BC introduces a carbon tax!
Since the provincial Liberals came to power in 2001 I have seen a lot of BC Budgets and not been too happy with any of them. Until now. Today’s 2008 model is a very interesting budget, and while I have a number of quibbles, I support the overall direction. And as in the recent past on climate change I find myself siding with the government against business â€“ which is, well, pretty weird.
I was prepared to be underwhelmed by this â€œgreen budgetâ€ after gimmick budgets in recent years: a â€œhousing budgetâ€ last year that failed to build any new housing, and a â€œchildrenâ€™s budgetâ€ the year before that did not expand early learning and child care. A couple of weeks ago the Premier was out lowering expectations by stating that a new climate action plan would not be released until after the budget. But once in the lock-up, I was pleasantly surprised.
To be sure, this is not the full-meal deal, and there were concessions made to business in order to sell the package. BCâ€™s green budget is a balancing act between environmentalists and business, and I think they struck that political balance well.
One notable point is that the carbon tax will have a broad base, covering 70% of BCâ€™s GHG emissions (much of the remainder will be covered by a cap-and-trade system for large industrial emitters in conjunction with the Western Climate Initiative). The remaining 30% represent emissions from industrial processes in cement and aluminum production, and fugitive emissions from pipelines and landfills. Overall, the amount of the tax is modest, at $10 per tonne (or 2.4 cents per litre at the pump) starting in July 2008, then rising to $30 per tonne by 2012. This gives a signal to businesses and consumers not only that the government is serious about climate change, but that prices for carbon-intensive goods and services are going to rise over time.
That said, a tax this size (even at the $30/tonne 2012 rate) will not be sufficient to get people out of their cars. Transportation is the last sector to respond to carbon taxes, according to the National Roundtable on Environment and Economy report. But they will affect decisions over time, as businesses upgrade their capital equipment and homes purchase new vehicles, furnaces and appliances. This capital stock upgrading is a big part of climate planning, and is a slow and steady process that happens over decades, with a carbon tax changing the nature of decisions made about which technology to purchase.
And if the $5 per tonne annual increases were to continue beyond 2012 (the final year specified in the budget) it would hit $70 per tonne in 2020 (the year we are committed to have reduced GHGs by one-third below 2007 levels) and $220 per tonne in 2050 (BCâ€™s commitment is to an 80% reduction by this date). These numbers, if they were to hold, put us on a path similar to the modeling I have seen out of Jaccard and company â€“ and that would get us to those targets.
The main point is that the carbon tax is there, period. Once implemented it can be increased in future budgets or by future governments. And this may well need to happen â€“ the budget estimates a 3 million tonnes of GHGs reduction from a carbon tax rising to $30/tonne then staying there until 2020. But this is only a small fraction of the 22 Mt of GHGs required for 33% reduction by 2020 from 2007 levels. And other complementary policies will be required, too.
Economic impacts estimated at 0.1% of GDP, which seems reasonable to me. Given that there are huge costs to doing nothing â€“ the narrowly averted spring flooding last year due to large snowpacks was estimated at $6 billion, or 3% of BCâ€™s GDP â€“ this seems a small price to pay. For businesses concerned about their competitive position, I would argue that there are first-mover advantages to business from taking a leadership role, and direct benefits to bottom lines from savings in energy efficiency.
The government chose to stick to a narrow definition of revenue neutrality, with all carbon tax revenues recycled through low-income tax credits and tax cuts. Modest personal income tax cuts are slated for the first two brackets (i.e. incomes under $70K). Iâ€™m not too impressed with tax cuts to appease business, who in the lead-up to the budget were lobbying hard behind the scenes against the carbon tax.
More tax cuts for business seems odd given that the costs will be paid by consumers. Some 38% of the carbon tax revenue is to be recycled to business through corporate income tax cuts. It would have been better to tie these cuts to GHG reduction in a more targeted manner. And above and beyond the carbon tax recycling there are additional goodies such as the elimination of the capital tax for financial institutions (presumably this will increase their ability to engage in innovative practices, like new mortgage products). Property taxes for large industry were also reduced.
