Note: British Columbia’s carbon tax remains the standard-bearer for carbon taxing in the Western Hemisphere. Click here for our Dec. 2015 report on its emissions impacts; click here for our press release; click here to download the data spreadsheet (xlsx).
Canada is set to impose a national carbon price in 2018. The initial price will be a minimum of $10 (Canadian) per metric ton (“tonne”) of CO2, and it will increase annually by $10/tonne to reach $50 in 2022.
The policy was announced on Oct. 3, 2016 by Prime Minister Justin Trudeau in an address to Parliament and widely reported across Canada. Here’s the lede from that day’s CBC News:
Prime Minister Justin Trudeau took provinces by surprise Monday by announcing they have until 2018 to adopt a carbon pricing scheme, or the federal government will step in and impose a price for them.
A tough-talking Trudeau told MPs in the House of Commons that provinces can craft a cap-and-trade system or put a direct price on carbon pollution — but it must meet the federal benchmark or “floor price.” “If neither price nor cap and trade is in place by 2018, the government of Canada will implement a price in that jurisdiction,” he said.
Trudeau made the announcement in leading off parliamentary debate on the Paris climate change agreement Monday, making the case for Canada to cut greenhouse gas emissions by 30 per cent from 2005 levels by 2030. Trudeau said the proposed price on carbon dioxide pollution should start at a minimum of $10 a tonne in 2018, rising by $10 each year to $50 a tonne by 2022.
Provinces and territories that choose a cap-and-trade system must decrease emissions in line with both Canada’s target and with the reductions expected in jurisdictions that choose a price-based system. Whatever model a province chooses, Trudeau said, it will be revenue neutral for the federal government, with any revenues generated under the system staying in the province or territory where they are generated.
In U.S. terms — applying a Fall 2016 exchange rate of 1.3 Canadian dollars to 1.0 U.S. and converting tonnes to tons — the price equates to $7 U.S. per ton at the start, rising to $35/ton in 2022. Inputting that price trajectory into CTC’s carbon-tax spreadsheet model suggests that a U.S. carbon tax at that rate would reduce CO2 emissions by 12-13 percent below “otherwise” emissions (without a carbon price) in 2022. While the two economies are far from identical, that result is probably a good first-order approximation of the prospective impact of the Canadian carbon price.
PM Trudeau’s policy appears to be modeled on the carbon tax adopted by British Columbia in 2008, discussed directly below. Both carbon prices employ a linear ramp-up plateauing in the fifth year, and both are revenue-neutral. The parallels point to the importance of putting an actual carbon tax in place to demonstrate its effectiveness and political acceptability and thus provide “proof of concept” to advance to the national level.
British Columbia is Canada’s third largest province (estimated 2015 population of 4.7 million). Its carbon tax is straightforward and transparent in both administration and revenue treatment, and it easily qualifies as the most significant carbon tax in the Western Hemisphere.
British Columbia inaugurated its carbon tax on July 1, 2008 at a rate of $10 (Canadian) per metric ton (“tonne”) of carbon dioxide. The tax incremented by $5/tonne annually, reaching its current level of $30 per tonne of CO2 in July 2012. At the U.S.-Canadian dollar exchange rate (1.00/0.75) in November 2015, and converting from tonnes to short tons, the provincial tax now equates to approximately $20.40 (U.S.) per short ton of CO2.
Emission Reductions from British Columbia’s carbon tax (this section is from our Dec. 2015 report)
From 2008 to 2011, British Columbia’s per capita emissions of carbon dioxide and other taxed greenhouse gases declined, continuing a downward trend that began in 2004. Averaged across the period with the tax (2008 through 2013; no data are available for 2014 or 2015), province-wide per capita emissions from fossil fuel combustion covered by the tax were nearly 13 percent below the average in the pre-tax period under examination (2000-2007), as shown in the graphic directly below.
