Is BC’s Carbon Tax Fair?

The CCPA released today a new study by myself and Toby Sanger on the distribution of BC’s carbon tax and recycling regime. I’ve probably leaked most of the findings in various blog posts in recent months, but the full meal deal is now available for download here. Toby and I modeled the carbon tax by quintile based on household survey data, then looked at the distribution of the recycling regime of personal and corporate tax cuts and a new low-income credit that piggybacks on the GST credit. We looked forward to see how the regime changes over time, and modeled some alternative credit schemes.

Below is an oped I wrote for the Vancouver Sun that gives a synopsis of what we found and our recommendations to the provincial government:

Is BC’s Carbon Tax Fair?

By Marc Lee

Introducing a new tax is never a popular political move, so it was notable when the BC Liberal government, known more for its tax cutting, brought in Canada’s first broad-based carbon tax in February’s budget.

In politics, timing is everything. Between Feb. 19, when the BC Budget tabled the carbon tax, and July 1, when it was implemented, prices at the pump rose to record levels. At the start of July, Vancouver gas prices peaked at more than $1.50 per litre, about 40 cents higher than at budget time. The carbon tax counted for a mere 2.3 cents per litre of that increase, but quickly became a lightening rod for public anger about higher fuel prices.

Now that gas prices have come back down, it is a good time to revisit the carbon tax and how it affects different households in BC. It is important to get the details right because the carbon tax is supposed to steadily increase over time, and will eventually have major impacts on both household and provincial budgets.

As with sales or consumption taxes, lower-income households will feel the impact of carbon taxes more intensely. On its own, BC’s carbon tax is regressive, meaning low-income families pay a larger share of their income to the tax than high-income families (even though high-income families will pay more in straight dollars).

But distribution is also affected by how the proceeds of the tax are recycled back to households in the form of personal and corporate income tax cuts and a new low-income tax credit. This revenue recycling turns a regressive tax into a progressive outcome – at least for the first year.

In 2008/09, the overall carbon tax regime delivers a modest net gain in dollar terms for the bottom two-fifths of households (about $40 per household on average, or 0.2% of income). These amounts are relatively small because the carbon tax starts out at such a low rate.

A major concern looking forward, however, is that the low-income credit is not scheduled to grow in line with the carbon tax. The credit of $100 per adult will grow to $105 as of July 2009, and no further increases are scheduled. But the carbon tax itself will grow by 50% as of July, and will continue to rise in future years.

This means the progressive outcome in 2008/09 disappears next year, and as of 2010/11 the carbon tax regime becomes regressive – and more so with each passing year.

This problem is relatively easy to fix. The 2009 BC Budget should commit that the low-income credit will grow in line with carbon tax revenues. Indeed, because low-income families need real options for taking climate-friendly actions, the credit could be increased much more. Currently, one-third of total carbon tax revenues is used to finance the low-income credit. If this was increased to one-half of revenues, the net gain in 2009/10 for the bottom 20% would be $125 on average (or 0.8% of income).

A second concern with the carbon tax regime is that tax cuts undermine a progressive outcome at the top of the income scale. In 2008/09, personal and corporate income tax cuts lead to an average net gain for the top 20% of households that is larger in dollar terms than for the bottom 40%.

This problem will get worse in future years, and is a perverse outcome since top earners tend to have the largest carbon footprints. Personal and corporate income tax cuts should thus be dropped, and the remaining carbon tax revenues should fund other programs to reduce BC’s greenhouse gas emissions, including major public transit expansion, transition programs for workers, and energy efficiency programs.

Taking global warming seriously means accepting higher prices for activities that emit greenhouse gases. Carbon taxes, as well as cap-and-trade systems and regulations on industry, will all lead to higher prices that will adversely affect low-income households. One of the main benefits of a carbon tax is that revenues come in to the government, which can use them to offset those regressive impacts.

A basic principle of fairness is that families with low or modest incomes should be no worse off under any carbon pricing system. BC’s carbon tax and recycling regime is a good first step, but the 2009 budget must correct some design flaws to ensure that the carbon tax regime does not worsen inequality.

7 comments

  • good points, thanks L

  • Any strategy that relies solely on tax policy to achieve its aims is going to be unfair. That’s why the carbon tax/cap-and-trade bunfight is just so much nonsense.

    What would be far more instructive, and far more progressive, I think, would be some costed proposals for real initiatives to reduce greenhouse gas emissions. And I’m not just talking about spending more money on transit, although that’s part of it.

    At what point, for example, do large geothermal projects pay for themselves? Could everyone on a city block to connect to a single geothermal ‘network’ and if so, at what point would that begin to pay for itself? What about solar projects? At what point would economies of scale make solar projects feasible? And what could governments do to facilitate those projects, especially in lower-income and/or rental neighbourhoods?

    The argument over whether carbon should have a cost is silly. The cap-and-traders and the carbon taxers both agree that it should have a cost. But it’s just as silly to think that a progressive society will come to climate change solutions based on economic models alone.

  • This means the progressive outcome in 2008/09 disappears next year, and as of 2010/11 the carbon tax regime becomes regressive – and more so with each passing year.

    Right.

    But wasn’t this the real intention all along? Really, wouldn’t a person have had to be incredibly naive not to realize that this was the real game from the get-go, to shift the tax burden down the income scale, just like so many other tax changes of the past few decades?

