Backgrounder: B.C. Carbon Tax

Transcription

1 Backgrounder: B.C. Carbon Tax Prepared by Ian Bruce November 13, 2008 In the February budget of 2008, the B.C. government announced a landmark decision to implement the first significant carbon tax to address global warming in North America. Purpose Pricing carbon emissions through a carbon tax is one of the most powerful incentives and tools that governments have to encourage companies and households to pollute less by investing in cleaner technologies and adopting greener practices. A carbon tax can improve fairness since it is based on the polluter-pay principle, where individuals and firms are faced with the full social costs of their actions. The carbon tax puts a monetary price on the real costs imposed on our economy, our communities and our planet by greenhouse gas emissions and the global warming they cause. A shift by households, business and industry to cleaner technologies increases the demand for energy-efficient products and helps spur innovation and investment in green solutions. And although a carbon tax makes polluting activities more expensive, it makes green technologies more affordable as the price signal increases over time. Most importantly, a carbon tax gets green solutions into use. Phased in The carbon tax came into place July 1 st 2008 and is phased in slowly at a low rate of $10 per tonne of associated carbon emissions and increases gradually by $5 a year for the next four years reaching $30 per tonne by This works out to 2.4 cents per litres for gasoline, rising to 7.24 cents a litre by The purpose of this phased in approach is to give individuals and businesses time to adjust. Leading economists and environmental experts agree: seeing that cost, and making it real, will give us new incentives to change the technologies and habits that created global warming in the first place. Protection for low-income households A key consideration as the B.C. carbon tax evolves is that it be equitable in allocating the responsibility for reducing greenhouse gas emissions among all British Columbians and firms. Like a sales tax, a carbon tax could potentially be regressive, meaning lowerincome people could be disproportionately affected, as they will pay a larger share of their incomes to the tax if it were not properly designed. A well-designed carbon tax, however, can protect low-income families by recycling a portion of the revenues generated back to low-income households. The B.C. carbon tax is a well-designed progressive tax that protects low-income earners. Results indicate that during the first 1

2 two years of the carbon tax plan, about one-third of the B.C. carbon tax revenues generated are to be recycled into a low-income credit, which will return more money to low-income households than they will pay from their daily activities that produce carbon emissions. The concern that the carbon tax could grow faster than the low-income credit over time should be addressed as the carbon tax evolves. As part of the carbon tax legislation, B.C. s finance minister must develop a three-year plan every year that clearly demonstrates how the revenue will be recycled back to all British Columbians, including low-income earners. Revenue-neutral B.C. s carbon tax is not an additional tax. It s a tax shift. All revenue collected through the carbon tax will be returned by law to British Columbians through personal income, corporate income, and small business tax cuts. So right off the bat, money will go back to British Columbians who can then choose to save money by making green choices. Firms and individuals that choose strong environmental practices save money by making green choices that don t expose them to the carbon tax, while people and companies that pollute more pay more tax. Environmental effectiveness A well-designed carbon tax is an effective tool to reduce global warming. For example, Sweden has used a carbon tax to reduce greenhouse gas emissions by an additional 20 percent since 1991, as opposed to solely relying on regulations. Economic modeling (by M.K. Jaccard and Associates) indicates that the B.C. carbon tax will reduce the province s emissions by up to three million tonnes annually by 2020, the equivalent of talking 600,000 cars off of B.C. roads. That represents nearly 10 per cent of the effort required to reach B.C. s goal of reducing greenhouse gas emissions 33 per cent below 2007 levels by Comparing the modest carbon tax to other climate-change policies, the B.C. carbon tax achieves five times the environmental benefit as B.C. s adoption of California s stronger vehicle fuel-efficiency standards, another key solution that provides British Columbians with significant fuel-cost savings. But even this projection significantly underestimates the potential of the B.C. carbon tax to reduce harmful emissions because it assumes the B.C. carbon tax incentive would not increase past its 2012 rate of $30 per tonne of carbon pollution. B.C. s carbon tax has the economic potential to catalyze massive innovation and use of green solutions and dramatically reduce B.C. s harmful emissions much further if the price signal were to continue to increase over time beyond 2012, and if it were coupled with other strong measures (for example, tough regulations for the energy efficiency of homes, as well as a major scale-up of investments in transit infrastructure and better consumer information on green solutions). Research conducted by Canada s blue-ribbon panel on the environment and the economy (the National Roundtable on the Environment and the Economy) concludes that a price of greenhouse gas emissions of $75 per tonne by 2020 would reduce B.C. s emission to 1990 levels. To reach B.C. s legislated emissions target 2

