Is British Columbia’s Carbon Tax a Model for the U.S.?

by Marlo Lewis on August 7, 2014

in Blog

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To persuade Americans — especially conservatives and libertarians — that a carbon tax can “work” (reduce emissions) without harming the economy, some proponents tout British Columbia’s carbon tax, enacted in May 2008. How relevant is British Columbia’s (BC) experience to environmental and tax policy debates in the U.S.? Is BC’s carbon tax a model for the U.S.?

BC’s Carbon Tax Act imposes a tax on all fossil fuels based on their carbon dioxide-equivalent (CO2e) emissions. The carbon tax started at (CAD)$10/ton CO2e in July 2008 and increased each year by $5/ton until reaching $30/ton in July 2012.

BC’s carbon tax is revenue-neutral — that is, all revenues must be used to reduce other taxes. In 2012/2013, the policy was actually revenue-negative because the tax reduced motor fuel sales more than forecast, hence raised less revenue than forecast. The carbon tax generated $1,120 million in revenues while the government decreased business and personal taxes by $1,380 million, yielding a net tax reduction of $260 million.

Writing last year in The American Conservative, my friend, R Street Institute economist Andrew Moylan described BC’s carbon tax as a success story — one that U.S. policymakers should emulate:

Early returns on the policy are quite positive. A recent study found that the province’s gross domestic product growth has outpaced the rest of Canada, while its corporate income tax rate has been reduced to among the lowest anywhere in the G8 countries. Despite concerns that it might grow government, the tax has stayed revenue neutral and enjoys broad public support. Polling of business and community leaders by the Pembina Institute found 64 percent believe the tax has been a positive move.

I find this general line of argument unpersuasive for reasons both small and large.

Small Stuff

The study to which Andrew refers, British Columbia’s Carbon Tax Shift: The First Five Years, does report that BC’s economic growth “outpaced the rest of Canada” during the first four years of the tax (2008-2011), based on data from Statistics Canada.

British Columbia Carbon Tax GDP 2008-2011 Statistics Canada

The report, however, cautions readers not to jump to conclusions:

The difference in GDP change is small (0.1% from 2008-11); moreover, the carbon tax is just one small factor in BC’s overall economic picture. Therefore, while it would be a stretch to claim that the tax shift has had a positive impact on the economy, the data appear to indicate it has not had a negative effect.

A stretch indeed. In 2012, BC’s GDP growth was below the Canadian average as well as below the growth rates of Alberta, Yukon Territory, Manitoba, Saskatchewan, Nunavut, and Northwest Territories, according to Statistics Canada.

Canadian Provinces GDP Growth 2012 Statistics Canada

In 2013 also, BC’s GDP growth was below the Canadian average as well as below the growth rates of Newfoundland & Labrador, Saskatchewan, Alberta, and Manitoba, according to the Royal Bank of Canada.

Royal Bank of Canada Provincial Growth Outlook March 2014

That doesn’t mean the carbon tax harmed BC’s economy in 2012 and 2013, but it clearly wasn’t a big plus. Even the BC Ministry of Finance, a staunch proponent of the tax as climate policy, does not view it as a stimulus:

Economic analysis conducted for the carbon tax review indicates that BC’s carbon tax has had, and will continue to have, a small negative impact on gross domestic product (GDP) in the province.

Andrew describes BC’s corporate income tax as “among the lowest anywhere in the G-8.” BC’s 11% corporate income tax rate is indeed way below those of G-8 member nations, which range from 20% (Russia) to 40% (U.S.). But we expect national tax burdens to exceed those of a province or state.

Of greater relevance is how BC’s corporate tax rate stacks up against those of other Canadian provinces and the 50 U.S. states. Although BC’s corporate tax is lower than that of 8 other provinces, the province with the lowest rate is Alberta (10%), according to KPMJ.

Canadian Provinces Corporate Taxes KPMJ

More importantly, with the exception of Iowa, which has a top rate of 12%, every U.S. state’s corporate income tax is lower than BC’s.

Some proponents claim BC’s carbon tax has reduced personal income taxes to the point where they now are the lowest in all of Canada for individuals earning up to $122,000. That is at best an oversimplification. *

TurboTax Canada’s blog finds that the “least taxing place” in Canada for individuals with a taxable income of $30,000 is the Territory of Nunavut, followed by Ontario and British Columbia. The blog does not discuss comparative tax burdens for individuals in higher tax brackets. 

