With an aim to lower harmful carbon emissions in favour of a healthy environment and sustainable wealth creation for future generations, the British Columbia Carbon Tax of 2008 has led to the lowest personal income tax rate in Canada as well as falling per capita fuel consumption each year since its introduction.
Designed to be revenue neutral, all tax revenue raised by increasing the cost of carbon consumption is offset by reductions to other taxes, such as income. In addition, British Columbia’s green tax shift includes measures to assist vulnerable households and communities in dealing with the associated transition costs of moving away from a carbon-based economy.
With a growing interest in such fiscal measures, momentum towards carbon pricing is growing across Canada in contrast to the national policy, with British Columbia’s carbon tax frequently cited as a model to replicate worldwide.
- The British Columbia Carbon Tax primarily aims to reduce greenhouse gas (GHG) emissions by at least 33% below 2007 levels by 2020.
- The tax covers three quarters of the Province’s GHG emissions from residential, commercial and industrial sources, starting at $10 per tonne of carbon emissions and rising by $5 a year for four years — having reaching $30 per tonne in 2012.
- As part of a green tax shift, this fiscal regime was designed to be revenue neutral meaning that the revenue raised from the Carbon Tax is to be used to offset other taxes – mainly cuts to income taxes (both personal and corporate) as well as targeted relief for vulnerable households and communities – resulting in no overall increase in taxation.
- In terms of impact, British Columbia’s fuel consumption per capita has fallen every year since the tax was introduced and the Province now has the lowest personal income tax rate across Canada.
Carbon Tax Act 2008 [in English]
The Carbon Tax Act highlighted here is part of a package of legislative measures aiming to reduce British Columbia’s greenhouse gas (GHG) emissions for a low-carbon economy. This includes:
- The Greenhouse Gas Reduction Targets Act which sets legislated targets for reducing greenhouse gases. Under the Act, British Columbia’s GHG emissions are to be reduced by at least 33% below 2007 levels by 2020 and 80% by 2050.
- The Greenhouse Gas Reduction (Cap and Trade) Act, which authorises caps on greenhouse gas emissions.
- The Greenhouse Gas Reduction (Emissions Standards) Statutes Amendment Act , which focuses on reducing GHG emissions from certain industrial operations, while increasing opportunities in the bio-energy sector.
- The Greenhouse Gas Reduction (Renewable and Low Carbon Fuel Requirements) Act, which promotes the use of renewable fuel in transportation fuel blends.
In addition might be considered:
- The Income Tax Act [RSBC 1996], c.215, s.8(1), which provides for the remuneration for low-income households, and a “climate action dividend.”
The British Columbia Carbon Tax has simultaneously discouraged pollution and reduced income taxes which has in turn, positively impacted upon employment and investment. Yearly increases to the tax have meant it is environmentally progressive, gradually increasing the incentive to shift away from fossil fuels and towards investment in renewable sources of energy. This increase however, is currently paused, meaning that the tax rests at $30/tCO2.
A wide tax base, covering the combustion of all fossil fuels, as well as a consistent price per tonne of CO2 and between industries, has sent a clear price signal to the markets. The increased price of carbon reflects more closely its true cost in terms of externalities.
To date, British Columbia’s reductions in emissions appear to be greater than in most European countries which have introduced similar measures. One reason for this may be its strength in outreach – for instance, the communication of the carbon tax in British Columbia has been referred to as an example of good practice by the OECD.
Despite British Columbia’s carbon price being higher than anywhere else in North America, and most other countries in the world, there is no evidence at this point, according to Sustainable Prosperity, that it has harmed the Provincial economy.
Our “Best Policies” are those that meet the Future Just Lawmaking Principles and recognise the interconnected challenges we face today. The goal of principled policy work is to ensure that important universal standards of sustainability and equity, human rights and freedoms, and respect for the environment are taken into account. It also helps to increase policy coherence between different sectors.
Sustainable use of natural resources
- Though the carbon tax covers neither GHG emissions from non-combustion sources, such as industrial processes in cement and aluminium production as well as landfill methane emissions, nor applies to exports of coal and gas, the policy clearly addresses the problem of global warming caused by a carbon-based economy.
- The annual price increase of $5/tCO2 gradually increases the economic incentives for efficiency and green technology innovation.
- Natural areas are respected, with energy sources such as hydroelectric power encouraged in order to promote renewable alternatives.
- Consideration was given to species particularly harmed by global warming, such as the Canadian Pine, in the development of the policy.
Equity and poverty eradication
- Tax revenue raised from the carbon tax is used to reduce the two lowest personal income tax rates by 5%.
- All British Columbians were given a one-off $100 cheque in 2008 to aid transition costs.
- Lower-income British Columbians receive an annual climate action credit of $115.50 per adult and $34.50 per child ($115.50 for the first child in a single parent family).
- A Northern and Rural Homeowner benefit of up to $200 has also been provided for as of the 2011 taxation year.
