Economists call for BC carbon tax

A group of BC-based academic economists have joined together to call for a carbon tax in a letter to BC Finance Minister Carole Taylor. BC is taking suggestions towards a climate change action budget this February. I’m not holding my breath that a carbon tax is likely; from what I’m hearing out of Victoria this stage of the game is all about identifying low-hanging fruit.

I support a carbon tax for a lot of reasons, but there are important design considerations to be made to ensure that they do not have adverse impacts on the poorest. The economists call for revenue neutrality – which is really about making the carbon tax politically feasible, no small task – and so endorse “tax shifting” by reducing income taxes at the same time as the carbon tax. I’ve been critical of this before, but I do see an acknowledgement in the letter of distributional impacts, which is good news.

My preference would be to use the proceeds of the tax to finance a mix of refundable tax credits (use the infrastructure of the GST credit) and public spending on research, public transportation and other alternatives. Perhaps “tax shift” is fungible if you consider refundable tax credits a tax cut rather than an income transfer. In “green” conversations there is generally a presumption that it would be income tax rate cuts or raising the threshold for paying income tax, both of which would not be of much benefit to the bottom deciles. Numbers will be helpful, and some modelling is needed. I want to do some simulations of distributional impact with some redistributive scenarios.

Like almost everyone, I agree that the tax should be phased in over time – a predetermined schedule of carbon tax increases, the letter argues, would stimulate innovation in advance of the actual tax increase. But eventually the tax must get much higher than anyone in the poltical arena is currently willing to admit. Based on the Jaccard modelling (see this post), the tax would have to be over $100 per tonne of CO2 emitted before we see any meaninful behavioural impacts, whereas the Greens are only calling for $25 per tonne (with maybe an increase to $50 by 2050).

The big picture context is that the magnitude of the ghg reductions we require is quite large, maybe 90-95% by 2050. And we also poorly understand the elasticities. There is some modelling but we are flying in the dark about the actual emissions reductions that will arrive for any schedule of carbon tax increases we produce. And people at the top of the distribution are more likely to try to buy their way out than to change their behaviour, and this will prove a challenge if only because everyone else being asked to sacrifice will not be pleased.

The letter also paints a fairly black-and-white picture of regulation versus market mechanisms. I think we need to use market-based measures but am skeptical that they can do the full job. Some degree of regulation is going to be required, especially if we think of regulation in the broadest terms as the rules that govern the marketplace. And in come cases there may be a compelling case to just step in and regulate: banning incandescent bulbs is a good example. But the letter’s caution that we must give as much space as possible for choices and innovation needs to be kept in mind.

So, here is the letter:

Dear Minister Taylor,

We are writing to urge you to include a revenue neutral carbon tax in your upcoming budget. Your government identified action on global warming as a critical policy goal. We believe that a carbon tax is the most efficient and effective way to reach that goal.

A carbon tax would consist of adding a tax to the price of carbon intensive fuels (e.g., oil, gas or coal) when they are sold in BC. Such a tax would induce consumers of carbon-intensive products to switch to more environmentally friendly goods. It would also induce firms to find more environmentally friendly ways to produce.

Right now the prices of the goods we buy don’t fully capture the costs to the environment of making those goods. A carbon tax will make the prices more accurately reflect all the costs of making a good.

The carbon tax could be made revenue neutral by offsetting increased carbon taxes with cuts in other taxes (e.g., the income tax). As a result, the average British Columbian family would see no change in its after-tax income. Families would still, however, have incentives to change their consumption patterns to make them more environmentally friendly. Even with the same income, if gas prices increase, families will choose to drive less, for example.

A carbon tax is superior to regulatory mandates because it allows both ordinary citizens and firms to adjust in the way that is best for them. It will also provide incentives for people to innovate, finding more environmentally friendly ways to produce and to live. In contrast, regulatory mandates force a “one size fits all” approach, are likely more costly to administer, and will always be one step behind in terms of the environmental technologies being applied.

In order not to impose too large a burden on BC businesses, the tax could be phased in with clearly announced steps. The initial steps may be small. This would allow BC firms time to innovate and adjust. All firms in all jurisdictions will eventually face requirements related to addressing climate change. Quebec is introducing a carbon tax in October of this year, for example.

We recognize that implementing a carbon tax involves complex decisions, including how to mitigate its impact both on the least well-off in our society and on BC firms. We stand ready to help the BC government develop an effective plan.

There is a growing consensus that the time to act on climate change is now. The most effective way to address problems related to carbon consumption is with a carbon tax. With a carbon tax, we can have a cleaner environment, a stronger economy, and a brighter future for our children.

Signatories

UBC
Economics
Siwan Anderson
Paul Beaudry
Mathilde Bombardini
Gorkem Celik
Clive Chapple
Brian Copeland
Michael Devereux
Erwin Diewert
Catherine Douglas
Mauricio Drehlichman
Mukesh Eswaran
Patrick Francois
Giovanni Gallipoli
Robert Gateman
David Green
Yoram Halevy
Joseph Henrich
Viktoria Hnatkovska
Atsushi Inoue
Tsvetanka Karagyozova
Ashok Kotwal
Amartya Lahiri
Thomas Lemieux
Kevin Milligan
Hugh Neary
Donald Paterson
Michael Peters
Angela Redish
W. Craig Riddell
Shinichi Sakata
Henry Siu
Rashid Sumaila
William Troost
Okan Yilankaya

Sauder School of Business
Richard Barichello
Anthony Boardman
Keith Head
Thomas Hellman
Sanghoon Lee
Peter Nemetz
Thomas Ross
Ratna Shrestha
Veikko Theile
Ilan Vertinsky
Ralph Winter

Faculty of Land and Food Systems
Richard Barichello
Katherine Baylis
Sumeet Gulati
James Vercammen

SFU
Economics
Steeve Mongrain
Gordon Myers
Krishna Pendakur
Arthur Robson
Nicolas Schmitt
Simon Woodcock

Public Policy
Dominique Gross
Jonathan Kesselman
John Richards

School of Resource and Environmental Management
Mark Jaccard

University of Victoria
Economics
Merwan Engineer
Martin Farnham
Elisabeth Gugl
Malcolm Rutherford
Herbert Schuetz
Paul Schure
David Scoones
G. Cornelius van Kooten

University of Northern British Columbia
Paul Bowles
Ajit Dayanandan
Fiona MacPhail