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Has BC's Carbon Tax Worked?

Experts are divided on what the levy has achieved and how it must evolve.

By Christopher Pollon, 23 Nov 2011, TheTyee.ca

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Clouded future for carbon tax? Burrard Street, Vancouver. Photo courtesy eric flexyourhead from Your BC: The Tyee Photo Pool.

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[Editor's note: This is the third article in an in-depth Tyee Solutions Society series, "BC's Quest for Carbon Neutrality: Reports from Canada's Climate Policy Frontier." To meet the lead reporters on this project, see the accompanying profile today on The Tyee.]

When governments come to do battle with climate change, truly decisive action courts political suicide. Consider the challenge of putting a price on carbon -- arguably our most effective policy tool in averting global climate disaster. In July, Australian Prime Minister Julia Gillard unveiled a national carbon tax on that country's 500 worst polluters, after her predecessor was turfed from office when his own carbon pricing scheme withered on the vine. Gillard has been bloodied by an ongoing revolt led by the coal industry, and faces an uphill battle to win re-election in 2013.

Former federal Liberal leader Stephan Dion's political life ended when his partisan rivals, including the late Jack Layton, savaged his complex "Green Shift" carbon tax. Most Canadians didn't get it; even more didn't trust it. The "Green Shaft," as it became known, now serves only to deter any other North American politician brave enough to seriously address the issue.

B.C.'S CARBON TAX SHIFT

B.C.'s carbon tax applies a single price to the province's fossil-fuel-originated CO2 emissions: It started at $10/tonne in July 2008 and has moved up in $5 increments each year ever since. In July 2012, it will hit $30/tonne. Exempted processes, including natural gas flaring, mean that about 25 per cent of B.C.'s CO2 emissions are untaxed.

More than a tax, B.C. has imposed a tax shift: The money collected from the carbon tax pushes personal and corporate taxes down, while steadily ramping up taxes on fossil fuels. Over time, this continually rising price provides an incentive for people and businesses to use less and find alternatives: Anyone who can lower their fuel usage and/or energy consumption, pays less tax. -- C.P.

Such cautionary tales make British Columbia's carbon pricing experiment all the more remarkable (see sidebar for the elements). There are a dozen or so carbon taxes in the world today (a chart laying all of them out can be found on page 16 of this report). Of all those levies, enacted by a patchwork of nations, provinces and even municipalities (Boulder, Colo., has one), B.C.'s tax has been widely hailed as a model of environmental and economic design.

We Have a Winner: British Columbia's Carbon Tax Woos Sceptics, gushed one headline in the Economist in July, as did a similarly glowing feature earlier this year in the New York Times, which suggested a B.C.-styled carbon tax could solve America's debt woes.

Yet in British Columbia today many remain less than enthused. Social advocates say the poor are being squeezed too hard by the tax, while an unfair chunk of the revenue is being given back to corporations. Environmentalists warn that the tax, which rose to $25/tonne on July 1, is too slight to change our bad energy habits. Meanwhile business leaders insist our small, resource-based economy shouldn't "dance alone" while global competitors continue to pollute unhindered.

Already one potential future premier, John Cummins of the upstart BC Conservatives, is proposing to kill the carbon tax, apparently believing the public mood has changed since then-NDP leader Carole James campaigned in 2008 on a promise to "axe the tax" -- and handed the BC Liberals a third straight majority.

But with the future of B.C.'s carbon tax experiment uncertain, and the next provincial election looming in May 2013, now may be the time for a little sober reflection: What has the B.C. carbon tax really achieved so far? What can we expect to see if we stick with the tax? And how might it need to change?

Good news for a change

One who calls our carbon tax a good-news story, is Stewart Elgie, a University of Ottawa law and economics professor and chair of the green economy think-tank Sustainable Prosperity.

Elgie says B.C.'s gasoline consumption has dropped by three per cent compared to the rest of Canada since the introduction of the tax, an effect that cannot be attributed to the post-2008 recession. He also points out that B.C.'s GDP has grown slightly in the three years since the tax appeared -- indicating at a bare minimum that the carbon tax hasn't hurt the economy. That, says Elgie, is because B.C.'s tax on fossil fuels was designed from the start to go as unnoticed as possible by being "revenue neutral" -- most of the money it collects from taxpayers is given back in the form of lower income and corporate taxes.