- The policy takes into account social justice and equity, following the ‘polluter pays’ principle. However, there have been higher employment losses among indigenous peoples who are highly represented in sectors adversely affected by climate change policies (for example forestry, the energy sector, mining and smelting, agriculture, transportation and tourism/recreation).
- The tax promotes a reduction of GHG emissions as action against the harmful effects of climate change. The policy directly targets carbon emissions, and is levied on a per-volume basis ensuring a consistent long-term price signal which promotes investment in renewable alternatives.
- The burden of proof regarding distributional effects and competitiveness has been studied under government-funded research.
Public participation, access to information and justice
- Outreach and consultation has taken place across different levels of government and targeted a variety of stakeholders. A Citizen’s Conservation Council was formed for educational purposes and $15m was spent on communication to British Columbians about the lifestyle choices they could make to further reduce their harmful emissions.
- Consultations with disadvantaged communities, such as those in remote Northern areas, and farmers, with concerns about competitiveness, led to a responsive, equitable mitigation of distributional effects by means of tax reductions.
- Access to information is provided for with reports on the impact of the carbon tax published annually in the public domain.
Good governance and human security
- Institutions were established to ensure a transparent, prompt, effective and fair implementation: the legislation requires a plan to be tabled in the legislature each year, showing how the revenue raised will be returned to taxpayers.
- An annual revenue-neutral carbon tax plan is submitted by the Finance Minister (Part II, Section 3, CTA 2008). Failure to submit implementation legislation within 120 days of the presentation of this carbon tax plan will lead to a reduction in the Finance Minister’s salary!
- The policy promotes freedom from want and fear to the extent that income tax is reduced and tax credits are given to low income families, and fears about climate change are actively addressed.
Integration and interrelationship
- The tax is aiding British Columbia to build a greener economy – positioning it well for future success in global markets, and reducing the risk from future petroleum price volatility.
- Social justice and environmental protection are both addressed by reductions to income tax and rebates given to schools as well as the extra measures provided for rural and low-income families, farmers and greenhouse growers.
Common but differentiated responsibilities
- The tax is uniform across fossil fuels, and almost uniform across industry sectors, without major preference shown, so as to be as equitable as possible.
- Technology and human resources are taken into account in the consideration of improving efficiencies through green technology advances.
In the early 1990’s, Finland, Norway, Sweden, and Denmark all instituted Environmental Tax Reforms, followed by the Netherlands and Germany towards the latter part of the decade and then the United Kingdom in 2001. With regards to Canada, Alberta and Quebec adopted carbon taxes in 2007 followed by British Columbia a year later. Recent reports indicate that Ontario is set to follow their lead in 2015.
Before the policy was enacted, average greenhouse gas emissions in British Columbia declined less per year than in the rest of Canada. In 2007, a surge of public concern for climate change was shown at the polls. Put forward by Premier Gordon Campbell’s Liberal Party, with the support of the business community, the broad-based and revenue-neutral tax did not provoke significant objections.
However, there exists some popular perception of the tax as unfair, especially in rural communities. This has manifested in a populist “axe the tax” campaign – similar to the campaign which saw Australia’s Carbon Tax get repealed. In the face of growing public disapproval, the carbon tax was ‘saved’ by the timing of the global recession in 2008, which deflected public attention away from the tax to the economy in general.
At the national level, Canadian voters rejected a carbon tax in the 2008 election. By 2011, Canada had withdrawn from the Kyoto Protocol. In the absence of federal action, policy change has been effected at the regional level, with Alberta, Quebec and British Columbia choosing to pursue a green tax shift through carbon pricing.
According to the British Columbia Budget of 2008:
“The purpose of the carbon tax is to encourage individuals and businesses to make more environmentally responsible choices, reducing their use of fossil fuels and related emissions.” It also “has the advantage of providing an incentive without favouring one way to reduce emissions over another” meaning that “Business and individuals can choose to avoid it by reducing usage, increasing efficiency, changing fuels, adopting new technology or any combination of these approaches.”
The legislated goals are:
- To reduce greenhouse gas emissions by at least 33% below 2007 levels by 2020 and 80% by 2050 (Part I s2(1)(a); 2(1)(b), Greenhouse Gas Reduction Targets Act 2007).
- Pursuant to s.3(2)(c), Carbon Tax Act 2008, British Columbia’s Carbon Tax is also designed to be “revenue neutral”; all the revenues are to be used to reduce other taxes – mainly through cuts to income taxes (personal and corporate), as well as targeted tax relief for vulnerable households and communities – resulting in no overall increase in taxation.
Effective from 1 July 2008, the British Columbia Carbon Tax applies throughout the province and is broad-based, applying to all fossil fuels and concerning all people in a hope to induce widespread behavioural change with the choice of a low-carbon lifestyle.
The Government defines a carbon tax as follows:
“…a tax based on greenhouse gas emissions (GHG) generated from burning fuels. It puts a price on each tonne of GHG emitted, sending a price signal that will, over time, elicit a powerful market response across the entire economy, resulting in reduced emissions. It has the advantage of providing an incentive without favouring any one way of reducing emissions over another. By reducing fuel consumption, increasing fuel efficiency, using cleaner fuels and adopting new technology, businesses and individuals can reduce the amount they pay in carbon tax, or even offset it altogether.”
