More on BC’s Carbon Tax Shift

On February 19, we applauded British Columbia’s new carbon tax shift. I’ve now had time to digest the plan. It’s even better than we said, and the province could tweak it to make it better still.

This policy is the purest instance of a tax shift that I’ve ever seen. It’s an exceptionally faithful implementation of tax shifting—a policy innovation Sightline has been promoting since 1994 and especially since our 1998 book. (A small brag: Gordon Campbell read the book that year and told me he was going to shift taxes in his second term as premier. I didn’t hold my breath, but now he has delivered.) The carbon tax shift (as opposed to the larger government budget it’s wrapped in) is almost entirely untarnished by handouts to special interests. It is built on four principles:

1.  Revenue neutrality—shifting taxes from “goods” to “bads.” As the BC Finance Minister’s plan says, “All revenue generated by the carbon tax will be returned to individuals and businesses through reductions in other taxes. None of the carbon tax revenue will be used for expenditure programs.” That’s good news for the province’s economic vitality: tax shifting boosts opportunity, strengthens enterprise, and generates wins for families, prosperity, and our natural legacy.

2.  Phased implementation—an economy-friendly time line. Carbon taxes rise from $10 per metric ton of carbon dioxide equivalent (CO2e) this year to $15 next year, then $20 the following year, and so on up to $30 per ton in 2012. Personal and corporate income taxes decline on a similar schedule. A future government will decide whether to continue the dollar-for-dollar shift from income taxes to carbon taxes. This phasing is good news, because it lets families and businesses upgrade their appliances and machinery gradually, seizing opportunities for efficiency and innovation at the right times in the turnover cycle. Predictable tax increases spur us toward a smarter energy economy, while still giving us time to adapt gracefully.3.  Tax benefits—Protection for working families. “The bottom two personal income tax rates will be reduced for all British Columbians resulting in a tax cut of 2 per cent in 2008 and 5 per cent in 2009 on the first $70,000 in earnings—with further reductions expected in 2010.” This income tax reduction will benefit everyone who pays income taxes, but it will benefit working families the most. In addition, low-income families will get an annual (and escalating) Climate Action Dividend; this year, it will be worth $100 per adult and $30 per child. Just like Cap and Buffer! The tax rate reduction plus the dividend give double protection to working families, which will help to compensate for the unfairness of climate disruption.

Working families may get side benefits from carbon taxation, too. For example, walking, cycling, and public transit all function better when more people are involved. More walkers and cyclists lead to safer streets; more transit riders support more frequent service. Todd Litman of the Victoria Transport Policy Institute points out that more parents seeking carpools make carpooling easier for all; more parents walking their kids to school make “walking school buses” easier to organize. So if carbon taxes shunt more middle-class people toward these low-cost, low-carbon alternatives, working class people may benefit.

4.  The broadest possible coverage. The carbon tax falls on all greenhouse-gases emitted from the burning of fossil fuels within the province: gasoline, diesel, natural gas, coal, heavy fuel oil, propane, kerosene—you name it. It’s exceptionally comprehensive. That’s good news, because it will make the tax credible, defensible, and efficient to administer. Most countries with carbon taxes, including tax-shifting’s pioneers in Scandinavia, have made one political compromise after another, exempting whole industries and fuels and thereby undermining the effectiveness and logic of the tax. (I’ve posted an accompanying description of carbon taxes elsewhere in the world.) British Columbia’s policy is a model.

It doesn’t yet include emissions from industrial processes, such as cement manufacturing and aluminum smelting or from “fugitive” sources, such as leaks of methane from pipelines and landfills. But those things are hard to measure, and the province’s plan states the government’s intention to include them too in time. Similarly, it excludes nonfossil carbon that comes from the atmosphere and ends up in wood, other biomass, and biofuels. (Biofuels’ climate impacts look worrisome, of late, but the province’s policy is logically consistent.) It also exempts exported fuels—including those in the fuel tanks of ships and airplanes that travel to other jurisdictions—because these fuels are not burned inside the province. When it comes time to integrate BC’s carbon tax with future ones in neighboring jurisdictions, or with cap and trade systems, its purity and consistency will be a huge advantage. (I’ll write more about that opportunity another day.)

Not that BC’s smart tax shift policy can’t be even better. It can. Some critics in British Columbia are disappointed in the tax shift for its modest starting rate of just $10 per ton (which works out to about 9 cents per gallon of gas). Tax shifting, however, is supposed to start small, so I like where it starts, particularly because no nearby jurisdictions yet have carbon pricing at all. My disappointment is where the tax shift ends. It only continues until 2012. Although it’s courteous of Premier Gordon Campbell not to commit his successors to ongoing rate increases, only such continuing rate increases will deliver on the tax shift’s promise. To avert the rank unfairness of climate disruption, the price of carbon ultimately needs to rise substantially. If BC extends its plan for twelve yearly increments—not just the five increments outlined last week—the province’s carbon tax rate will still be lower than the existing rate in Sweden ($69/metric ton of CO2e). And Sweden’s rate clearly isn’t high enough yet to engender a clean-energy revolution.

This observation isn’t just a matter of future influence; it’s about the present. In fact, advance notice of future carbon price increases are as important as the increases themselves. If British Columbians know that the price of fossil fuels is going to go up every single year for as far into the future as the eye can see, they’ll make di
fferent decisions now. They’ll choose different jobs; live in different neighborhoods; and buy different homes, cars, and appliances. Businesses, too, will expand their thinking to fit a new energy era: they’ll invent different products, market different services, deploy different technologies, and develop different business strategies. Again, the influence of a tax shift isn’t just that carbon prices will be higher; it’s that they’re sure to keep rising. Psychologically, that’s a huge difference.

Still, I don’t want to criticize much, especially considering the still-skeptical reaction of many British Columbians. Even without extension into the future, BC’s carbon tax shift is a huge political breakthrough. It’s revenue-neutral, phased, comprehensive, and equitable. It’s ready to be copied elsewhere in Cascadia and beyond. And I mean that literally: copied and pasted into the law books. It’s that good.

For more information on BC’s carbon tax shift:

The province’s actual document, the BC Budget 2008, contains a 40-page section describing the tax and related measures. It’s surprisingly accessible and interesting, as tax policy goes. Or, highlights are in this online slide show.

Flag photo courtesy of Flickr user Scazon under a Creative Commons license.