3 of 10 per cent below 1990 levels by 2020, a carbon emission price in the range of $100 per tonne will likely be required, together with additional regulatory and fiscal incentive measures such as those identified in the recommendations of the B.C. Climate Action Team, an independent, multi-sector advisory body to the B.C. government. Under the existing legislation, increases in the carbon tax would be accompanied by decreases in personal and some business income taxes, as well as tax credits for low-income earners. An additional criterion to ensure environmental effectiveness is to apply the carbon price signal broadly throughout the economy (environmental effectiveness improves with broader coverage). So to ensure environmental effectiveness, it s best to cover as many emission sources as administratively feasible. B.C. s carbon tax is fairly broad-based as it applies to 70 per cent of B.C. s emissions and nearly all fossil-fuel-based emissions (see figure below). However, about 30 percent of B.C. s greenhouse gas emissions are associated with non-fossil-fuel-based emissions such as agriculture, landfill waste and chemical-process emissions in the production of aluminum, cement, lime and fugitive emissions such as natural gas venting that are currently not subject to the carbon tax but have been identified by the B.C. government to be addressed through regulations (e.g. cap-and-trade), although these measures have yet to be implemented. No coverage BC s emission sources Industry s Other Transportation Light Duty Vehicles Homes and Buildings Waste and Agriculture Carbon tax 3

4 Political build-up to the B.C. carbon tax During the years leading up to 2007, B.C. faced a series of extreme weather events, flooding, severe forest fires and forest insect infestations due to warmer winters that clearly demonstrated the vulnerability of B.C. s economy and communities to climate change. At the same time, environmental organizations were attempting to stop B.C. s first two coal-fired power plants that had received approval for construction. With public concern over climate change at an all time high, these coal-fired plants quickly became a political lighting rod as many British Columbians saw these polluting energy plants as a symbol that the B.C. government was failing to take the problem seriously. Then in 2007, the B.C. government responded in their Throne Speech that addressing climate change would become a top priority (the coal-fired plants were cancelled) and that a new government body, the Climate Action Secretariat, would be formed to develop and execute government policy. Unique to this government agency was the governance structure, with the Deputy Minster of this body reporting directly to the premier and not the Environment Minister, as historically has been the case in Canada. Many independent observers have noted this new government body and high level placement within government highlights the importance of climate change in the B.C. government s priorities. This significant change in policy direction was followed by a legislated goal to cut the province s greenhouse gas emissions 33 per cent by These government commitments focused public attention on developing a world class budget on climate change action for B.C. s leading environmental organizations and academics quickly proposed that a carbon tax was an essential element to effectively reduce B.C. greenhouse gas emissions if the province was serious about its emissions target. The B.C. government responded openly that all proposals would be considered. During the B.C. budget consultation period in the fall of 2007, political momentum for a B.C. carbon tax escalated. More than 70 economists and 80 business leaders in B.C. wrote Finance Minister Carole Taylor separate letters calling for a revenue-neutral carbon tax. This was follow-up in shortly after by several faith groups representing hundreds of B.C. churches who wrote to the Minister calling climate change action a moral imperative. 4

5 GENERAL BACKGROUND Who has called for carbon taxes? One of the fundamental problems fuelling Canada s contribution to global warming is that the atmosphere is treated as a free dumping ground for harmful, heat-trapping emissions. Pricing carbon emissions through a carbon tax or other means is supported by the world s leading climate change experts and endorsed by several international working groups including the U.N s Intergovernmental Panel on Climate Change. Many industrialized countries and jurisdictions are now putting a price on carbon emissions to account for their full environmental and economic costs. For example, Sweden has used a carbon tax to reduce greenhouse gas emissions since Although a suite of other policies has been used to reduce emissions, the Swedish Ministry of Environment estimated the carbon tax has cut emissions by an additional 20 to 25 percent (as opposed to solely relying on regulations) and contributed to their overall success: Sweden s carbon emissions have decreased more than seven percent since Sweden s carbon tax has been credited as the economic tool that has spurred the innovation and deployment of new low-carbon energy technologies such as green heating technologies which have significantly phased out the burning of oil for heating. Sweden s carbon tax has also been credited in part to putting the country on target to achieve and honour its commitment under the Kyoto Protocol. DSF s views on the B.C. carbon tax The David Suzuki Foundation supports the B.C. carbon tax and believes it is an essential policy that forms the foundation for any effective plan to reduce global warming. DSF acknowledges B.C. s leadership in spearheading this important climate change policy in North America and recognize it as a model for other governments to follow. DSF also notes the fact that the countries most effective at reducing global warming emissions today are using a both a carbon tax and a cap-and-trade system, the path B.C. currently appears to be following. But DSF cautions the most important consideration for success in the fight against climate change is to ensure these two policies are welldesigned and put into place in a timely manner. 5