    I have tried pointing this out before, but perhaps in a post election environment the point will finally be recognized. A very good hint as to what the more vehement carbon tax proponents had in mind was givne in this item from the SFU PEOPLE IN THE NEWS of Feb 28:

    The Canadian Press, Canwest News Service, CBC Radio and TV, CTV, GlobalTV and La Presse Canadienne covered a new report saying the average Canadian would see a 50-per-cent income tax cut if the federal government phased in a new tax to crack down on activities that contribute to global warming. The authors: environmentalist David Suzuki and SFU’s Mark Jaccard.

    http://www.sfu.ca/sfunews/Stories/sfunews02290801.shtml

    Note that the emphasis is on an opportunity to slash income taxes in half. Global warming prevention is a secondary clause.

  • Tony, costing out alternatives is a great idea, or linking to groups who’ve done that already. I recall also that California had made an offer to obtain new wind-generated electricity in BC (now that’s silly, sending wind power off to the US while BC dams more rivers; Ontario is doing the same.) That item may have been linked from the Save Our Rivers site.

    Transition to good alternatives can be partially paid for with carbon taxes. We’re still going to need mechanisms to restrict bad behaviour, while advancing the good.

    Here’s and example of why it’s necessary, from Offshore’s online journal for oil and gas sea drilling, from Sept.9/08:

    http://www.offshore-mag.com/display_article/338790/120/ARTCL/none/RGRPT/1/Industry-experts-see-future-for-exploration-offshore-Iceland/?dcmp=ENL.OSWR

    “About 90% of all housing in Iceland is heated with geothermal energy and 80% of the country’s electricity is generated by hydropower with the rest from geothermal power. Iceland is the least dependent on oil of all nations, said [Icelandic Minister] Skarphedinsson. However, he said, the price of oil and the technology to explore for it offshore Iceland is now favorable, and as geopolitical strategy, it is prudent to establish Iceland’s ownership of its offshore areas.”

    “‘The Atlantic margin and the Jan Mayen Ridge are world class exploration provinces,’ [Norwegian oil co. official] Andersson said. ‘There aren’t that many places left where you can do elephant hunting,’ he said. ‘This is one of them.'”

    There is a huge existing dinosaur industry, that still wants to hunt elephants, even when other options are already in place. Why? Because they can make money, and lots of it, even with current prices which are still very high, as this blog has pointed out. The dinosaurs and elephant hunters have to be handled with a multifaceted approach that includes shoring up alternatives, and reigning in the offshoring, of all kinds.

    Which brings me back to the IMF, not to be escaped, and speculation on what other concessions may have been made in terms of foreign financial and energy siting in recent negotiations.

    While costing out alternatives, support for diverse financial controls remains critical at this time, particularly controls that are not revenue neutral for some of the most profitable industries on the planet.

    Rod, the taxes could be used to support low income people, rather than the opposite, and these changes should be supported. Better than getting rid of the program, no? Though if we fail in getting real global financial regulatory controls and let speculators continue to manipulate exchanges then carbon taxes and even hard cap regs in BC, unless global, will be rendered impotent in a final race to the bottom of the deep blue sea.

    So let’s hang together in clarifying and pushing for good policy at all levels.

  • “Rod, the taxes could be used to support low income people, rather than the opposite, and these changes should be supported. Better than getting rid of the program, no?”

    Leigh, the key words here are “could” and “should”. The question is what really is the BC Govt’s, or any government’s, actual policy. Not what it could or should be tweaked to.

    I recall reading an op-ed piece in the Van Sun by one of the SFU economists who normally specialized in labour issues, and it too relied heavily on conditional promises. We could do this, … we could do that, … and we could do something more too! Given the actual record of tax changes in recent decades, and given the way the last great policy emergency, debts and deficits, were handled, relying on coulds and shoulds is a pretty dangerous strategy for anyone not already making an above average income.

  • Alexandra Zwicker

    “A basic principle of fairness is that families with low or modest incomes should be no worse off under any carbon pricing system.”

    I beg to differ with this statement. Yes, the rich often do have bigger carbon footprints than poor or medium income families. But carbon taxes work by “punishing” carbon-use through higher prices. If carbon taxes are to work, we need everyone in our society to feel the carbon “pinch” in order to bring about the change in behaviour we need to reduce our carbon footprint as a society. Therefore, families with low or modest incomes should be equally and proportionately (according to their income) affected by the carbon tax. They too must feel the carbon “pinch”, or we will reduce the carbon imprint of rich families (a relatively small proportion of our population) and do nothing at all about the carbon print of the rest of our populace. Rich or poor, we all have to be responsible and reduce our carbon print.

    What bothers me most about carbon-taxes is that they are also being used to piggy-back wealth distribution schemes. This is disingenuous. If people feel that wealth should be redistributed, then please feel free to lobby for that with your local representative. But don’t hijack the real purpose of the carbon tax in order to do this. Keep the issues separate.

  • Bravo Marc – intelligent, progressive criticism of the BC carbon tax.

    It does, however, give one pause to reflect on how abysmally the BC NDP handled this issue, destructively employing the anti-tax frame and once again pushing away key constituencies (both of which errors will come back to bite it in future).

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