10 Key Takeaways from BC’s Polluters-Pay Model

British Columbia has a world-class carbon tax. It’s been working for almost seven years, cutting pollution and pumping money into other parts of the economy, like the pockets of businesses and households who now pay lower taxes. Jealous decision-makers down here in Oregon and Washington might be asking “Yes, but how how did they start taxing pollution and helping businesses and residents? How did they do it?” Clean Energy Canada set out to answer your anguished questions by interviewing 13 of the architects of British Columbia’s carbon tax. Below are their 10 takeaways about a carbon tax, along with a little explanation and my take.

1. A carbon tax and a thriving economy can co-exist.

“The numbers speak for themselves. In the last five or six years, B.C. has outgrown most of the rest of Canada, and has had significantly less emissions than the rest of Canada.” —Ross Beaty, Executive Chairman, Alterra Power

True, that.

Every single interviewee agreed that the carbon tax has not harmed the economy. Some interviewees noted that carbon-funded corporate tax cuts have helped attract businesses to the province.

Hear that, Oregon and Washington? Making prices tell the truth about the cost of pollution is at worst neutral for the economy and at best good for business.

2. You need strong political leadership to get a carbon tax in place. (Public concern about climate disruption helps, too.)

Gordon Campbell made this happen. As premier, he made climate change a priority, and made a carbon tax the centerpiece of British Columbia’s budget. (It helped that the public in British Columbia placed a high priority on environmental stewardship. And while none of the parties initially came out swinging for a revenue-neutral carbon tax, parties across the political spectrum supported doing something to reduce climate pollution.)

Good news for the Evergreen State:

• Governor Inslee is committed to making climate change a priority;
• People in Washington are rightly proud of their state’s environmental beauty;
• Washington has a big budget problem that a polluters-pay bill could help solve; and
• Washington state Republicans, while not actually supporting the polluters-pay principle, now say they, too, want to do something about climate pollution.

Possibly good news for Oregon:

• Oregon has strong enough Democratic majority in the legislature that if someone decided to become Oregon’s Gordon Campbell, they would have a good chance of making it happen;
• Oregonians have a strong environmental ethic: we believe our environment is the top reason that Oregon will be a better place to live in 10 years, a strong majority believe in prioritizing the environment over economic growth, a supermajority believe that we need to make polluters pay for the costs they impose on the public, and most of us (72%) believe we need to do something about climate change.

3. Keep it simple: design a policy that’s easy to administer thanks to broad coverage and minimal exemptions.

Simple, fair, and no loopholes are good policy principles. The BC tax covers all fossil fuel combustion in the province, and businesses appreciate that its streamlined design is less cumbersome than regulations. Unfortunately, British Columbia did a tiny bit of crumbling around the edges, creating exemptions that were politically necessary but almost certainly unwarranted. For example, they gave some subsidies to the agricultural sector, but recent academic research found little evidence that the agricultural sector was actually harmed by the carbon tax (meaning it got a windfall from the subsidies).

Advice for Oregon and Washington: keep it simple, fair, and resist pressure to create unwarranted loopholes.

4. Start with a low price.

The BC tax started at $10 per ton. That price translates to less than a dime per gallon of gas, so it didn’t create a price shock in the first year of the program.

5. Commit from day one to a schedule of price increases, and stick with it.

British Columbia could have taken more of its own advice on this one.

Because the increase was written in legislation, it wasn’t a constant public debate.” —Carole Taylor, Finance Minister of British Columbia

The price started at $10 per ton in 2008 and went up $5 per ton for 4 years, reaching $30 per ton in 2012 and staying there. Most interviewees expected it to keep going up after 2012, and bemoaned the fact that they did not firmly commit to a longer schedule of price increases. $30 per ton is a good start, but not enough to complete the clean energy transition we need. The interviewees’ advice (and mine) for Oregon and Washington would be to committed to a steadily increasing price schedule for at least 10 years.

