Revenue recycling critical to climate policy
Canada’s Ecofiscal Commission lays out the government’s options
British Columbia proudly claims the lead position for carbon pricing in Canada. B.C.’s carbon tax generates about $1.3 billion annually, and all of it is returned to the economy through reductions in personal and business income taxes. It is a textbook version of a tax shift — good for both the economy and the environment.
Given B.C.’s ambitious targets for reducing greenhouse gas emissions, the tax of $30 per tonne will need to rise beyond 2018. As it does, more revenues will be generated, and this will re-start a discussion about how the revenues can best be used. The current revenue-neutral approach could be maintained, but there are other options worth considering.
On Wednesday, Canada’s Ecofiscal Commission released a new report, Choose Wisely, examining how provinces can recycle their carbon-pricing revenues. There is much at stake in this discussion: How governments use these revenues seriously affects the overall benefits from their climate policies.
The Ecofiscal report discusses the pros and cons for six options. Direct cash transfers to households can protect the most vulnerable families. Reductions in personal or corporate income taxes may enhance long-term economic growth. Supporting development of clean technologies would complement the carbon price by further reducing GHG emissions. Investing in critical public infrastructure can improve mobility, trade and productivity. Providing transitional support to emissions-intensive industries can alleviate the concerns about business competitiveness. Reducing public debt can generate long-term economic gains.
A central message from Choose Wisely is that there is no single approach that achieves government’s complex objectives. For example, direct transfers to households are a good way to protect lowincome families, but probably have no effect on long-term growth. Reducing corporate income tax rates is probably a good pro-growth policy, but it is too blunt an instrument to address the competitiveness challenge caused by the carbon price. Providing transitional support to the emissions-intensive industries can address the competitiveness issue, but evidence from recent surveys shows it garners little public support. One of the most popular options is to make public investments in clean technology, but this is difficult for governments to do effectively.
Which revenue-recycling choices make the most sense in British Columbia? Since B.C. already has relatively low personal and corporate income tax rates, using the growth in carbon revenue to reduce these rates further may not be the best choice. Reducing existing public debt, now at 17 per cent of provincial GDP, is similarly a low priority. Direct cash transfers to households may also be less critical since B.C.’s low-emissions electricity system means carbon pricing will have only a small impact on household energy costs.
Two recycling options are likely to be more important. A sizable infrastructure deficit exists, particularly in the area of transit and transportation, and with continued growth in population, the needs on this front will surely grow. Transitional support to the province’s emissions-intensive and trade-exposed sectors could also play an important role in reducing any competi- tiveness threats caused by the carbon price.
Public investment in the development of cleaner technologies may be an even higher priority for the B.C. government, especially given the province’s ambitious emissions-reductions targets. But such choices need to be made carefully, in a way that minimizes political involvement and maximizes the chance of long-term success. This is all easier said than done.
The report from the Ecofiscal Commission does not provide all the answers, but it raises some crucial questions and offers governments a useful framework for assessing their choices. Let’s hope B.C.’s environment and finance ministers take the time to read this report and consider the various trade-offs involved as they plan for the future of their carbon-pricing policy. We all stand to benefit when they choose wisely.
There is much at stake in this discussion: How governments use these revenues seriously affects the overall benefits from their climate policies. Richard Lipsey, Christopher Ragan
and Peter Robinson