This post was written by the Pembina Institute and originally appeared on its website.
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Basic design
B.C.’s carbon tax was implemented with a five-year schedule of rate increases starting at $10 per tonne in 2008, rising by $5 per tonne per year to $30 per tonne in 2012. The tax applies to almost all of the fossil fuels burned in the province (e.g., coal, gasoline, natural gas), amounting to over 70 per cent of the province’s carbon pollution. In 2013, the government decided to keep the rate and coverage stable for five years — or until other jurisdictions introduce similar carbon pricing approaches.
For the 2013–14 fiscal year, the carbon tax is forecasted to raise $1.2 billion — slightly less than three per cent of total provincial revenue. The Carbon Tax Act requires that money raised by the carbon tax be used to reduce other provincial taxes (referred to as ‘revenue neutrality’). In 2013–14, the largest reduction measures were cutting corporate income taxes ($440 million) and personal income taxes ($237 million) and providing low-income tax credits ($194 million). These were the only three measures in the initial carbon tax design, but additional personal and business tax credits have since been included and they totaled $361 million in 2013–14.
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Environmental and economic impacts
The handful of studies that have attempted to measure the impact of B.C.’s carbon tax have found it to be an environmental and economic success. No studies have identified significant negative impacts.
Looking economy-wide, recent analysis shows per capita fossil fuel use declined by 16.1 per cent in B.C. from 2008 through 2013. The same metric has risen by over three per cent in the rest of Canada. During this same period, B.C.’s per capita GDP has slightly outpaced the rest of Canada’s, growing by 1.75 per cent versus 1.28 per cent. The study attributed the positive economic results to B.C.’s decision to use carbon tax revenue to lower personal and corporate income taxes.
Several studies have looked at the tax’s impact on specific segments of the economy. One found that the carbon tax has been responsible for a much larger than anticipated drop in per capita gasoline demand. The drop was almost five times greater than what would be expected from an equivalent increase in gasoline price not related to the carbon tax.
An analysis of municipal government climate action in B.C. found that the carbon tax has encouraged B.C. communities to move ahead with clean energy projects. Seven of 12 communities interviewed saw the carbon tax as having either a very or somewhat positive role in building the business case for projects they had implemented. The remaining five viewed it as having a neutral effect, primarily because the rate is too low to significantly influence their investment decisions.
A study examined the carbon tax’s economic impact on B.C.’s agriculture sector, which had expressed concerns about impacts on competitiveness. Using agriculture trade data, the study compared the economic performance of agriculture sectors across provinces and found “little evidence that the carbon tax was associated with any statistically significant effects on agricultural trade or competitiveness from 2008–2011.”
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Public opinion
B.C. implemented the carbon tax as part of a wave of climate change initiatives that started in 2007. A year after its implementation, the carbon tax became a central issue in the 2009 provincial election, with the opposition B.C. New Democratic Party (NDP) campaigning to eliminate it. Largely because of their perceived strength on economic issues, the B.C. Liberals — and the carbon tax they implemented — won that election. The government proceeded with the scheduled rate increases in 2009 through 2012, which overlapped with the March 2011 transition when Christy Clark replaced Gordon Campbell.
The 2013 provincial election was a different story. All of the candidates who won seats in the legislative assembly supported the carbon tax. The Liberals endorsed the carbon tax without any further changes, the NDP backed broadening its coverage and moving away from revenue neutrality, while the Green Party wanted to increase the rate and broaden its coverage. The B.C. Liberals won the election.
Tracked since the carbon tax was announced in February 2008, public support dropped as low as 40 per cent when the policy was implemented, then mostly trending upwards to as high as 64 per cent in November 2012. Independent of the carbon tax, British Columbians have expressed a high degree of confidence that the province can reduce carbon pollution without negatively impacting the economy.
The province invited British Columbians to share their views on the carbon tax during the 2013 carbon tax review. Of the 2,200 public submissions received, more than 75 per cent expressed support for the tax and for taking next steps to strengthen the policy. That support was distributed throughout urban, suburban and rural parts of the province.
As with any new policy, many aspects of the carbon tax design have been debated in the province. The most prominent are summarized below.
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Industry competitiveness
B.C.’s business community has generally been supportive of the importance of addressing climate change and the use of carbon taxes as a potentially effective tool. They have also expressed concern that the carbon tax design doesn’t protect sectors of the economy that are emissions intensive and trade exposed, and they have called for a freeze in carbon tax rates. In 2013, the province froze the carbon tax rate and coverage for five years. It also made a small change to the carbon tax’s coverage to largely exempt the agriculture sector. While many stakeholders have been open to the idea of targeted measures to protect B.C. businesses where there is a demonstrable need, the exemptions introduced by the province were criticized because they weren’t backed by evidence and they undermined the incentive to reduce carbon pollution.
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Protecting low-income British Columbians
The carbon tax design includes a tax credit for low-income British Columbians to offset the financial burden of more expensive fuel — a decision that was broadly supported. A point of debate has been whether the tax credit provides
adequate support for low-income British Columbians, with the available evidence offering conflicting conclusions. One study found that low-income households were better off through 2010 because the low-income credit was more than the amount paid in carbon tax. After that, increases in the size of the credit have not kept pace with increases in the carbon tax rate. A second study found the carbon tax to be highly progressive, even before the low impact tax credit was considered.
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Northern and rural concerns
The original carbon tax design did not contain any other targeted measures like the low-income tax credit. Over time, a number of additional tax credits have been introduced, including an annual grant for northern and rural homeowners. The grant was in response to opposition to the carbon tax from those communities. Its introduction has been criticized as unnecessary because the province’s data indicated that rural residents were paying less in carbon tax than those in urban and suburban communities.
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Coverage
The carbon tax applies to almost all of the carbon pollution produced by burning fossil fuels in B.C., but it excludes non-combustion sources such as methane released during natural gas transmission and processing. Whether the carbon tax should apply to those non-combustion sources has been an ongoing debate since shortly after the tax was implemented. The province acknowledges this gap in its Climate Progress report, but has not said how it will be addressed.
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Investing the revenue
Government decided to use all carbon tax revenue to reduce other taxes, because they determined it to be in the best interests of the economy and the most saleable to business and British Columbians. A wide range of viewpoints has been offered on this approach. There is support for the revenue neutral approach, and there is support for investing some revenue in climate change solutions — either immediately or when carbon tax revenue increases. Public opinion research indicates that British Columbians would be more supportive of the carbon tax if at least some of the revenue were invested in healthcare, education and/or climate change solutions. The government remains committed to keeping the carbon tax revenue neutral.
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Moving forward with carbon pricing in B.C.
Having survived two elections and a change in premier, B.C.’s carbon tax is here to stay for the foreseeable future. The economic, environmental and social lessons emerging from the B.C. experience offer a useful platform for other jurisdictions to learn from, and for B.C. to build upon when it decides to move forward with the carbon tax.
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