Just the Facts: Is B.C’s carbon tax shift a silver bullet solution?

We've just finished crunching the numbers to see how British Columbia’s pioneering carbon tax shift performed in its first five years. Check out our oped in the Globe and Mail and follow this blog series, where we tackle the biggest questions about the policy.

Over the past few blogs we’ve looked at both the environmental success of the B.C. carbon tax as well as its economic effectiveness. A policy that can lower fuel use by 16.1% in five years (while the rest of Canada’s fuel use increased!) without hurting the economy, and prepare BC to prosper in the emerging lower carbon global economy is one worthy of significant attention.

Outside of Canada, BC’s carbon tax has certainly earned it. The head of the Organization for Economic Cooperation and Development (OECD) calls it a “textbook example” of good climate policy. The Economist calls it a global “winner”. The World Bank profiles it as a global lesson in successful carbon pricing. And Dr. Paul Ekins, Director of the U.K. Green Fiscal Commission, says it is “a model for the world”.

However, for all its success, the policy is not perfect. Some of the key weaknesses are:

• While the tax covers most (about 70%) of BC’s Greenhouse Gas (GHG) emissions, it exempts some sources, including land-based emissions (from farming and forestry), process emissions from certain industries (like cement), and ‘fugitive’ emissions from oil and gas (which became an issue in the last election). And a further special exemption was granted last year to greenhouse growers. It would be more effective, and fair, to apply the tax to all sources (that can be measured), and address any concerns about economic effects through other means – such as providing direct support to help hard-hit industries transition to lower carbon alternatives.

• The tax shift is designed to buffer the impact on low income households, since fuel is a higher portion of their budget, by providing them with additional income tax cuts and rebates. But as the carbon tax rate has risen those rebates have not kept pace, resulting in some additional burden to low-income persons. (Though, to be fair, most other types of climate policies also have this effect, it is just more transparent with a tax.) This problem could be remedied simply by raising the levels of low income tax relief.

• The government chose to freeze the tax at a rate of $30/tonne as of July 1, 2012. One apparent effect of freezing the carbon tax rate is that BC’s fuel use stopped declining in 2012-13 and flattened out, as the figure below shows. That’s still better than the rest of Canada’s (which rose), but ends the annual improvements seen since 2008 for BC. If BC is serious about hitting its legislated 2020 GHG reduction targets, it needs to continue increasing the carbon tax, along with the offsetting income tax cuts. The evidence shows this tax shift is not hurting the economy (and may actually help over the longer term). If the government’s concern is about potential economic impacts to certain carbon-intensive industries (like cement), that could be better addressed through targeted relief, rather than shutting off the incentive for further fuel efficiency gains.

[[{"type":"media","view_mode":"media_original","fid":"1531","attributes":{"alt":"","class":"media-image","height":"2055","typeof":"foaf:Image","width":"2969"}}]]

Fixing these flaws would make an already-good policy even more effective. And in doing so, BC should explore options — such as how best to use additional carbon revenues (funding better transit province-wide?), and how to buffer the effects of a higher price on vulnerable households and industries. These are legitimate policy design questions, to which there is no one right answer.

But one thing is clear: the moment for debating if a price on carbon works is over. Better to spend our precious time figuring out how to make these approaches work better—for our economy and our environment.

To learn more about the results of the B.C. carbon tax, including its environmental, economic, and political impacts, follow the series: 
The true story of how B.C’s carbon tax is working

What’s behind B.C’s whopping fuel use drop?

Did the carbon tax shift burden or buoy B.C’s economy? 
Is there a cure for carbon price phobia? 
Appendix: A Note on Research Methods

Author contact: Stewart Elgie 
Media inquires: Jenn Wesanko 604-347-5988