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BC’s pioneering revenue-neutral tax is lauded internationally for its buy-in from citizens and industry and success in cutting emissions. But it has not been an easy ride and challenges lie ahead, says Kathryn Harrison of the University of British Columbia
British Columbia’s carbon tax, adopted in 2008, was celebrated internationally as a textbook model of carbon taxation. The province’s even-handed coverage of fossil-fuel consumption by both households and industrial sources was a departure from carbon taxes in other countries that exempted politically influential industries.
The schedule of tax increases from C$10 per metric tonne of CO2 in 2008 to $30/tonne in 2012 was gradual and predictable, as recommended by policy experts. All revenues from the tax were to be returned two ways: through low-income dividends – to avoid regressivity – and reductions in individual and corporate income tax rates, to deliver spill-over economic benefits.
Implementation of BC’s landmark carbon tax reflected a confluence of factors. Polls in 2007 indicated that the environment and climate change were at the top of Canadian voters’ agenda, prompting diverse policy proposals from provincial and national governments. The business community thus anticipated that increased costs would be forthcoming, not least given growing interest in cap and trade in both the US and Canada.
When consulted by a trusted right-of-centre BC government in late 2007, business representatives indicated that they could live with a carbon tax if the burden of reductions was shared with households and the tax was revenue-neutral.
A final critical factor was leadership by Gordon Campbell, premier at the time, who developed a strong personal interest in climate change and was willing to embrace advice that a carbon tax was the most straightforward and cost-effective policy option. Campbell’s government announced in its February 2008 budget that a new carbon tax would take effect that July. Survival was by no means guaranteed.
When unrelated increases in gasoline prices in the spring of 2008 created growing public unease, the opposition NDP mounted an opportunistic “axe the tax” campaign. Public support fell for the BC Liberals and increased for the NDP, bringing the parties neck and neck by the fall. However, despite nervousness in the Liberal caucus, Campbell stayed the course.
Thereafter, the carbon tax was saved by a decline in the price of gasoline and the onset of the global recession, which redirected voters’ attention from gasoline prices to the economy, an issue on which voters favoured the Liberals over the NDP by a 30-point margin in polling at the time.
Revenues from increases above $30/tonne are earmarked for more generous low-income tax credits and subsidies to support business transition from fossil fuels
In the 2009 election, the Liberals campaigned on sound management of the economy, barely mentioning the carbon tax until Campbell proudly highlighted it in his election-night victory speech. The next survival challenge was loss of the policy’s champion. Campbell was succeeded as Liberal leader and premier by Christy Clark in 2011. Public support for the carbon tax had rebounded above 50% in 2011, eventually reaching 64% in 2012.
However, opposition had grown in the business community, as other national and provincial carbon pricing proposals were shelved, leaving BC isolated with its $30/tonne tax. The Clark government announced a review of the carbon tax in 2012, but ultimately opted only to freeze the rate at $30/tonne until other jurisdictions caught up.
As one of four provinces that laid the foundation for the Trudeau government’s decentralised approach to carbon pricing, BC would be able not only to maintain its preferred strategy of carbon taxation, but also to benefit from the levelling of the playing field. It thus seemed surprising when Christy Clark was one of the last holdouts in negotiation of the Pan-Canadian Framework on Clean Growth and Climate Change (PCF) in 2016.
Clark’s reservations reflect the fundamental challenge of reconciling price- and emissions-based approaches, in particular that the resulting carbon price, and thus costs to provincial economies, might be lower in provinces that opt for cap-and-trade plans compared with those that commit to meet the federal benchmark price of $50/tonne via carbon taxes. Clark signed on only after securing agreement to an interim review of the pan-Canadian framework in 2020, the year in which BC would have to increase its tax, according to the benchmark schedule.
In the 2017 BC election, the Liberals maintained that they would not increase the carbon tax, contrary to their own Climate Leadership Team’s recommendation. In contrast, both the NDP, which abandoned its opposition to the carbon tax in 2011, and the Green Party proposed increases. The election yielded an NDP minority government supported by three Green Members of the Legislative Assembly (MLAs). The two parties agreed to increase the carbon tax by $5/tonne starting in 2018, reaching the $50/tonne federal benchmark one year earlier than the pan-Canadian framework deadline.
Revenues from increases above $30/tonne are earmarked for more generous low-income tax credits and subsidies to support business transition from fossil fuels.
A growing body of research has found that the BC carbon tax reduced consumption of gasoline and residential natural gas as well as overall emissions
The BC carbon tax offers a number of lessons, both positive and negative. A growing body of research has found that the BC carbon tax reduced consumption of gasoline and residential natural gas as well as overall emissions. It also prompted greater uptake of fuel-efficient vehicles, all without loss of jobs or harm to low-income households.
However, while BC’s emissions are lower than they would have been without the carbon tax, the fact they have only levelled off underscores that either a higher carbon price or more aggressive complementary measures are needed to achieve the absolute reductions in emissions.
The BC experience also offers cautionary lessons about the politics of carbon taxes. Public misunderstanding of how environmental taxation works, combined with the visibility of costs and lower visibility of benefits, renders carbon taxes ripe for populist attacks. The BC NDP’s opportunistic axe-the-tax campaign relied on rhetoric that has since been echoed in other provinces, nationally and internationally: highlighting the most salient price increase, which is on gasoline in the Canadian context; questioning or ignoring corresponding revenue returns via tax cuts or dividends; and falsely asserting that carbon taxes are unfair to “working families” while “big polluters” are being let off the hook.
More recently, Conservative opponents have also insisted that carbon taxes don’t work and kill jobs, despite strong evidence to the contrary from BC. Although BC stayed the course and will increase its tax to $50/tonne in line with the PCF, it is striking that the province’s ambitious 2018 climate plan does not rely on further increases to the carbon tax. Although the BC carbon tax’s even-handed application to all sources and its revenue neutrality via income tax cuts were celebrated in 2008, its evolution over time illustrates the temptation to use revenues for political gain.
After the first three years of income tax cuts, revenues from $20 to $30/tonne were recycled via narrower tax credits, including for video game production and children’s sports fees. Fuels used by farmers were exempted. More significantly, both the Liberal and NDP governments made generous carbon tax concessions in attempts to secure investment in liquified natural gas.
There are, however, positive lessons as well. Public support for the carbon tax bounced back after three years and remains strong, though that doesn’t necessarily indicate support for significantly higher tax rates. The resilience of the BC tax is also noteworthy. Whether or not it is revenue-neutral, repealing a carbon tax leaves a hole in a government’s budget that typically will need to be filled by increasing another tax, potentially rekindling anger among voters just as they have gotten used to the carbon tax.
Going forward, BC has earmarked its carbon tax revenues above $30/tonne rather than maintaining revenue neutrality. It will be interesting to see whether British Columbians embrace that strategy, of which industry is the immediate beneficiary, or come to resent that they are not receiving the tax credits enjoyed by Canadians in provinces subject to the federal tax.
Kathryn Harrison is a professor of political science at the University of British Columbia. She has published widely on Canadian and US environmental and climate policy. This article was originally published in Policy Options as part of a series of articles on carbon pricing in Canada.