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Analyzing British Columbia’s Carbon Tax

October 30, 2016

In 2008, the Canadian province of British Columbia implemented the first comprehensive carbon tax in North America.[1]Led by Premier Gordon Campbell, the center-right British Columbian (BC) Liberal Party introduced the tax on carbon-based fuels with the goal of reducing greenhouse gas emissions.[2]Most notably, the tax’s designers strove for revenue neutrality, aiming to simultaneously reduce other taxes in order to ease the burden on businesses and consumers.[3]

By Brian Rodio, C’20

Enabled by increased voter interest in climate change, trust from the business community, and a strong push by the premier, the BC Liberal Party imposed the North America’s first tax on greenhouse gas (GHG) emissions.[4]The novel approach of carbon pricing and revenue neutrality became a laudable and successful model for achieving real reductions in fossil fuel consumption while preserving economic competitiveness and sparing consumers from potential price hikes.

With regards to environmental effectiveness, the carbon tax achieved reductions in fossil fuel usage as intended. The environmental approach of British Columbia was the imposition of a price on carbon—a tax on fossil fuels used within the province. The tax applied to 70-75 percent of GHG emissions in the province, including gasoline, diesel, natural gas, and coal.[5] Starting at $10 per ton of carbon dioxide, the tax rose $5 per year until 2012, and has remained at $30 per ton ever since.[6] Residential consumption fell by about 15 percent.[7] Similarly, the $30 per ton tax was estimated to have caused a reduction of 11-17 percent in gasoline sales.[8] Ultimately, the tax reduced fuel consumption by 5-15 percent in British Columbia, while the rest of Canada saw its usage increase since 2008.[9]

Figure 1: As British Columbia's refined petroleum product usage fell after the imposition of a provincial carbon tax, Canada's total usage continued to rise. [10]Figure 1: As British Columbia's refined petroleum product usage fell after the imposition of a provincial carbon tax, Canada's total usage continued to rise. [10]

Figure 2: Similarly, per capita fuel consumption deviates from the Canadian pattern after the introduction of carbon tax, clearly falling in relation to the country as a whole. [11]Figure 2: Similarly, per capita fuel consumption deviates from the Canadian pattern after the introduction of carbon tax, clearly falling in relation to the country as a whole. [11]

Most markedly, British Columbia’s emphasis on revenue neutrality has inhibited the economic impediments of a tax. Revenue neutrality, in the case of British Columbia, signifies the recycling of tax revenues raised by the carbon tax to households and businesses. By offsetting the carbon tax burden by reducing income, corporate, and other taxes, the revenue-neutral approach in British Columbia approaches an ideal economic model of a tax on an externality. As a result of revenue neutrality, the carbon tax’s reduction in greenhouse gas emissions and consumption come at minimal or no cost to business competitiveness and consumer welfare. British Columbia’s GDP growth was on par with Canada’s at-large from 2008-2011, actually outpacing it by 0.1 percent.[12] The tax had no statistically significant impact on GDP growth, a testament to revenue neutrality’s ability to shield businesses and consumers.[13] British Columbia continues to be one of Canada’s leading provinces in regards to economic growth.[14]

Figure 3: Revenue neutral efforts offset the imposition of the carbon tax, with ensuing cuts to corporate, income, and personal taxes coupled with additional tax credits.[15]

Despite the political challenges of enacting such legislation and the risk of potentially detrimental environmental impacts, the carbon tax has stood up to skeptics. A natural concern that arises from a carbon tax is the fear that it will be regressive, with the tax burden falling disproportionately on the most disadvantaged, low income members of the population. Yet the tax, which in general aimed to return government revenues to businesses and individuals, did direct a small portion of revenues to low-income tax credits, while cutting rates for the lowest income brackets.[16] Some skeptics proposed that lurking variables aside from the carbon tax led to the lower levels of fossil fuel emissions and gasoline consumption. Yet, aviation fuels, which were not subject to the tax, did not diverge from Canada’s pattern.[17] Other taxed fuels showed the same pattern of reduced usage, suggesting a British Columbian disconnect from the rest of Canada.[18] Such findings suggest that the carbon tax was indeed effective, and weakens the contention that cross-border shopping or other lurking variables generated the reduction in consumption. 

Ultimately, the British Columbia carbon tax has been a successful model that balances reducing emissions and maintaining competitiveness. The tax has avoided hurting businesses and consumers through revenue neutrality. Concerns such as cross-border shopping and competitiveness have been addressed with exports and industries such as forestry and agriculture being exempted.[19] A national or continental carbon tax would further reduce greenhouse gas emissions as cross-border shopping and interstate competition would be less of a concern. A revenue neutral carbon tax at a national or international level would be optimal for combating fossil fuel consumption and mitigating the effects of the tax on business competitiveness and consumer welfare.

References

  [1] Brian Murray and Nicholas Rivers. British Columbia’s revenue-neutral carbon tax: “A review of the latest “grand experiment” in environmental policy”. Energy Policy, 86 (2015): 674-683. 

  [2] Kathryn Harrison, “The Political Economy of British Columbia’s Carbon Tax,” OECD Environment Working Papers, 2013.

  [3] Murray and Rivers, 2015.

  [4] Harrison, 2013.

  [5] British Columbia, British Columbia Ministry of Finance, June Budget Update 2013/14 0 2015/16 (Victoria: BC Ministry of Finance, 2013): 63-65. http://www.bcbudget.gov.bc.ca/2013_june_update/bfp/2013_June_Budget_Fiscal_Plan.pdf.

  [6] Murray and Rivers, 2015.

  [7] Sumeet Gulati and Zahra Golami, “Estimating the impact of a carbon tax on natural gas demand in British Columbia.” Sustain. Prosper, 2015.

  [8] Nicholas Rivers and Brandon Schaufele. “Carbon tax salience and gasoline demand.” SSRN Electronic Journal, 2012.

  [9] Murray and Rivers, 2015.

  [10] Ibid.

  [11] Ibid.

  [12] Sustainable Prosperity, British Columbia’s Carbon Tax Shift: The First Four Years (Ottawa: University of Ottawa, 2012). http://www.sustainableprosperity.ca/sites/default/files/publications/files/British Columbia’s Carbon Tax Shift.pdf.

  [13] David Pearce, “The Role of Carbon Taxes in Adjusting to Global Warming,” The Economic Journal 101, no. 407 (1991): 938 

  [14] Jock Finlayson and Ken Peacock, “BC Economic Review and Outlook,” (Business Council of British Columbia, 2016). http://www.bcbc.com/content/2452/BCERO_2016_02.pdf.

  [15] Murray and Rivers, 2015.

  [16] Ibid.

  [17] Mark Jaccard, “BC’s Carbon Tax after 5 Years,” Simon Fraser University, August 20, 2013. http://www.sfu.ca/sustainability/talking/energy/2013/bc-s-carbon-tax-after-5-years.html.

  [18] Ibid.

  [19] Murray and Rivers, 2015.

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