Policy Notes Vol. 1 Issue 2 May 1, 2009

Analyzing the BC Carbon Tax: Are We Getting the Full Story?

When Premier Campbell established a new transportation fuel tax dubbed the carbon tax last summer, there were many suspicions. It seemed odd that a government that was pursing offshore oil, coal bed methane, and the sale of water rights to private power producers on sensitive rivers should be taking vigorous action on global warming. Suspicions were high, but many concerned about global warming hoped for the best. Some feared that he was taking action to manipulate public opinion and to curry favour with environmental leaders in order to give his government a more progressive image. There was a fear among many in the environmental community that British Columbians were getting a political tax to advance the fortunes of the Liberal party. Nevertheless the Premier has won the accolades of some environmental leaders, a small but prominent number who have become partisans in support of the Liberal party.

One of the problems is that the Premier has never provided much explanation of why he chose this approach over others to address carbon emissions. To be fair there has been some very general talk about a preference for pricing carbon rather than regulating it. This is consistent with the views of a school of largely conservative economists and think tanks, many of whom who are close allies of his government. To their credit they have agreed that carbon emissions from human activity are creating a global warming problem. However there has been little real discussion of the efficacy of regulation compared to fuel pricing mechanisms.

The basic features of the BC carbon tax are fairly straight forward. The tax will be a fixed amount per unit of the carbon in fuels and charged to the consumers of the fuel. In this sense it has correctly been called a fuel tax. It was implemented without any coordination of actions in other jurisdictions, foreclosing coordination with policy initiatives elsewhere. Numerous exemptions were established favouring large industrial polluters, a large number of whom are contributors to the Liberal party. Revenues from the tax go to financing long promised tax reductions rather than to investments in new clean technology.

The program has created huge debate in the environmental community. Many questions are being asked. Will it green BC? Is it the best way for BC to engage in the global warming fight? Was it carefully planned to take into account effectiveness and equity compared to other options? Does it consider the need to build allies and supporters among middle and working class voters whose support is needed to sustain any effective long lasting fight against this threat to the survival of the earth as we know it?

Answers to these questions are critical if we are to have an effective, fair and sustainable carbon policy. A number of considerations are relevant to getting to the bottom line answer.

First, this type of carbon tax depends on the voluntary response of consumers of carbon products who must make reductions in their consumption of carbon emitting products in substantial amounts if it is to have any real affect. In order to work, the tax must be high enough to induce real change, given the magnitude of the reductions needed. Unfortunately many consumers can make only small changes in their fuel carbon use because for example they live in the suburbs and must commute or they live in rural areas where vehicles are a necessity. The same is true of farmers and many commercial operations that depend on internal combustion engines. For all of these users, the tax is a hardship with little corresponding societal gain through adjustments in carbon emissions. They will pay a lot of tax but can’t much change their fuel consumption.

Second, a tax of this sort does not set a hard cap on emission. Its effectiveness depends on highly questionable estimates of economists. No one knows what level of tax will be needed to being about a meaningful drop in carbon consumption and no predetermined drop can be established with what we now know. Weak and undependable estimates are all that we have. Experts do agree, however that for a tax to have any meaningful affect it will have to be many times higher than what the BC government plans.

Regulatory mechanisms set a hard cap so that the outcome is predetermined and unambiguous. With the carbon tax, the amount of money paid is predetermined while the carbon reduction outcome is uncertain.

We do know that the result of setting a tax high enough to bring about change will be twofold. One, it will be highly regressive, with the burden falling on lower and middle income groups, including small farmers and businesses. Second, and related, a high and regressive tax will undermine the nascent support for meaningful measures on global warming from the lower and middle income groups making up the majority of voters. In other words, the tax approach contains the seeds of its own political destruction if it were ever to be effective at reducing carbon consumption. This is the lesson that the authors of the welfare state understood at the time of its development. There must be buy in from the middle classes in particular for such far reaching policy changes, and policy design can have a very large impact on this.

Third, a tax cannot have a meaningful affect of it is applied in one province only. It simply becomes a drain on taxpayers with little gain for the environment. This is recognized by all of the top world experts. A tax in a single province will just punish the residents of that province.

Fourth, a tax is ineffective in bringing about the changes in technology that are needed to achieve real change quickly. For instance in the auto transport sector what is needed is much lower emission levels for autos. Past experience shows this can be achieved in a short time through vigorous emission standards. If these are put into place, consumers will have the choice to buy vehicles that will produce fewer emissions. To reduce emissions, vehicles must be available in large numbers in various models at reasonable prices.

Fifth, exemptions create major holes in carbon taxes. Major industrial polluters, ships, cross country trucks and airplanes are exempt in BC, leaving a very large whole in the approach. One problem with tax options more generally is that the large corporations have the resources and power to successfully lobby for exemptions, while ordinary workers, farmers and soccer moms do not.

Taking into account all of the relevant considerations, the BC carbon tax is ineffective policy. It is essentially a political tax, designed to create the impression of change without ensuring meaningful change in actual behavior. It is a concession to conservative thinking which opposes regulation on ideological grounds. It may even be an attempt to hinder the implementation of meaningful policy by creating obstacles to needed inter jurisdictional cooperation. It is at its best symbolic, lacking hard and rigorous analytical support.

Alternate policy that can make a difference is fairly well understood. Any effective measure must start with hard caps on the amount of permitted carbon emissions. The caps must become more restrictive through time and be tied to actual quantitative carbon reduction levels established through hard science.

It must cover a large geographical area, much larger than a single province. Caps must extend to transportation and small machinery. This can only be done through regulation of the manufacture of internal combustion engines. Huge gains were made in the 1970’s with this approach, and it can be repeated again in a short time. The standards must apply to all types of internal combustion, with subsidies paid in cases where adjustments will take time and cause real hardship.

It must extend to major industrial carbon emitters. Exemptions found in the BC carbon tax point to a major weakness in the taxation approach.

Revenues from permits under cap and trade programs must go to new technology and conservation. The carbon tax in BC is being used to justify tax cuts rather than being invested in the changes we need in the technology of carbon consumption and in alternatives to carbon, including conservation.

Workable sustainable approaches must be fair. There must be a broad social consensus on the approach taken and it must not alienate large blocks of voters because of it lack of fairness. They cannot be based on high and regressive taxes on consumers.

BC can move in that direction. It can be done with a cap and permit system (i.e. cap and trade) doing the heavy lifting, along with emission standards in internal combustion engine manufacture, conservation, and new technologies. The US is clearly thinking in terms of hard caps, cap and trade and emission standards. Western states have shown their support for experimenting with a cap and trade regime.

All of this is good news for the environment if not for the BC government’s somewhat quixotic political adventure. To be part of the evolving partnerships and have a meaningful affect on global warming, BC must drop its carbon based fuel tax and work with these initiatives. They show real promise. However to be really effective they require a broad based shared commitment of governments to a common approach and common measures. BC’s position at the moment is a hindrance to such cooperation. It is out of step and known to have little hope of working. It is time to move on.