The 12.9% decrease in British Columbia’s per capita emissions in 2008-2013 compared to 2000-2007 was three-and-a-half times as pronounced as the 3.7% per capita decline for the rest of Canada. This suggests that the carbon tax caused emissions in the province to be appreciably less than they would have been, without the carbon tax.
These figures come with an important caveat: They exclude emissions from electricity production ― a minor emissions category for British Columbia, which draws most of its electricity from abundant (and zero-carbon) hydro-electricity, but a major emissions source for much of Canada. This sector accounted for just 2 percent of total emissions from fossil-fuel combustion in British Columbia in 2013, but for nearly 20 percent in the rest of the country. More importantly, that sector constitutes most of the “low-hanging fruit” for reducing carbon emissions, since electricity generation affords more opportunities for quickly and easily substituting low-carbon supply than any other major sector. Eliminating it from our analysis allowed us to compare changes in emissions over time on an equal basis between BC and the rest of the country.
In terms of total emissions (not per capita), British Columbia emissions of CO2 and other greenhouse gases covered by the carbon tax (but excluding the electricity sector) averaged 6.1% less in 2008-2013 than in 2000-2007. (The reduction was 6.7% when electricity emissions are counted.) The 6.1% contraction is roughly what would be expected from a small carbon tax such as British Columbia’s.
We also found that British Columbia’s carbon tax does not appear to have impeded economic activity in the province. Although GDP in British Columbia grew more slowly during 2008-2013, the period with the carbon tax, than in 2000-2007, the same was true for the rest of Canada. From 2008 to 2013, GDP growth in British Columbia slightly outpaced growth in the rest of the country, with a compound annual average of 1.55% per year in British Columbia, vs. 1.48% outside of the province.
Nevertheless, as seen in the figure at left, GHG emissions increased in British Columbia in 2012 and again in 2013, not just in absolute terms but also per capita. This suggests that the carbon tax needs to resume its annual increments (the last increase was in 2012; its bite has since been eroded by inflation) if emissions are to begin again their downward track.
While we believe our report demonstrates unequivocally the success of the carbon tax at reducing BC’s emissions, our figures are less striking than reductions claimed in some other publications. For example, University of Ottawa law and economics professor Stewart Elgie, an eloquent supporter of the carbon tax, asserted in an 2015 interview in Yale’s “Environment 360” on-line journal, How British Columbia Gained by Putting a Price on Carbon (April 2015), that fossil fuel use in the province fell by 16 percent in the wake of the tax. While Prof. Elgie’s interview is a tour de force on the politics of designing, selling and implementing a carbon tax without disadvantaging vulnerable sectors and alienating the citizenry, we believe the figures in our report provide a more precise and comprehensive portrait.
Raise the Tax?
Not just the case for raising British Columbia’s tax, but a framework for doing so, was laid out in a Feb. 1 (2016) Huffington Post essay by Pembina Institute communications director Stephen Hui. Drawing on a report of the province’s Climate Leadership Team released in January by BC Environment Minister Mary Polak, Hui summarized the key recommendations (there were 32 in all):
- Increase B.C.’s carbon tax by $10 per tonne per year starting in 2018 (and use the incremental revenue to lower the provincial sales tax from 7% to 6%, protect low-income households and implement measures to maintain the competiveness of emissions-intensive, trade-exposed industry);
- Cut methane emissions from the natural-gas sector by 40 per cent within five years;
- Commit to 100 per cent renewable energy on the electricity grid by 2025 (except where fossil fuels are required for backup);
- Require new buildings to be so energy-efficient that they would be capable of meeting most of their annual energy needs with onsite renewable energy within the next 10 years (and starting in 2016 for new public buildings);
- Require an increasing percentage (rising to 30 per cent by 2030) of light-duty vehicles sold in the province to be zero-emission vehicles;
- Review the Climate Leadership Plan every five years.
(Although Hui didn’t say so, one can speculate that the financial incentives inherent in the robustly rising carbon tax levels in the first bullet point might by themselves exert enough force to effectuate most of the other recommendations).
