What’s Next for BC’s Carbon Tax?

The Minister leading up BC’s Carbon Tax Review, Kevin Falcon, may be gone – his departure came just as the deadline for submissions was closing – but the carbon tax lives on. For now. Back in 2008 when the carbon tax was announced, it was scheduled to rise from an initial level of $10 per tonne (2.3 cents at the pump for those who don’t speak fluent carbon) to $30 a tonne as of July 2012.

But the government has been silent on next steps for the carbon tax, reflecting dissent and division within the BC Liberal caucus (witness the departure of Falcon and 18 others who will not seek re-election). They proudly pointed to the carbon tax when trying to impress people about their green street cred, but behind the scenes have been too busy pushing a natural gas expansion agenda that will make BC’s legislated GHG targets road kill.

Nonetheless, BC brought in a carbon tax that is better than anything out there in North America. European countries have much more experience with both carbon taxes and their more politically presentable cousin, cap and trade. California’s recent foray into cap-and-trade may change that. BC was supposed to join in this carbon market, called the Western Climate Initiative, but the provincial government backed away from making a firm commitment.

Anyway, I made a submission to the Carbon Tax Review (available here). I mostly summarize recommendations out a more detailed research paper from last year, called Fair and Effective Carbon Pricing: Lessons from BC. In the brief, I focus on four big picture recommendations:

1. Continue to increase the carbon tax
2. Expand the coverage of the tax to include all industrial emissions, exports and imports.
3. Reform the low-income credit and make it available to more households up the income ladder.
4. Use revenues to support climate actions like public transit and building retrofits.

I also modeled a carbon tax and credit system based on continued $5 per year increases, which would take the carbon tax to $50 per tonne by 2016. Arguably, this is still too small – the best available modeling suggests the tax needs to hit something like $200 per tonne by 2020, a level that would make BC gas prices more like Europe’s. I assume that a renewed commitment to climate action leads to BC meeting its 2016 target of an 18% reduction relative to 2007 levels, and that the tax is expanded to cover 82% of provincial emissions. Not included is the application of the carbon tax to imports and exports, nor are estimates adjusted for population growth.

In effect, this scenario means that BC reduces its emissions from 64.9 million tonnes of carbon dioxide equivalent (Mt CO2e) in 2007 to 53.2 Mt in 2016. Based on these assumptions, the carbon tax in 2016 would raise $2.2 billion, half of which would be allocated to an expanded carbon credit system and half to support complementary climate actions (latter not shown in table).

The table shows household income groups by decile (groupings of 10% from lowest income to highest) and the top 1%. The redesigned carbon credit both increases the maximum amount of the credit for low-income households, and is designed so that 80% of households would receive the credit. In particular, the bottom half of households would receive a credit that, on average, is larger than carbon tax paid. Thus, the heavy lifting is accomplished by households with higher incomes, who have, on average, the largest carbon footprints. Note that the credit is larger for some households in the middle of the distribution than lower deciles due to larger family size.

Table: A carbon tax scenario of $50 per tonne in 2016

While this is just one possible scenario, among many tax and revenue recycling options, the key point is that it is possible to have a progressive carbon tax system that reduces inequality as it raises the price of emitting greenhouse gases.

Topics: Climate change & energy policy, Taxes