KPMJ analysis indicates that many individuals earning up to $122,000 pay lower income taxes in Ontario, Alberta, Yukon, and Nunavut than do their counterparts in BC. For example, individuals earning up to $75,213 have lower marginal tax rates in BC than in Alberta, which has a 10% flat tax for income at all levels. But BC’s marginal rates are higher than Alberta’s for all income above $75,213, as follows: $75,214–$86,354 (10.5%), $86,355–$104,858 (12.29%), and $104,859–$150,000 (14.70%).

A similarly mixed picture emerges from Tax Tips Canada’s comparison of combined federal/provincial average tax rates and tax payments. For example, the average tax rate for an individual earning $30,000 is 17.7% in Alberta and 19.2% in BC. A single-income household with two dependent children earning $60,000 pays an average tax of $10,918 in Alberta and $12,919 in BC.

Nuvavut is also the clear winner in BDO Canada’s 2013 Tax Facts report for all income levels. Among provinces, BC has the lowest average personal income taxes for individuals earning between $30,000 and $125,000 (p. 12). However, that was essentially the case before BC enacted the carbon tax. In 2007, BC had the lowest average personal income taxes for individuals earning between $25,000 and $105,000 (BDO Canada 2007 Tax Facts report, p. 14).

In short, BC did not need a carbon tax to be Canada’s lowest-income tax province. Let’s also not forget that a revenue-neutral carbon tax does not reduce the overall tax burden, it just redistributes it.

Although Canada’s carbon tax remains revenue neutral and capped at $30/ton, BC greens and lefties want to rescind those features. In 2012 and 2013, the David Suzuki Foundation, the Canadian Centre for Policy Alternatives, and the Pembina Institute advocated increasing the tax to $200/ton by 2020 and using revenues to fund ‘climate action’ programs. This became an issue in the May 2013 elections.

Defying pollsters’ predictions, the governing Liberal Party retained its majority, partly because Premier Christy Clark campaigned on a promise to freeze the carbon tax for five years. So, although a carbon tax, once enacted, need not morph into an anti-growth policy, the usual schemers will push for increasingly punitive versions of the tax. Obviously the best way to keep a new tax from harming the economy is not to enact it in the first place.

Big Picture

The chief reason BC is not an appropriate “model” for the U.S. is that the province’s geology, climate, and electric supply system are dissimilar to those of most American states.

BC’s peculiar electricity fuel mix sharply limits the damage that a $30/ton carbon tax can do to the province’s economy.

British Columbia electricity fuel mix

Source: British Columbia Ministry of Energy and Mines

Nearly all of BC’s base load electricity is zero-carbon hydropower. The second largest source of electricity is carbon-neutral biomass from wood waste used to generate onsite power at pulp and lumber mills. The third largest source is natural gas, used to meet peak demand and for load balancing. It is the only part of BC’s electric supply system subject to the tax. It is the lowest-carbon fossil fuel and generates less than 6% of BC’s electricity.

BC, Washington State, and Oregon are part of the Columbia River Basin system. Unsurprisingly, those states too derive most of their electricity from hydropower (Washington, 77.8%; Oregon, 75.3%). But the U.S. as a whole gets only 7% of its electricity from hydro.

That is not due to some fuelish perversity of people living outside the Columbia River Basin. As Energy BC, a non-profit educational and research institute, observes:

Hydroelectric developments depend upon a combination of elevation, climate and running water. It is most common for hydroelectric power stations to be located on mountain rivers at points where the elevation begins to drop significantly. High precipitation levels are needed to enhance river flow.

Take a look at BC’s 1,740 MW Mica Dam, one of three large dams that provide over half of all the province’s electricity.

Mica Dam (1,740 MW) British Columbia

The geography and climate making this wonder of engineering feasible and economical do not exist in most U.S. states. Moreover, environmental and property rights concerns today preclude construction of large dams like BC’s Mica, Gordon M. Shrum, and Revelstoke even where favorable geology and climate might exist. As Energy BC observes:

The consequences of damming are far-reaching; conversion of surrounding valleys to lakes displaces communities of both humans and animals, and slowed flow-rates can cause severe losses in biodiversity and increases in sedimentation permanently changing that area.

Let’s look at the other side of the coin. Whereas coal generates no electricity in BC, coal provides the majority of electric power in 21 states and is the largest single source of power in half the states.