And while the carbon tax might not have won the last election for the Liberals, it didn't lose it for them either. (Politicians both inside and outside B.C. take note -- recent polling for the Pembina Institute shows that public support for the carbon tax remains strong; strong for a tax, at least.)

"B.C. is now the lowest per-capita gasoline user in Canada, and also has the lowest income tax rates in Canada," says Elgie. "That is in large part because of the carbon tax shift."

In 2008, B.C. emitted 68.7 million tonnes (Mt) of greenhouse gas emissions, measured in carbon dioxide equivalent (CO2e). In all of 2009, total greenhouse gas emissions in British Columbia were down slightly to 66.9 megatonnes CO2e, according to the provincial government. Updated stats for 2010 will not be published until 2012.

How have other carbon taxes worked out?

It's still early days for the B.C. tax. What can we expect in the years to come? It helps to look at Sweden, where a carbon tax has been in place for 20 years.

In 1991, Sweden imposed a carbon tax of just over $50/tonne of CO2. By December of 2008, greenhouse emissions had dropped by more than 40 per cent from levels of the mid-1970s -- well below its Kyoto commitments -- as Swedes embraced renewable energy from biomass, heat pumps and waste heat recovery, and expanded their use of district heating systems.

In 2008, Swedish Environment Minister Andreas Carlgren credited Sweden's tax policy for cutting its emissions by 20 per cent below what levels would have been without it. "A carbon tax," Calgren told the Guardian at the time, "is the most cost-effective way to make carbon cuts, and it does not prevent strong economic growth."

The Swedish carbon tax is not identical to ours. Most prominently, it is much, much higher. Sweden's tax started at about twice the dollar-per-tonne rate that ours reached only this year, and the top rate has jumped to about $100 per metric tonne since its inception. On the other hand, many Swedish industries pay a lower rate (about $22/tonne), not all fossil fuels are covered, and proceeds go into general government revenues instead of tax cuts.

But the similarities between Sweden and B.C. are nonetheless striking. Both have a small population, widely dispersed across a forested, northern land base with just a few large cities. Both rely on a lot of hydro for electricity.

"When you look at B.C.'s policies," says Mark Jaccard, an environmental economist at Simon Fraser University, "you see the very same things we saw in the first years of the Swedish policy, which is the beginning of this disconnect between economic output and emissions."

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Sweden's "carbon tax effect": A disconnect between economic output and emissions. (Source: Mark Jaccard, Simon Fraser University Energy and Materials Research Group, March 2011.)

Elgie finds that pattern repeated across the handful of other European countries -- including Finland and the Netherlands -- that have followed the carbon tax path. First there is a period of adjustment, as society begins to alter its behaviour and infrastructure in response to the higher prices. During this early phase, as in B.C., critics insist the tax is not working.

But, as Elgie points out, no one buys a new car or modernizes their factory every month. Yet if you know the price of energy will keep going up over time, fuel efficiency becomes a prime consideration the next time such an investment needs to be made.

The experience of others shows that 15 years on, carbon emissions can go down by five or six per cent with no negative impact on GDP. "The story we're seeing in B.C. is pretty much the same story that's already played out in countries with more experience," says Elgie. "Good for the environment, no harm to the economy."

Tweak the tax?

That's not to say B.C.'s carbon tax couldn't be made better, even in the eyes of admirers. It covers only about 75 per cent of our greenhouse gas emissions, for one thing. The rest, such as flaring from gas wells or non-combustion processes in cement and aluminum manufacturing, remain untaxed. "Let's go after that final 25 per cent," urges Mark Jaccard.

In particular, Jaccard fingers natural gas production as a growing emission source that could "swamp all of our efforts," unless we take action. "Tell them they can't emit (greenhouse gases) into the air, end of story," he says.

But gas facilities aren't the only places where emissions "leak" past B.C.'s tax: landfills, smelters and cement kilns are others. Jaccard's view? "Regulate everybody. Tell them they'll have to measure what is coming out. And, we're taxing you on it." Jaccard says this hard line could be phased in, however, to allow companies and regional districts time to prepare.

If that seems radical, note that such an approach has been taken before in B.C. In early 2007, BC Hydro had signed contracts to receive power from two coal-fuelled plants -- until premier Gordon Campbell decreed that all future sources of electricity must be zero-emission. The projects were promptly cancelled.

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