6. Revenue neutrality helps address private-sector concerns and makes the policy more durable.

“Revenue neutrality is an important promise that was made to BC taxpayers with the introduction of this tax. Reducing taxes on things like income, and placing them on pollution instead, is good policy that makes good sense.” —Christy Clark, current Premier of British Columbia

Revenue neutrality didn’t win passage for the carbon tax, but it made it more difficult for business interests to attack. The revenue-neutral design addressed the fear that a new tax means bigger government—the tax guaranteed that the government would not get bigger, even going so far as to say the finance minister would not get paid if he could not show he had kept this promise. The design also addressed the more personal fear that a new tax means a bigger tax bill for a particular business—lower-carbon businesses could lower their total tax bill as a result of the new tax. None of this turned the business community into cheerleaders, but it prevented or muted business opposition.

The more significant benefit of revenue neutrality came after the tax had passed: anyone trying to reverse the task now faces a formidable task. To reverse it, you have to raise taxes on business and households by over one billion dollars! Good luck with that.

7. On the other hand, revenue neutrality doesn’t get you very far with voters.

Ah, yes: here is where reality so rudely intrudes on the economist’s dream. “Tax the bads, not the goods” makes so much sense—why wouldn’t everybody love it?! But here are some of the reactions that voters had to the BC plan:

• Once the government collects new tax revenue, its not going to refund money back to us. Not gonna happen. Voters simply don’t believe the government will give money back to them. Even when the government actually gives the money back, people don’t notice because their tax bill varies year to year anyway.
• “Revenue neutral” means I will get a check for exactly the amount of money I paid toward the carbon tax, right? Revenue neutral means the government will refund back as much as they took in, total. The individual impacts will vary: people with a higher-polluting lifestyle will end up paying more than those with a lower-polluting lifestyle. That’s the mechanism that nudges the economy away from fossil fuels and towards clean energy. Unfortunately, people are disappointed when they figure this out.
• What’s the point? If you’re just going to give it back, why collect it in the first place? People want the government to invest in infrastructure and schools and other collective goods. The idea of collecting a tax and then not spending it on those important things is confusing.
• Where did it go? People want to see something for their taxes: roads and buildings getting built and maintained, schools hiring new teachers, solar panels and windmills going up. When none of that happens (because the money is getting refunded to them), they wonder why they approved the tax.

8. A carbon tax can’t do everything; it needs to be just one component of a full suite of climate policies.

British Columbia first enacted other policies encouraging energy efficiency and clean energy. The tax was just one piece of the puzzle and selling it as such, and not as the great climate panacea, helped.

Oregon and Washington also have a suite of other clean energy policies—energy efficiency requirements, clean energy standards, and clean car standards—in place that could be strengthened to complement a carbon price.

9. Prepare for motivated, vocal—and not necessarily fact-based—opposition. You’ll need active, engaged supporters and targeted communications strategies to counter the critics.

Even though rural residents were not in fact particularly disadvantaged by the carbon tax, their perception was that the government was trying to force them to do the impossible: give up their cars. And of course we know what the oil industry’s playbook will be. Interviewees recommended that states or countries considering a carbon price should:

• Prepare for the long term.
• Engage a range of potential allies to support the policy both in the legislature and within their communities.
• Provide tailored information about what the policy will mean for specific groups. (Oregon’s carbon tax study that looked at impacts by region has given us a step up on this point.)
• Ensure that the spokesperson is a skilled communicator.

10. Prepare for a cleaner environment, an enhanced reputation, and a thriving clean technology sector.

All interviewees agreed that the carbon tax has helped British Columbia cut pollution. British Columbia has 13 percent of Canada’s population but 22 percent of its clean technology firms. That success in cutting pollution while growing the clean energy economy has given British Columbia a positive international reputation.

“We’ve gained that reputation as a place that’s very competitive for business and investment, while holding industry to a high environmental standard. I think that’s the kind of province that most British Columbians want us to be.” —Christy Clark, current Premier of British Columbia