Coal Majority of Electricity in 21 States

Coal Largest Source of Electricity in Half the States

Source: Loris, Dayaratna, and Kreutzer, 2013

BC’s $30/ton carbon tax translates into gasoline tax of 6.7¢/liter, or roughly 23¢/gal. in U.S. dollars. Motor fuel prices can fluctuate more than that from year-to-year and even seasonally. Is it any wonder the tax has not wrecked BC’s economy? The carbon tax contributes to the overall price of gasoline, but BC gas prices are not the highest in Canada.

Motor Fuel Prices Across Canada

Source: PetroCanada 

The economic impact of the carbon tax would be much larger if, like Alberta, BC got 52% of its electricity from coal and 37% from natural gas.

BC’s carbon tax translates to a coal tax of $53.31/ton for low heat-value coal and $62.31/ton for high heat-value coal (see p. 14 of this Ministry of Finance document). In U.S. dollars, that’s a coal tax ranging from $48.53/ton to $57.07/ton.

Based on EIA coal price data, adopting such a tax in the U.S. would almost double the cost of Appalachian coal, more than double the cost of Illinois Basin coal, and more than quadruple the cost of Powder River Basin coal. How could such cost increases not have significant adverse impacts on coal producing states and states that derive most or much of their electricity from coal?

Revenue Neutrality?

As noted, in year five of the carbon tax, BC ‘progressives’ campaigned to scrap the revenue neutrality requirement. They were unsuccessful largely because there is a huge difference between budget politics in BC’s Capital of Victoria and in Washington, D.C. BC’s Liberal government ran a $175 million surplus in the current fiscal year, and forecasts surpluses of $184 million, $206 million, and $451 million over the next three fiscal years. When you’re flush with cash, it’s easy to be revenue-neutral with new taxes.

Washington policymakers face very different fiscal pressures. Although the U.S. budget deficit is down from its 2009 peak, it’s still near half a trillion dollars, and CBO’s latest (July 15, 2014) Long-Term Budget Outlook forecasts the deficit to start increasing in 2015. Thus we can expect the quest for revenue “enhancements” to resume after the November elections. In that fiscal context, the politicians most interested in a carbon tax will be those looking for a new cash cow to milk.

A Grand Bargain?

Andrew and some other proponents envision a grand bargain between conservatives and environmentalists whereby revenue-neutral carbon taxes “supplant entirely the myriad regulations that exist to reduce [CO2] emissions” including EPA’s Clean Power Plan and federal fuel economy standards.

Yet nothing like that has happened in BC (nor would eco-activists ever allow it). The province has legislated greenhouse gas reduction goals of 33% below 2007 levels by 2020 and 80% below 2007 levels by 2050 (p. 10 of this Ministry of Environment report), and no one expects the carbon tax alone to achieve those targets. The Ministry of Finance states:

The tax will be integrated with other measures – The carbon tax will not, on its own, meet B.C.’s emission-reduction targets, but it is a key element in the strategy. The carbon tax and complementary measures such as a “cap and trade” system will be integrated as these other measures are designed and implemented.

According to the Ministry of Environment, complementary measures include: motor-vehicle greenhouse-gas emission standards, renewable and low-carbon fuel requirements, green building regulations, ‘smart growth’ (high-density) zoning regulations, energy-efficiency regulations, demand-side management programs, a 93% renewable electricity standard, and – potentially – cap-and-trade.

As noted previously on this blog, neither the carbon tax bill sponsored by Sens. Bernie Sanders (I-Vt.) and Barbara Boxer (D-Calif.) nor that sponsored by Sen. Sheldon Whitehouse (D-R.I.) and Rep. Henry Waxman (D-Calif.) would repeal one iota of EPA’s regulatory power. The latter bill even includes language precluding a tax-for-regulation swap:

Nothing in this Act shall affect the application of any other provision of law to a covered entity, or the responsibility for a covered entity to comply with any such provision of law.

As Rep. Waxman explained when announcing the bill, “I wouldn’t want it to replace the other actions that, say, the EPA could take.”

To sum up, while BC has implemented something very close to a textbook carbon tax, the policy is not a model for the U.S. Although the economic impacts have so far been small, BC’s experience offers no reasonable grounds for believing that a U.S. carbon tax would be economically-benign, revenue-neutral, or a cure for regulatory excess.

* Updated August 9, 2014. New text is in italics.

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