A REVENUE-NEUTRAL TAX ISN’T ALWAYS GOOD POLICY
What’s efficient isn’t always obvious, Nancy Olewiler and Rhys Kesselman say.
Writing for The Vancouver Sun (Sept. 14), three Fraser Institute analysts critiqued the new B.C. government for departing from revenue neutrality and economic efficiency in its planned hikes to the province’s carbon tax. Their assessment and policy prescriptions are off base on all counts when a proper economic analysis is applied.
To begin, we explain the rationale for a carbon tax and its special properties. B.C. implemented a carbon tax in 2008 — the first in Canada — to encourage businesses and households to reduce their emissions of greenhouse gases. These emissions contribute to global climate change that is causing evermore frequent extreme weather events, melting polar ice, rising sea levels and other adverse consequences.
Without a carbon tax, consumers and businesses use energy and energy-intensive products without taking into account the environmental cost of the associated GHGs. By applying an appropriate carbon tax, these environmental costs influence decisions of how much and what type of energy to use, leading to a more efficient economy. The carbon tax puts a price on pollution.
A carbon tax can raise revenues while improving incentives for efficient behaviour. This contrasts with most other taxes, which distort the economy’s efficiency. How a government chooses to use the revenues from a carbon tax has nothing to do with the efficiency of the tax itself. This point belies the Fraser Institute assertion that using carbon-tax revenues for anything besides cutting other taxes is inherently inefficient.
From the outset, the B.C. government required its carbon tax to be revenueneutral, in part to assure the public that the tax wasn’t a revenue grab. The revenues were returned to the public mainly via reductions in corporate and personal income taxes, combined with special rebates for low-income and rural households, municipalities, farms and small business.
However, the tax has actually been revenue negative. For example, in B.C.’s 2016-17 fiscal plan some $500 million labelled as tax cuts using carbon-tax revenues were in effect subsidies for children’s fitness and arts classes, interactive digital media and the film industry. These actions contravene the Fraser Institute admonition against using the revenues for “pet” projects.
To provide sufficient incentive for the sharp reduction in carbon emissions needed to avoid catastrophic global consequences later this century, the carbon-tax rate would have to be set at a multiple of the $50 per tonne required by federal policy for 2022. Going quickly to a much steeper rate would be too damaging for the provincial economy unless other jurisdictions faced a comparable tax rate and coverage.
The province employs supplementary actions and regulations to augment its carbon tax to restrain emissions. Examples include low-carbon fuel standards, zero-emission vehicle charging stations, renewable electricity generation and energy-efficient building codes and requiring all B.C. public-sector entities be carbon-neutral. These policies reject the Fraser Institute admonition against using regulatory restraints on the “free market” for energy development.
B.C. was a leader in carbon policy in 2008, but now with Canada’s federal GHG legislation and ambitious programs in other countries, we are no longer out in front. Indeed, big GHG emitters such as China are aggressively pursuing carbon-pricing programs and regulation and rapidly shifting from coal to renewable electricity generation. European countries have significantly reduced total emissions. Meeting B.C.’s emission targets will take both a rising carbon price and diverse supportive policies.
Despite climate-change policies elsewhere, many countries with which B.C.’s resource industries compete don’t have as high a price on carbon. A major omission in B.C.’s carbon policy is providing support for our tradeexposed, energy-intensive industries. These are sectors that sell in external markets at internationally set prices and require carbon-intensive fuels in their production processes.
A loss of B.C. exports in these sectors affects local jobs and contributes to carbon leakage — an increase in global GHGs when production shifts to jurisdictions with more lenient carbon policy. Use of carbon-tax revenues to offset competitiveness pressures and carbon leakage while still preserving the positive-incentive effects of a carbon tax is efficient and good policy.
Proper economic analysis repudiates the Fraser Institute’s rigid prescriptions for B.C. climate policy, its rejection of regulatory climate measures and, in particular, its insistence on revenue neutrality. Revenue neutrality of carbon taxation is found to be neither necessary nor sufficient to ensure efficient and effective climate policy.
In fact, a rising carbon tax needs to be supplemented by regulatory and public supports for energy-efficient investments and innovation to fulfil B.C.’s GHG targets. Public funds also need to be dedicated to mitigating the adverse effects on particular industry sectors, as well as on households and businesses more generally.
A rising carbon tax will facilitate more efficient decisions in the private sector, and appropriate complementary policies will help accelerate reductions in GHGs.
Proper economic analysis repudiates the Fraser Institute’s rigid prescriptions for B.C. climate policy, its rejection of regulatory climate measures and, in particular, its insistence on revenue neutrality.