BC’s Carbon Tax Clash

With the BC election campaign now officially on, the carbon tax debate is back. Since the fall’s federal election, when the Prime Minister dropped in to beat up the carbon tax to solidify his support in BC, the carbon tax has dropped off the public radar, replaced by stories about the economic and financial crisis. Gas prices have also dropped dramatically, from over $1.50 per litre in Vancouver in early July (the carbon tax pushed the price above that threshold) to between $0.90 and $1 per litre (depending on the day). Interestingly, the price at the pump is now lower than when the carbon tax was first introduced.

In hindsight, the carbon tax was perhaps the worst-timed policy announcement ever, with prices at the pump jumping by about 40 cents per litre between the announcement in the February 2008 budget and July 1, when it was implemented. This shows both how quickly a carbon tax can be introduced (compared to years of negotiations for a cap-and-trade system) and how the intent of the tax can be subverted by market forces. The relatively puny 2.3 cent a litre carbon tax absorbed much of the public anger about rising fuel prices that were about 20 times larger in magnitude.

Thus, an important lesson is that we need more than a carbon tax, but to regulate fuel prices (so that they act like stable market prices plus a rising carbon tax). This would enable households to avoid opportunistic price increases at the pump every time a storm is headed for North American shores, and the broader problem in 2008 of a speculative bubble in energy prices. It would provide the clear market signal of rising prices that proponents of a carbon tax want. The tax would essentially become hidden and represent the difference between the wholesale and retail prices (including other federal and provincial fuel taxes, too). This mechanism could also provide a floor price for emissions under an emergent North American cap-and-trade system (price volatility is one of the downsides of cap-and-trade).

We also need more than a carbon tax in terms of complementary public investments and standards/regulations around energy efficiency, alternative power and urban and inter-city transit. The carbon tax is too small on its own to affect behaviour, and even at 7.2 cents per litre in mid-2012 (if it survives that long) it will not make a dent in BC’s greenhouse gas emissions. The tax needs to be much higher, like twenty times higher, if we are to induce shifts in people’s transportation habits (this process was underway last year but lower fuel prices have undermined those gains). However, we too often think of a driving metaphor when contemplating the efficacy of a carbon tax; large, industrial emitters will feel the pinch at lower levels of the tax.

In any event, one major problem with the NDP’s proposal to scrap the tax is that the tax could be used to finance those good things above that need a public boost. Instead, the NDP would have to borrow the money for those investments, and with the BC budget in a sea of red ink, the bias will be towards doing too little. Another problem is that any strategy to reduce greenhouse gases that is successful will lead to higher consumer prices. Even with the carbon tax, two-thirds of the tax paid by households will be indirectly embodied in the price of goods and services people buy in the marketplace. Cap-and-trade or regulatory approaches that increase costs for compliance will lead to higher prices for GHG-intensive goods and services, and overall that is a good thing. But we need to be honest about how we are going to address distributional aspects of those higher prices.

With carbon pricing alone, we just end up pricing out the lowest-income people. But addressing distributional issues is where the revenue from the carbon tax also comes in handy. The current “recycling regime” of the carbon tax dedicates about one-third of revenues to a low-income credit in year one (2008/09), which more than offsets the average impact of the tax for the bottom two quintiles. But this credit is not scheduled to grow in line with the carbon tax, and that progressive result at the bottom disappears this July, and becomes regressive as of July 2010 (on average, households will pay more in carbon taxes than they get back from the low-income credit). Toby Sanger and I crunched the numbers in a paper released last Fall.

Carbon pricing alone is also not enough because the households with the largest carbon footprints are those with the largest incomes (Hugh Mackenzie, Hans Messinger and Rick Smith detailed Canada’s ecological footprint by decile in a study last year for the CCPA). The richest households can buy their way out of change, so standards and regulations are needed to ensure that emissions from the largest-emitting households are reduced.

Fixing the tax also means that it should be applied to all GHG emissions, not just to burning fossil fuels. This means applying it to flaring and pipeline leakages in the oil and gas sector (the NDP propose something like this), process emissions in the cement and aluminum industries, and to landfills (although the current regulatory approach to this latter area may in fact make more sense than applying the carbon tax). And we should even consider applying it to exports of coal and natural gas, as these lead to massive GHG emissions outside BC’s borders that are not counted in our emission totals (only emissions associated with the extraction of the resource, which themselves are huge, are counted).

Most environmentalists are aware of these shortcomings but see the carbon tax as an important first step. But too much of the attention of climate policy has been on the carbon tax, rather than the host of other measures that need to accompany it. Rightly or wrongly, the carbon tax has become a litmus test for seriousness on climate change to the great detriment of the NDP. While I disagree with the NDP’s stance on the carbon tax, their budget platform essentially endorses the rest of the BC government’s climate action plan and does make some improvements: the royalty on flaring mentioned above; more public transit investment; and short-term caps on emissions from the largest industrial emitters. The NDP proposal for low-interest loans for housing efficiency retrofits is a weak link; we need to get beyond incentives and start mandating audits and retrofits, particularly for older building stock, and finance that through BC Hydro bills so households do not have to lay out any cash upfront but still see lower Hydro bills (a classic win-win).

So go the finer points of climate policy. There are many shades of grey, good things and bad things to be said about both the NDP and the Liberals. But by tossing the carbon tax, the NDP was won the eternal wrath of most of the enviro movement. So it is a shame to see the Pembina Insitute, David Suzuki Foundation and Forest Ethics hold a press conference to that effect, without giving credit for the good parts of the NDP platform. And given the shortcomings of the carbon tax, to fully endorse the Liberals seems a bit much, especially when there are some glaring contradictions in the Liberals’ approach, such as pressing forward with an astonishingly expensive ($3-5 billion) Port Mann Super-Bridge that will drive unsustainable suburban development further up the Fraser Valley, and that will clog up the new bridge within a few years of its opening (the NDP is silent on this one). The Liberals also want to increase oil and gas development in the Northeast – which creates few jobs but produces enormous greenhouse gas emissions – and have announced road expansion into the oil and gas patch, effectively a ramping up of subsidies to the industry (the flaring royalty notwithstanding, the NDP seems to think expansion is fine, too).

A painful bottom line is that, for all of the work on climate action over the past couple of years, and after much ado about legislated targets for greenhouse gas emissions, BC enters the election without a plan to get to its 2020 target of a 33% reduction (hello, balanced budget legislation?). The current climate action plan is estimated to get 60-80% of the way there. The remainder was considered by a Climate Action Team that reported last summer, but whose recommendations have not been implemented. And there is no plan to build these into a new climate action plan. And the kicker is that the safety valve in the CAT report that allows us to meet our 2020 targets: the carbon tax.