased sharply, climate change has become an extremely serious problem facing the world today, especially the global warming. “From devastating storms and warmer winters to longer summer droughts and forest fires, the impacts are being felt right here in British Columbia.” As we can see, there are so many bad consequences of global warming that have greatly impact on the environment, the economy and our generation. According to the Intergovernmental Panel on Climate change, “earth’s climate is changing because of human activities. The effects will continue to worsen if no action is taken”. So, the B.C. Government decided to implement the revenue neutral carbon tax in 2008, and this carbon tax keeps implemented till now.

What is a Carbon Tax?

As defined, the carbon tax is “a tax based on greenhouse gas emissions (GHG) generated from burning fuels.” It charges on each unit of GHG emitted in order to reduce the consumption of greenhouse gas producing fuels. According to the textbook, we know that the advantage of a carbon tax is that it not only lead to a cost-effective allocation, but also it stimulates the development of innovative methods to reduce emission and to promote technological progress. In addition, under the revenue neutral carbon tax system, tax revenue of the B.C. Government will remain unchanged (neutral), even if there are changes in tax laws. Because they may have different tax rate according to the different level of GHG emission (it would be further discussed in Distributional effects part).

The Implementation of the Carbon Tax in B.C.

To better understand how the carbon tax works in B.C., we need to know tax base, taxpayer/collection point, tax rates, and the use of revenue. Basically, the general relationship between tax base, taxpayer/collection point, tax rates, and the use of revenue is Tax base * Tax rate = Tax revenue. In B.C., not all the GHG emission are covered in carbon tax, and the carbon tax is only applied to the purchase and use of fuels within B.C. According to the British Columbia revenue-neutral carbon tax principle, “The tax has the broadest possible base – Virtually all emissions from fuel combustion in B.C. captured in Environment Canada’s National Inventory Report are taxed, with no exemptions except those required for integration with other climate action policies in the future and for efficient administration.” So, we can know that the emission of CO2 and other GHGs from combustion of fossil fuels are the main tax based. To be more specific, emissions of CO2 from industrial producing and processing are not applied to the carbon tax, such as the production of oil, gas. In addition, the emission of other GHGs such as CH4 and N2O from the disposal of solid waste and the agricultural sector are not applicable to carbon tax. In the Provincial Budget, it explains that “The tax base includes fossil fuels used for transportation by individuals and in all industries, including the combustion of natural gas to operate pipelines, as well as road, rail, marine and air transportation. As well, the tax bases includes fuel used to create heat for households and industrial processes, such as producing cement and drying coal.” For the tax rate of different GHG emission from various fuels, we can refer to Carbon Tax Rates by Fuel Type provided by Ministry of Finance, and the use of tax revenue will be discussed in the last part. By the way, according to B.C. revenue-neutral carbon tax principle, “The tax will be integrated with other measures” – This means that the other carbon policy such as cap-and-trade system would also be implemented together with the revenue-neutral carbon tax.

What effect will the carbon tax have on GHG emissions?

We believe that the carbon tax would change people’s consumption behavior due to their respond to price signals. “Several studies show that consumers generally respond to higher gasoline prices by reducing consumption either by purchasing more fuel efficient vehicles or by driving less.” To assess the effectiveness of carbon tax policy, we can refer to the reduction potential in the future. A preliminary estimate by an independent consulting company (MK Jaccard and Associates) suggests that “in absence of all other GHG reduction strategies, the carbon tax alone could cause a reduction in B.C.’s emissions in 2020 by up to three million tonnes of CO2 equivalent annually. This is roughly the equivalent to the greenhouse gas emissions created by 787,000 cars per year. ” From the estimate, we do see the significant mitigation potential under this carbon tax system.

Distributional Effects of the Tax Policy

One of the primary concerns around a carbon policy is that by raising the price of energy it disproportionately impacts the poor. However, if we refer to some of British Columbia revenue-neutral carbon tax principles, we will found that the distributional effects of the policy will be offset by Corresponding program to help the low income individuals and families. The related principles are listed as follow:

• “All carbon tax revenue is recycled through tax reductions”. This principal means the carbon tax revenue are planned to return to the taxpayers (individuals, businesses, and local governments) through tax reductions such as income tax reduction, instead of funding government program. “Since it was first introduced in 2008, the carbon tax has returned $500 million more to taxpayers in tax reductions than it has raised in revenue.”

•  “The tax rate started low and increases gradually”, which gives individuals and businesses time to “make adjustments and respects decisions made prior to the announcement of the tax”.

•  “Low-income individuals and families are protected”– The low-income individuals and families will get refunded by the Low Income Climate Action Tax Credit that is designed to help offset the carbon tax paid. “The credit is paid quarterly along with the federal GST credit and BC HST Credit. The credit provides an annual maximum of $115.50 for each adult and $34.50 for each child ($115.50 for the first child in a single parent family). The maximum credit is reduced by 2 per cent of net income in excess of $31,711 for single individuals and $36,997 for families. ”

 

 

 

Reference

1. B.C. Ministry of Finance. Carbon Tax Review, and Carbon Tax Overview. Retrieved on 9th March, 2014 from: http://www.fin.gov.bc.ca/tbs/tp/climate/carbon_tax.htm

2. B.C. Ministry of Finance. What is a Carbon Tax?. Retrieved on 9th March, 2014 from: http://www.fin.gov.bc.ca/tbs/tp/climate/A1.htm

3. B.C. Ministry of Finance. How the Carbon Tax Works?. Retrieved on 9th March, 2014 from: http://www.fin.gov.bc.ca/tbs/tp/climate/A4.htm

4. B.C. Ministry of Finance. Myths and Facts about the Carbon Tax. Retrieved on 9th March, 2014 from: http://www.fin.gov.bc.ca/tbs/tp/climate/A6.htm

5. Ministry of Finance Tax Bulletin June 2013 Retrieved on 9th March, 2014 from: http://www.sbr.gov.bc.ca/documents_library/bulletins/mft-ct_005.pdf

6. David G. Duff. (2008). THE REALITY OF CARBON TAXES IN THE 21ST CENTURY. South Royalton: Vermont Law School

7. Tietenberg, Thomas. (2011). Environmental & Natural Resource Economics 9th Edition. New Jersey: Pearson Education, Inc.,