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Canada’s got a good thing going: a tax on carbon

Meredith Fowlie, Associate Professor and Class of 1935 Distinguished Chair in Energy | March 28, 2016

It’s tax season and this makes many Americans pretty grumpy. According to a recent poll/parody, 27 percent of those surveyed indicate they would rather get an IRS tattoo than pay their taxes. Given the deep-seated ire that taxation can inspire in U.S. taxpayers, it’s not altogether surprising that calls for an economy-wide carbon tax do not find broad support.

Tattoo gun

Tattoo gun (THOR via Wikimedia Commons)

Things are different in my native land, Oh Canada, where tax is not a four-letter word. Public support for judicious taxation and public spending are, in my mind, among the shared values that define the Canadian identity (up there with health care, hockey, and Neil Young).

Recent surveys suggest Canadian support for taxation extends to carbon.  According to this comparative study, a majority of Canadians support a carbon tax. Responding to the same survey, less than a quarter of Americans share this view.

Given this cultural bent, it’s not surprising that the highest carbon price in North America is found in Canada.  In 2008, the Canadian province of British Columbia implemented an economy-wide, revenue-neutral carbon tax.  A tax of $30/ton of CO2e (or approximately $23 USD) applies to all fossil fuels consumed in the province.

Carbon-tax revenues, which account for approximately 6 percent of provincial tax revenues, offset other taxes (e.g. income and corporate taxes) or are directly transferred to households.

bctaxSources of British Columbia tax revenue (Source)

This carbon tax has won international acclaim and support at home. Last year, even the Business Council of British Columbia recommended keeping the BC carbon tax in place. A recent poll shows six in 10 support their homegrown B.C. carbon tax.

The new Canadian Prime Minister is hoping to leverage this important carbon tax foothold. During election season, many swooned over Justin Trudeau’s legendary perfect hair. His hair is perfect. But what made my heart skip a beat was his election promise to pursue a national carbon price that would apply across the country.

Earlier this month, Trudeau convened a ministers’ meeting to accelerate action on this important promise. But alas, even in my tax-tolerant Canada, a nation-wide carbon price is meeting with formidable resistance.  Although all parties at the meeting ultimately signed on to endorse “some form” of carbon pricing, this compromise language hinges on a very loose interpretation of carbon pricing.

ministers

First Ministers meeting in Vancouver, B.C., March 3, 2016

Perhaps the most creative interpretation comes from Saskatchewan Premier Brad Wall. Pointing to the CCS project in his province that captures carbon dioxide from a coal-fired power plant and sells it to oil companies for use in extracting crude, he maintains that this could fall under the umbrella of carbon pricing, very broadly defined.

Others point to government regulations mandating renewable energy and clean technology development, noting that these programs put a hidden price on carbon, paid for by industry, taxpayers, and electricity consumers.

We have seen similar debates play out here in the U.S. where renewable energy mandates, tax incentives, and clean technology programs are the preferred policy response. Across the U.S., a patchwork of these prescriptive policies have been implemented. The good news is that many of these programs are delivering real emissions reductions. The bad news is that many of these emissions reductions come at higher-than-necessary cost.

Pursuing a greenhouse gas emissions reduction target without a carbon price amounts to tackling climate change with one (invisible) hand tied behind your back.  Mandating levels of investment in specific technologies or mitigation options – versus using a strong carbon price signal to coordinate actions taken by households and firms –  can significantly increase the cost of meeting emissions reduction targets.

Here in California, we see significant differences in marginal abatement costs across disconnected climate change policies and programs. This tells us that we could be achieving the same carbon emissions reductions at less cost if we relied more heavily on harmonized market-based mechanisms.

Another key cost consideration for any Canadians preparing to jump the carbon tax ship is that a carbon tax or cap-and-trade program – unlike mandates, subsidies, or  tax breaks – generate government revenues. These revenues can be used to finance reductions in the marginal rates of existing distortionary taxes (see British Columbia for proof of concept). Alternatively, tax revenues can be used to fund other climate policy initiatives (such as investments in clean technology development) that can expand future opportunities for climate change mitigation while meeting other social objectives.

The upshot is not that carbon pricing is the silver bullet. Multiple market failures and distortions contribute to the global climate-change problem. Complimentary measures such as clean technology subsidies and mandates have a role to play in moving the climate change mitigation ball forward. But carbon pricing is the essential catalyst for coordinating today’s most cost-effective abatement and supporting tomorrow’s most promising abatement options.

Canada has a good thing going in British Columbia. Some other Canadian provinces are preparing to follow suit. With global enthusiasm for action on climate change picking up post-Paris, the value of demonstrating well-designed climate change policy is high. Here’s to hoping that Canada’s good thing keeps on going.

Cross-posted from the blog of the Energy Institute at Haas (tag line: Research that Informs Business and Social Policy).

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