In late March, more than 130 British Columbia businesses called on BC government to increase the carbon tax by $10 per tonne per year, starting in July 2018, as reported by Pembina.
The new Climate Leadership Plan is due out this spring, and the web-based public consultation period expires on April 8 (deferred from March 25). As Hui notes, this is a critical opportunity to rally public support for ambitious new actions.
Revenue from British Columbia’s tax funds 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. All carbon tax revenues are being returned to taxpayers through personal income and business income tax cuts, as well as a low-income tax credit, fulfilling the 2008 promise of revenue-neutrality by Carole Taylor, who as BC finance minister shepherded the tax to implementation. A 2015 study by University of Ottawa graduate students concludes that BC’s carbon tax is “highly progressive” distributionally.
Mary Polak, BC’s minister of environment, commented in 2014, “We were told it would destroy the economy and we’d never get elected again, but we’ve won two elections since [our carbon tax] was enacted five years ago. It’s the revenue neutrality that really makes it work. We collected C$1.2 billion last year and a little bit more was returned.”
The Feb. 2008 BC Budget and Fiscal Plan spelled out the rationale, impacts and mechanics of the tax, including the revenue return provisions. The first 40 pages in particular make essential reading for any carbon tax advocate seeking to master not only the details of carbon taxing but communication tools for making a carbon tax palatable to the public. We also recommend Alan Durning’s March 13, 2008 Grist post, which usefully parsed the four principles embodied in BC’s carbon tax: revenue neutrality, phased implementation, protection for families, and broad coverage.
In May 2009, British Columbia voters re-elected Liberal Party Premier Gordon Campbell, under whose aegis the province’s carbon tax was proposed, devised and instituted, to a third four-year term. Our post, BC Voters Stand By Carbon Tax, reported on the election’s significance for carbon tax campaigners. See also Macleans magazine’s detailed take, Did Gordon Campbell Win Because of His Carbon Tax? In the same vein, the Vancouver Sun reported in November 2009 on the cost to the opposition New Democratic Party of its strident opposition to the BC carbon tax during the May provincial election.
In July 2012, on the occasion of the fourth (and final) annual increase in the BC carbon tax, the Toronto-based Financial Post newspaper chimed in with 4 key reasons why BC’s carbon tax is working. (The Post drew its text from the June, 2012 report by Sustainable Prosperity, British Columbia’s Carbon Tax Shift: The First Four Years.)
- Drop in Fuel Consumption: “The carbon tax has contributed substantial environmental benefits to British Columbia (BC). Since the tax took effect in 2008, British Columbians’ use of petroleum fuels (subject to the tax) has dropped by 15.1% — and by 16.4% compared to the rest of Canada. BC’s greenhouse gas emissions have shown a similarly substantial decline (although that analysis is based on one year’s less data).”
- Growth Unaffected: “BC’s GDP growth has outpaced the rest of Canada’s (by a small amount) since the carbon tax came into effect – suggesting that it has not adversely affected the province’s economy, as some had predicted. This finding fits with evidence from seven other countries that have had similar carbon tax shifts in place for over a decade, resulting in neutral or slightly positive effects on GDP.”
- Revenue-Neutral: “The BC government has kept its promise to make the tax shift ‘revenue neutral’, meaning no net increase in taxes. In fact, to date it has returned far more in tax cuts (by over $300 million) than it has received in carbon tax revenue – resulting in a net benefit for taxpayers. BC’s personal and corporate income tax rates are now the lowest in Canada, due to the carbon tax shift.”
- Greenhouse Gas Emissions Declining: “From 2008 to 2010, BC’s per capita GHG emissions declined by 9.9% — a substantial reduction. During this period, BC’s reductions outpaced those in the rest of Canada by more than 5%.”
