Last week, I also visited a Carbon Talks lecture on “BC’s Carbon Tax Shift: What’s Working? What’s Next?” where I got an insight into Sustainable Prosperity’s recent evaluation of BC’s carbon tax shift.
BC’s carbon tax was introduced in July 2008 as North America’s first carbon tax. It started at a price of $10 per tonne of CO2 in 2008 and was increased by $5 every year to the current price of $30 per tonne of CO2. After its first four years of operation, it is time to assess how it has performed both environmentally and economically.
According to James Mack, Head of the BC Climate Action Secretariat, BC’s carbon tax is a cornerstone of BC’s Climate Action Plan which aims at reducing CO2 emissions by 33% by 2020 and by 80% by 2050. As a revenue neutral tax, its $1.2 bn in revenues have to be offset with tax cuts (currently mainly business tax cuts, low income tax credits, and personal income tax cuts). Apart from the effects in terms of emission reductions and economic benefits, one major aim is also to inspire other regions on climate action.
Stewart Elgie, Director of the University of Ottawa’s Institute of the Environment, Chair of Sustainable Prosperity, and lead author of their “British Columbia’s Carbon Tax Shift: The First Four Years” report then examined in detail how BC’s carbon tax has worked environmentally and economically. In terms of the environmental benefits, BC’s fuel use (-15.1%) is down 16.4% relative to the rest of Canada and GHG emissions have shown a similarly substantial decline.
There have also been positive effects on the economy, with BC’s GDP growth outpacing the rest of Canada’s, showing that a carbon tax doesn’t hurt a region’s economic competitiveness. Moreover, the tax was net positive for taxpayers as it has returned far more in tax cuts (by over $300 million) than it has received in carbon tax revenue. In short, BC now has the lowest fuel use in Canada, the lowest income taxes, and a healthy green economy with a fast growing cleantech sector.
By positioning itself as an emerging green economy, BC has become a leader in North America in the transition to a low-carbon economy. To continue this successful journey, BC needs to expand the tax to cover remaining sources and to further increase the carbon price to $50-100 per tonne of CO2 (instead of reducing the tax which would hurt investors) to drive energy efficiency and CO2 emission cuts to those levels that are needed to meet BC’s GHG reduction targets.
Professor Stewart Elgie, the report’s lead author, said: “British Columbia’s decision to introduce a carbon tax shift in 2008 was a courageous and far-sighted one. Our study shows that the decision was also a wise one, inasmuch as the tax shift has delivered real environmental benefits to the province, even as the BC economy has continued to grow. Moreover, by “decoupling” its economic growth from fuel consumption, the province is making itself less vulnerable to the volatility of fossil fuel prices, and it has created a fiscal advantage for itself through reduced personal and corporate income cuts.”
Nicholas Rivers from the University of Ottawa then provided scientific evidence that at $30 per tonne of CO2, BC’s carbon tax caused a 7% reduction in retail gasoline sales. In addition, theory and empirical evidence suggest that exemptions are a poor way to address competitiveness, profitability, or employment issues and a more appropriate way would be to rebate a portion of carbon tax revenues in lump sum or in proportion to output for negatively affected industries.
Finally, Mikael Skou Andersen from the European Environment Agency in Denmark confirmed that BC’s carbon tax is one of the best designed carbon taxes in the world, that an intelligently designed environmental tax reform (ETR) can mitigate competitiveness impacts, and that (similar to BC’s experience) environmental tax reforms in several EU member states caused a 4-5% decline in fuel demand, had a bigger impact on GHG emissions, and a small positive impact on GDP.
With regards to the problems of a carbon tax, an observed carbon leakage (businesses move abroad so that carbon emissions will just take place somewhere else) rate of 2-4% corresponds well to other studies. It should be clear though, as 20% of companies consume 60% of energy, revenue-recycling will not be neutral at the company level and instead create winners and losers (energy-intensive industries which are usually not very labour-intensive).
In short, while a carbon tax (such as most other policies) creates winners and losers, it is generally a win-win policy instrument for the economy and the climate. By designing a revenue-neutral tax, BC could minimize the financial impacts on low-income groups which would otherwise be disproportionately impacted by such a policy as they spend a greater proportion of their income on carbon-intensive goods.
British Columbia’s experience shows that today an economy prospers not by sticking with failed industries of the past but by moving forward into an innovative, green low-carbon economy with creative and future-minded entrepreneurs who offer sustainable products and services. In the face of BC’s positive experience with regards to emissions, jobs, innovation, and economic growth, it is no surprise that even the majority of energy and carbon intensive industries in Canada are overwhelmingly in favour of a price on carbon.