The BC carbon tax model: the structural story

Sustainable Prosperity’s recent review of the impacts of British Columbia carbon tax shift points to a number of encouraging economic and environmental trends in the province. GHG emissions and fossil fuel use are declining, tax rates on corporations and individuals have been reduced, and the province’s economic growth has not suffered in any discernible way. In short, the carbon tax is behaving pretty much as advertised.

One of the underplayed parts of the BC carbon tax story, though, is the impact at a structural level.

To set this up, consider what we know about the volatility of energy markets, and how much of a price our economies and societies pay for that volatility. Some research has shown that skyrocketing oil prices in the early part of 2007 were at least partly to blame for the financial meltdown that occurred later that year. Intuitively, we understand that people react to increases (and decreases) in relative pricing by shifting (or reducing) consumption. And history has shown that there are few things more prone to price swings than energy (particularly oil).

On the basis of this, in addition to the obvious signs that the B.C. carbon tax is working, there exists the possibility that the carbon tax is also leading to a more structural decoupling of economic growth and fossil fuel use in B.C.’s economy. It is simply a possibility at this point because four years of data is not really enough to draw hard conclusions. But if we look at the relationship between per capita fuel use in the province (on those fuels covered by the tax) and GDP, we see – particularly in the last two years for which data is available – a growing spread. Using our “control group” (i.e. the rest of Canada) to compare, we see no such spread. What we see instead is correlation between fossil fuel use and GDP, which is pretty much what you would expect.

For British Columbia, this trend should be seen as an encouraging sign that the carbon tax – in addition to the direct “wins” it is delivering – is also leading to a more profound structural shift in the B.C. economy’s ability to grow as it reduces fossil fuel use. Given what we now of how inevitable – and how damaging to an economy – energy price volatility can be, that shift may set up the province very well for future competitiveness and may be the most significant payoff of what has been a pretty successful policy.