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The Progressive Economics Forum

Next generation carbon pricing

Climate change is upon us – it feels like we see evidence almost daily in the form of extreme weather events, floods, drought, reductions in food supply, and so on. We have a lot of work to do to transform our economy from one still dominated by a resource extraction mindset, where we cut taxes and regulations in the hopes that foreign corporations will come to create a few jobs for us, whatever the ecological costs. Indeed, it is telling that Canada is threatening to pull out of the much-hyped Canada-EU free trade deal, not because of the concerns cited by activists about potential impacts on public services, domestic agricultural production and intellectual property rights; but because the EU won’t take our dirty tar sands exports.

The transformation of our economy requires major public investments in transit, energy efficiency in buildings, green manufacturing and adaptation. A recent UN report called on countries to invest 2% of their GDP per year in these types of investments, and notes that doing so can create green jobs, reduce poverty, and meet other health and environmental goals in addition to the reduction of greenhouse gases. People want action, existing technologies can drive shift to zero fossil fuels by 2040 with minimal economic disruption, and we can do it in a way that improves life satisfaction – what is missing is the political will to take on a leadership role.

CCPA’s latest Climate Justice Project report, Fair and Effective Carbon Pricing: Lessons from BC, by yours truly, does not answer the political question, but I hope it opens up the debate about how we move forward by outlining a framework for how we pay for the change we need. We focus on BC, but the lessons are generalizable to other jurisdictions, and since BC now has almost three years experience with a carbon tax, we need to understand what is working and what’s not before scaling it up.

There is a lot in the report, and while much of it is an analysis of the carbon tax and recommendations on next steps, it also includes a look at BC’s carbon neutral government mandate (which requires the public sector to pay an additional $25 per tonne for its emissions as “offsets”) and the Western Climate Initiative. Some key findings:

  • The carbon tax is too low to significantly reduce emissions;
  • Loopholes exist for some of BC’s largest industrial polluters;
  • Tax cuts and credits have reduced government revenues by more than what the carbon tax brings in, making the tax “revenue negative”;
  • Corporate income tax cuts, justified by the carbon tax, are now more than half of revenues (up from one-third in 2008 when the tax was introduced), and will hit two-thirds of revenues in 2012/13. By 2012/13, CIT cuts will be worth $1 billion per year, more than the BC government spent on all other climate action over four years going back to 2007;
  • Those CIT cuts are tantamount to a huge tax cut for the wealthiest British Columbians, meaning the top 1% actually get back more in tax cuts than they pay in carbon tax, on average;
  • This drain on the public sector is worsened by requirements that the public sector pay an additional tax (or “offset”) for emissions, leading to reduced public services; and
  • Even after tax cuts and credits are figured in, the carbon tax has a disproportionate impact on low-income British Columbians, and most benefits the highest-income households that are also the biggest emitters.

In spite of those flaws, the tax can be fixed. Indeed, based on modeling done by Mark Jaccard and associates, the paper adopts a target of $200 per tonne (currently $20) by 2020. This is a big increase but not out of the realm of experience for advanced countries, as it would steadily close the gap between BC gas prices and levels prevailing in Europe and Japan.

But in order to make that leap, what really matters is what we do with the revenues. I argue that half of revenues should be used to support climate action, especially in places where there are structural barriers that inhibit individuals from making change based on a higher carbon price alone. This includes investments like public transit, energy efficiency, green jobs programs and forest conservation. The other half would fund a new refundable tax credit that would increase the value going to low-income households but would also reach further up the income distribution (I model one scenario where the bottom half of households get back more on average in credits than they would pay in tax, while 80% of households get some amount of credit).

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Comments

Comment from rcp
Time: February 24, 2011, 5:42 am

Is there a simple rationale for imposing a “luxury carbon tax” on business air travel, as the report suggests? I would have thought that imposing it on vacation air travel would have been more internally consistent.

Comment from Marc Lee
Time: February 24, 2011, 8:48 am

My thinking is that this would be easiest to implement, as you just tax seats in business class. Someone commented to me elsewhere that taxing all airline travel would be highly progressive. A topic for further research!

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