My biggest concern has been the impact of a carbon tax on low-income families. The budget thankfully addresses this with a low-income carbon tax credit that will piggyback on the GST credit. The credit is worth $100 for adults and $30 for children with a phase-out period.
However, I would suggest some cause for caution. The tax credit is indexed to inflation but not to increases in the carbon tax. In other words, by July 2010 the carbon tax will have doubled to $20 per tonne, but the tax credit will have only increased by about 4% assuming 2% annual inflation. In the budget this means that the low-income credits amount to almost one-third of the carbon tax collected. A good start, but carbon tax revenues increase by 160% by 2010/11, while the low-income credit increases by only 40%.
[Correction, June 24: Upon re-reading the technical part of the budget, my take above on the low income credit is incorrect. The credit will increase by 5% as of 2009, and there are no scheduled increases thereafter. We will have to wait for future budgets to ensure that the credit grows in line with the tax. It is the income thresholds for the credit, not the credit itself, that will be adjusted upward by the rate of inflation.]
This is something that merits more modeling, as there is little information in the budget about how the combination of carbon tax and credit would look, especially three to five years down the road. Another issues is what happens to rural areas, where folks drive longer distances and are more car dependent. No additional provisions there.
In addition, all British Columbians will receive a one-time $100 climate action â€œdividendâ€ this June. This will cost $440 million and is funded out of the 2007/08 surplus. While some may spend this on energy efficiency and the like, I suspect we will see a number of dividend parties come summer.
Besides the carbon tax are $1 billion in expenditures over four years towards meeting BCâ€™s climate action plan (including measures from the 2007 Throne Speech, which was green but not in time for the budget the following week). In 2008/09 this will amount to $186 million. Energy efficiency retrofits and audits at $60 million over three years. And funding will help remote native communities switch away from using diesel as their main source of power. The list goes on for a long time, and almost all of it is good stuff.
A concern not addressed in this budget is the outstanding liability for BC government entities, including schools and universities, to be carbon neutral by 2010. For any emissions that cannot be reduced, they must pay $25 per tonne into a special fund to be used for other GHG reduction projects around the province. The potential liability for schools and others is huge and administrators are currently scrambling to get plans in place.
Finally, masked behind pages of green, there is the rest of the budget, which is pretty much the status quo. Increases in the health and education budgets are sufficient for services to keep moving along as they have been. No major increases that would reduce class sizes or build out community health care were tabled.
One piece to keep an eye on is a special account in health care for fee-for-service funding pilot in hospitals. While there is nothing wrong in principle with getting a better handle on how hospitals spend money, this move looks likely to increase administrative costs. Moreover, one wonders what this means for patients with complications that will cost more than the â€œaverageâ€ as paid by the government. It is wide open question whether this model will work at all.
Social services, never a strong point with this government, gets the short straw in this budget. Housing advocates are deeply concerned about the abject poverty and homelessness on BCâ€™s streets. With the 2010 Winter Games less than two years away, urgent action is needed. Yet, Budget 2008 allocates a weensy $33 million for new homelessness initiatives. This money will keep shelters open 24-7, on a permanent basis (from a pilot initiative last year). In contrast, the 2008/09 budget for the Olympics is about three times this amount.
This is a huge disappointment given that the underlying surpluses the government has are still quite large. The Minister wears the â€œprudenceâ€ built into the budget as a badge of honour. With $1 billion in stated prudence built into the budget, there is much more in there if we add in low economic growth assumptions. Indeed, next year revenues are stated to fall by 2%, even though GDP growth is expected to remain relatively strong, at 4.2% (nominal growth). Expect the 2008 year to close with another multi-billion surplus.
If the worst were to occur and BC was hard hit by a US recession, the impact on the budget would merely be to reduce to size of the surplus. Only if something catastrophic happened would BC experience a deficit.
So overall, this is a good budget and another step forward on the climate change front. But in other areas that are usually the focus of the budget there is little to write home about.
UPDATE: A tighter and shorter version of this post was published as an oped in today’s Vancouver Sun.