Wednesday, April 3, 2013

Carbon taxes and sustainability in British Columbia: What IS a sustainable carbon tax?

by Kai Chan

Tuesday evening (Apr 2), I wrote to my candidate MLAs in BC to request that they campaign for a strong, effective carbon tax. The Better Future BC Fund is organizing a letter-writing campaign, and as a supporter, I jumped on. I also forwarded the email to colleagues at IRES. John Robinson, head of the UBC USI and Associate Provost for Sustainability, pointed out that a sustainable carbon tax might actually be one that doesn't invest the proceeds into clean energy projects.

The Better Future BC Campaign asks for several very reasonable developments, including closing loopholes that allow some businesses to avoid paying the carbon tax, and increasing the carbon tax rate so that the tax provides a meaningful incentive for corporations to reduce their greenhouse gas emissions. But John takes issue with the third component, which is to "invest in solutions". Sounds great, doesn't it--how could a sustainability advocate argue against this?

Well, see for yourself. Below, I've copied John's email to me (with permission), which lays out a compelling reason why the carbon tax should not be tied to green investments. In short, because doing so makes the carbon tax desirable only to governments that truly own 'green investment', whereas having carbon tax revenues go into tax rebates makes the tax invaluable to all governments, 'green' or not. And the carbon tax, if strong enough, is already an effective incentive for green development (in the reduction of greenhouse gases).

I have been arguing for some time with Matt Horne and other colleagues that it is a mistake to argue for using carbon tax revenues to fund green investments. My reasoning is very simple. The most important goal must be to preserve the tax. Using the tax revenues to fund green activities removes the greatest protection that the tax has, which is that since all the tax revenues are now used to reduce other taxes, eliminating the carbon tax would require a major tax increase in other areas to make up the lost revenues. In BC at the present this would mean that eliminating the carbon tax would create a need to raise other taxes to the tune of about $1.2 billion, as I recall.

In fact, I believe that this is the only reason we still have a carbon tax in BC. It was clear that Christy Clark was not interested in having this tax when she came into office but the political pain of having to create new taxes was too great and prevented her from eliminating the carbon tax. In fact it would prevent even the most ideologically opposed government from eliminating the tax, I believe.

I think our first goal should be to protect the tax, and recognize that its main effect, in environmental terms,  is not to generate revenue but to penalize carbon intensive activity. That is, the behavioural consequences of carbon taxation is the main reason to have such a tax. Using the revenue for green purposes would be a good secondary purpose, if it did not make the tax vulnerable. Unfortunately, killing the tax is easy if there is no tax increase penalty in doing so. Note also that more right wing governments would consider reducing a carbon tax and also reducing green subsidies as both good things. But they are probably the least inclined to reduce a carbon tax, which, in the case of BC, has become more or less invisible to residents,  if it means increasing other taxes.

I think if we direct carbon tax revenues to green investments, we are likely to sound the death knell of that tax.

John convinced me: the sustainable tool for a sustainable relationship between BC and the Earth's biosphere is a carbon tax that provides revenues for tax rebates(1). As a citizen, I remain an ardent supporter of a stronger, tighter carbon tax.

(1) Ideally these would address distributional consequences for the poor, who--according to another esteemed colleague Hadi Dowlatabadi--are commonly less able to shift their behavior in response to energy taxes. The BC carbon tax's associated rebates do seem to be somewhat structured this way already.


  1. From Matt Horne, Director of the Climate Change Program at Pembina Institute (and a key instigator of Better Future BC):

    I saw your blog post about the Better Future BC campaign – thank you for the support.

    I thought I'd share a bit of my own thinking regarding the point John Robinson raised in case it is of interest.I have indeed been debating this with John for a while, and neither of us has been successful in convincing the other yet.

    I agree with John that we should be careful of any change in approach that could make the tax more susceptible to being rolled back at some point.

    I think putting a portion of new revenue towards solutions can pass this test and has an advantage in that it enables a more positive framing of tax policy, which was the origin of the Better Future campaign. If we want to have a serious conversation about higher carbon tax rates (which I think we need to), I'm not convinced that can happen if it is constrained to a revenue neutral framework. British Columbians have consistently said that they'd like to see the carbon tax linked with solutions, and I don't think we should ignore that public perspective in talking about next steps on the carbon tax. I'm certainly not opposed to tax cuts, and those could easily be an important part of any future increases, but I think we hinder our chances of success if we limit ourselves to tax cuts.

    My own thinking is that the local governments provide the best channel through which to link the carbon tax with solutions, where one option would be to replicate what the federal government does with gas tax revenue. This approach could direct a portion of new revenue to communities around the province for investment in sustainable infrastructure. Beyond creating a link between the carbon tax and solutions, this approach would have two other advantages. First, by making $'s available throughout the province, it would help bridge the rural / urban divide that often surfaces in climate change policy discussions. So instead of just supporting transit in the lower mainland, there would support for the priorities around the province. Second, it would create an active constituency for the revenue (and therefore for the tax), which would make it difficult to take away in the future. This has certainly been the experience of the federal gas tax transfers, which have become more engrained over time as they become a central piece in infrastructure financing for local governments.

    A final point is that I'm not convinced a revenue neutral carbon tax is as indestructible as John describes. I agree that it is difficult for a government to eliminate the tax if it means having to increase other taxes. The problem is that basic math doesn't always have to govern political platforms and promises. The NDP promised to eliminate the carbon tax in 2009 and the BC Conservatives are promising the same things this election – neither party offered a detailed explanation of how they would make up for the lost revenue. Another relevant example would be the 2001 election when Gordon Campbell came to power – he promised big cuts in income taxes (which were bigger in relative terms than the carbon tax currently represents for provincial revenues) and followed through on that promise. The loss in revenue was predominantly handled by cutting services and running a deficit for several years – very little in the way of increasing other taxes.

    When it comes to carbon tax revenue, I don't personally think there is any right answer on how to spend it, and I think any government deserves praise if they figure out a way to increase it. But having been involved in the B.C. carbon tax debate since it was implemented, I still think the best way to open up a conversation about next steps is by proposing to link a portion of the new revenue with the solutions that people want to have greater access to.

    Best regards,
    Matt Horne

  2. From John Robinson, UBC:

    I think Matt provides the best argument for the view that we should dedicate new carbon tax revenues to sustainability-related expenditures. And if this happens, I would certainly support the idea that such revenues go towards community infrastructure investments. But we still disagree about the politics here.

    With respect to increasing the carbon tax, Matt thinks we could better sell carbon tax increases by devoting the incremental revenues to such investments; I believe that combining carbon tax increases with tangible tax rebates is likely to be much more popular. With respect to making the tax hard to eliminate, Matt thinks that devoting part of the increase to municipal infrastructure investment would create a strong constituency against reducing the tax. I actually agree with this, but believe that offsetting all of the increases with tax rebates would be create a stronger constituency.

    If all of the tax increases went to municipalities for sustainable investment, then I think his case would be stronger, as I agree that they would become fierce advocates for that revenue. But note that Matt's point about government's being able to avoid making clear how they would make up the lost revenue from carbon tax reductions applies just as much to his preferred use of the revenues as mine.

    All the best,