The tax was transitionally phased in: when introduced in 2008, the tax was initially set at $10 per tonne of CO2. It was then designed to rise by $5 per year thereafter until it reached $30 per tonne (roughly 7 cents per litre of gas) in 2012. Described as revenue neutral,income and corporate taxes are reduced to offset revenue from carbon tax (s3(2)(c), CTA).
In addition, a one-off climate action dividend was granted to every British Columbian resident upon the implementation of the tax to facilitate transitional measures. Lower-income British Columbians receive an annual Climate Action Credit of $115.50 + $115.50 for a spouse or common-law partner, and $34.50 per child ($115.50 for the first child in a single parent family).
There were few exemptions in place when the carbon tax was initially introduced. However as it became clear that other regions in Canada and the US were not progressing with their carbon taxes, certain exemptions were added: for example, non-combustion emissions are now exempt from the tax which includes industrial processes such as cement, lime and aluminium production.
For transparency purposes, many reporting requirements are in place such as an annual revenue-neutral carbon tax plan issued by the Finance minister (Part II, s3, CTA) which outlines exactly how the revenue will be returned as tax reductions. Failure to submit implementation legislation within 120 days of the presentation of this carbon tax plan will lead to a reduction in the Finance Minister’s salary!
Finally, out of a $46 million three-year Climate Action Secretariat budget, $12 million was earmarked for outreach and consultation across different levels of government and other stakeholders. This included the establishment of a Citizen’s Conservation Council responsible for climate change education and outreach. An additional $15 million was assigned to the communication and education of British Columbians about the lifestyle choices they could make to reduce greenhouse gas emissions. These activities have been noted as best practice by the OECD.
British Columbia has reached its interim greenhouse gas target of a 6% reduction below 2007 levels by 2012. In addition, its fuel consumption per person has fallen every year since the carbon tax came in: overall, it declined by 17.4 per cent from 2007/08 to 2011/12 – 18.8% more than in the rest of Canada during this four year period, where per-person consumption rose by around 3%.
British Columbia now has the lowest per capita fuel use of any large province in Canada, passing Ontario (as the forerunner prior to the implementation of the carbon tax). It also has the lowest personal income tax rate in Canada and one of the lowest corporate rates in North America. Meanwhile, revenues from the carbon tax gradually increased from $306 million in 2008-2009 to $959 million in 2011-2012 and are estimated to reach $1.28 billion in 2014-15.
In the period that the carbon tax has been in place, British Columbia’s economy has outperformed the rest of the country. The difference in GDP has been minimal (0.1% from 2008-11); data which does not suggest any significant negative effect on GDP. In fact, petroleum fuel consumption is decoupling from GDP growth,reducing reliance on a carbon-based economy, a trend accelerated by the carbon tax.
British Columbia has also managed to attract green investment and green technologies, with twice the Canadian average adoption of hybrid vehicles for example.
Public support was also initially unstable, yet it rebounded by 2012, with the proportion of voters supporting the tax now almost double those opposed (64% compared to 34%).
Nonetheless, many critiques of the legislation have also been raised:
- Competitiveness: Energy taxes and carbon prices impose costs fall solely on domestic producers, meaning a competitive disadvantage for domestic producers vis-à-vis foreign producers.
- Distributional effects: Poor households spend a larger proportion of their income on energy.
- Low-income families may rent, rather than own homes, so incentives for installing better insulation or purchasing energy efficient appliances may not be accessible to tenants.
- Low-income families may rely upon public transit rather than own a vehicle, so incentives to ‘tune up’ vehicles were not relevant to the poorest British Columbians.
- Cross-border gas-buying (‘leakage’) occurs, undermining the price signal emitted by the carbon tax.
- The tax does not cover exports of oil, coal or gas and Canada’s minister of natural resources, Joe Oliver, stated plans in 2012 to liquefy and export 9bn cubic feet a day of gas —much of which is extracted by fracking in British Columbia.
Other North American jurisdictions have been slow to follow British Columbia’s Carbon Tax model: partly due to a lack of political support, as well as differences in energy mixes and geology. However, after receiving much praise for it’s implementation and success in reducing emissions and per capita fuel consumption, other legislatures have been watching closely.
“B.C.’s carbon tax has gained widespread global praise as a model for the world – from places like the OECD, the World Bank, and The Economist.” (World Bank, 2014).
Such success could be replicated by policy-makers elsewhere and within Canada itself, Ontario recently announced plans for a potential carbon tax of its own in late 2014. A failure to act at the federal level does not prohibit action from the provinces.
British Columbia Ministry of the Environment (2014). Climate Action in British Columbia: 2014 Progress Report.
The Economist, 31 July 2014. British Columbia’s carbon tax: The evidence mounts.
Sustainable Prosperity (2014). BC’S Carbon Tax Shift After Five Years: Results: An Environmental (and Economic) Success Story.