A similar tack was taken in a July, 2012 NY Times op-ed, The Most Sensible Tax of All, by Yoram Bauman, an environmental economist and fellow at the Sightline Institute in Seattle, and Shi-Ling Hsu, law professor at Florida State University and former law professor at the University of British Columbia, and author of “The Case for a Carbon Tax” (Island Press, 2011). (Bauman has since become the spearhead of Carbon Washington and its Measure I-732 Carbon Tax initiative.)
A later summation is a July, 2014 Toronto Globe & Mail op-ed, The shocking truth about B.C.’s carbon tax: it works. Also useful is a July, 2014 op-ed in the Guardian, A carbon tax that’s good for business?, that cogently compares B.C.’s successful revenue-neutral carbon tax with Australia’s short-lived revenue-raising one.
BC’s Advantage — Abundant Hydro-Electricity
British Columbia’s carbon tax applies to energy sold and consumed in the province from fossil fuel combustion. (Notably, the tax excludes coal exported for combustion elsewhere.) Because the province is blessed with abundant sources of hydro-electric power, the price of electricity there is only minimally affected by its carbon tax. But BC’s power grid is linked to the U.S. Pacific Northwest and Alberta. Seasonal and daily fluctuations in power availability and electricity demand result in electricity inflows and outflows, in turn raising the question of whether BC’s carbon tax applies to the full carbon content of electricity consumed there.
Recent analysis indicates that at times, up to a quarter of BC’s electricity may be generated by fossil fuel sources outside the province, whose carbon emissions are not covered by the tax. Nevertheless, this should be seen as a minor flaw in BC’s carbon-tax leadership. Indeed, this instance of carbon leakage points to the need for adjacent jurisdictions, perhaps especially those linked through the power grid, to enact their own carbon taxes, as part of the march to a globally-harmonized carbon price.
Canada (other than British Columbia)
Why Saskatchewan should join the carbon-pricing club, Christopher Ragan, Globe & Mail, 29 Feb 2016.
Canada’s Atlantic provinces eyeing regional carbon price – PEI environment minister, Mike Szabo, Carbon Pulse, 14 Feb 2016.
Ottawa seeks to set national minimum on carbon pricing, Shawn McCarthy, Globe & Mail, 17 Feb 2016.
Canada’s second largest province began collecting a carbon tax on “hydrocarbons” (petroleum, natural gas and coal) on Oct. 1, 2007. Though the tax rate is quite small, the tax nevertheless made Quebec the first North American state or province to charge a carbon tax.
Here are details from the Toronto Globe & Mail (June 7, 2007, updated April 3, 2009):
Quebec will introduce Canada’s first carbon tax this fall, forcing energy producers, distributors and refiners to pay about $200-million a year in taxes as one part of an ambitious plan to fight global warming.
About 50 energy companies will be required to pay the new tax, including Ultramar Ltd., Petro-Canada and Shell Canada Ltd., which operate refineries in the province as well as distributors Imperial Oil Ltd., Irving Oil Ltd. and independent retailers.
Oil companies will be required to pay 0.8 cents for each litre of gasoline distributed in Quebec and 0.938 cents for each litre of diesel fuel. The tax is expected to generate $69-million a year from gasoline sales, $36-million from diesel fuel and $43-million from heating oil.
At March 2008 exchange rates, the petroleum tax rate equated to just 3.1 cents (U.S.) per gallon of gasoline and 3.6 cents for diesel. Moreover, because only a tiny fraction of electricity in Quebec is generated from fossil fuels (virtually all is from hydroelectricity), power prices are essentially unaffected.
Spread across Quebec’s population of 7,546.000 million (2006), the anticipated annual carbon tax revenue of $200 million is only $26.50 per person per year ($26.75 U.S.). For the U.S. to generate the same per capita revenue through a carbon tax would entail a rate of just $4.26 per ton of carbon (equivalent to $1.16 per ton of carbon dioxide), which equates to 1.1 cent (U.S.) per gallon of gas.