Bury the B.C. carbon tax myth

The B.C. carbon tax is now enshrined as a world famous economic miracle, thanks to some handy promotional papers by a few Canadian economists and a gullible media.

From the World Bank to the Organization for Economic Co-operation & Development, the province’s imposition of a 6.67 cents a litre tax on gasoline is cited as a model for all jurisdictions. Marianne Fay, the World Bank’s chief economist for climate change, recently appeared on CBC Radio to declare that the world needs global carbon tax regimes. “B.C. has done it very successfully,” she said.

Via a recent paper co-authored by Fay, the World Bank is using the B.C. model as a handy selling point for carbon taxes, which it argues must become a vital part of a move to planetary decarbonization by 2100. The paper, “Decarbonizing Development: Three Steps to a Low Carbon Future,” cites the B.C. carbon tax favourably, along with a few key papers that back the idea the tax has been effective.

Among the World Bank’s supporting documents is a 2013 OECD working paper, “The Political Economy of British Columbia’s Carbon Tax,” by Kathryn Harrison, a University of British Columbia professor of political science. She argues that the B.C. carbon tax has been a success for essentially three reasons: popular acceptance, no loss in economic growth, and a sharp decline of 17.4 per cent in per capita gasoline consumption in the province between 2008 and 2012.

The problem with these claims is that they are not supported by all the facts and/ or have been overtaken by reality. The most dramatic of these is the big 17.4 per cent decline in gasoline consumption as a result of a tax increase of about four per cent in the price of gasoline. This dramatic drop is without precedent in economics for a product such as gasoline, which is generally considered to be price inelastic, i.e., demand doesn’t respond that much to small or even large shifts over the short term.

As the nearby graphic shows, B.C. gasoline demand may have dropped over the 2008-12 period, but the cause remains unclear. The correlation with price is far from obvious. And that was 2012. Gasoline demand in the province as of March this year hit an all-time high of 4.96-million cubic metres. Not much de-carbonization going on there. More importantly, on a per-capita basis, gasoline consumption has rebounded this year to 1.07 cubic metres, about exactly where it started when the first carbon tax was imposed in 2008.

As the graphs imply, there’s a lot more going on in the B.C. economy than a relatively tiny 6.67-cent increase in the price of gasoline — an increase that fails to show up in the longer-term trend in Vancouver.

It is time to put an end to the B.C. carbon tax success story. If anything, the tax has been a non-event in the economic lives of the people in the province. It’s a nice source of revenue for the government, and much is made of the fact that chunks of the tax take are recycled back to taxpayers. But so what? That’s what happens to all taxes.

The reality is that the B.C. carbon tax became accepted because it was phased in over four years, had little impact on lifestyles and travel, and was minimally distortive of economic growth because of its low rate. The province also vowed not to raise it again, pending a review in 2015. That review is under way, although where it will end up is anybody’s guess.

The government, backed by economists’ reports, still claims the carbon tax could reduce carbon emissions in 2020 by up to three million tonnes annually, “which is equal to taking almost 800,000 cars off the road each year.” Given that the province’s gasoline consumption level today is running higher than in 2008, the 2020 target looks meaningless. There will be no decarbonization in B.C., now or in the near future.

In global carbon policy making, however, the near future has no meaning. Today’s carbon tax is seen as the first baby steps in a regime of constantly escalating regime of tax increases over the coming century. That’s the dream at the World Bank, where economists are out to prove the right policies can decarbonize the global economy.

At least they should acknowledge the B.C. carbon tax has failed to deliver on its promise.