British Columbia’s Carbon Tax Architects Speak

A new report from a British Columbia think tank reveals the inside story behind B.C.’s successful tax on CO2 pollution. “How to Adopt a Winning Carbon Price, Top Ten Takeaways from Interviews with the Architects of British Columbia’s Carbon Tax,” published by Clean Energy Canada, draws on extensive interviews with senior government officials, elected representatives and a broad range of experts who helped shape or respond to this groundbreaking policy.

BC C-TX RPT CVRBritish Columbia inaugurated its carbon tax on July 1, 2008 at a rate of $10 (Canadian) per metric ton (“tonne”) of carbon dioxide released from coal, oil and natural gas burned in the province. The tax incremented by $5/tonne annually, reaching its current level of $30 per tonne of CO2 in July 2012. At the current U.S.-Canadian dollar exchange rate (1.00/0.80), and converting from tonnes to short tons, the B.C. tax now equates to around $22 (U.S.) per ton of CO2.

In the half-dozen intervening years, fuel use and resultant CO2 emissions in British Columbia have fallen 16% while the rest of Canada’s emissions increased 3%. Revenue from the tax has funded more than a billion dollars worth of cuts in individual and business taxes annually, while a tax credit protects low-income households who might not benefit from the tax cuts.

Also since 2008, British Columbia’s GDP has grown slightly faster than the rest of Canada’s, according to a post last year by two Canadian academics and an industrialist, published by the World Bank. (The growth rates, 1.7% for B.C. and 1.3% for the rest of the country, cover the entire 2008-2013 period and thus reflect the financial crisis.) One nice surprise: even as the tax increased annually, public support rose from 54% in 2008 to 64% in 2012; the most recent poll shows 58% of voters support the policy.

CEC’s interviewees repeatedly cited strong leadership from Premier Gordon Campbell and a clear, well-coordinated information campaign by finance minister Carole Taylor. Building on public support for government action to curb climate disruption, Campbell and Taylor proposed a simple upstream tax pegged to the carbon content of coal, oil and natural gas, in February 2008. They promised that the tax would be revenue-neutral, with all proceeds returned to the public through tax cuts, credits and direct payments. Some interviewees reported that the term “revenue-neutral” led some citizens to mistakenly believe that they would get their own carbon tax payments returned. Of course, for the carbon tax to do its job of disincentivizing fossil fuel use, tax revenues must be returned without linkage to individuals’ fossil fuel consumption.

Campbell and Taylor chose to use the revenue to cut a range of other taxes; B.C. does not use the carbon levy to fund government programs. (In practice, B.C.’s carbon tax has been slightly revenue-negative because of administrative costs.) The revenue has allowed British Columbia to cut its corporate tax rates, which interviewees suggested was one reason B.C.’s economy grew faster than the rest of Canada. While revenue-neutrality was a selling point initially, Taylor suggested that it may no longer be as important to the public now that the carbon tax concept has proven successful.

In designing the program, Taylor resisted pressure to carve out exemptions and loopholes. Her insistence on applying the tax across-the-board to all CO2 emitters apparently solidified public perception that the tax would be fair and effective. Campbell’s government had authority to implement the tax administratively, without a vote by the legislature or a popular referendum. Campbell cast the tax as a simpler, more transparent and business-friendly alternative to cap-and-trade which had been advocated by the more leftist New Democrat Party. In the 2009 election, Campbell campaigned on his successfully-implemented carbon tax; NDP’s opposition to it reportedly helping swing the election toward Campbell.

The CEC report also suggests that the tax’s low starting price of $10 per metric ton boosted public acceptance; and, moreover, that announcing and sticking to a pre-announced annually-rising price trajectory helped households and businesses plan and adapt without undue hardship or disruption.

CEC’s interviewees caution advocates not to oversell carbon taxes, pointing out that complementary policies are needed to reduce CO2 emissions. This is particularly true for a carbon tax at the provincial or state level, since concerns over business flight and border “leakage” make it impracticable to raise the tax to the triple-digit level at which a third or more of emissions would likely be eliminated. Not surprisingly, B.C.’s carbon tax architects also exhort advocates to gird for “vocal and not necessarily fact-based” opposition; organizing and informing supporters about the effectiveness and simplicity of carbon taxes was essential to B.C.’s success.

Clean Energy Canada’s concise, compelling 32-page report concludes with a chorus of encouragement: other jurisdictions should follow British Columbia’s carbon tax leadership and “prepare for a cleaner environment, an enhanced reputation, and a thriving clean technology sector.”

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