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BC’s Carbon Tax: Inapplicable to America

By -- September 3, 2014

“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. Nearly all of BC’s base load electricity is zero-carbon hydropower…. Natural gas is the only part of BC’s electric supply system subject to the tax …. and generates less than 6% of BC’s electricity.”

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 the British Columbia (BC) “model” to U.S. climate and tax policy debates?

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. That’s what its U.S. conservative admirers like most about it. 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.

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

Small Stuff

The study to which Moylan 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. The report, however, cautions readers not to jump to conclusions. During those four years BC’s GDP growth outpaced the Canadian average by just 0.1%, and besides “the carbon tax is just one small factor in BC’s overall economic picture.”

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. Similarly, in 2013, 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.

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, estimates the “carbon tax has had, and will continue to have, a small negative impact on gross domestic product (GDP) in the province.”

As for BC’s 11% corporate income tax being “among the lowest anywhere in the G-8,” it is indeed lower than that of eight other Canadian provinces, but not lower than Alberta’s 10% rate, according to 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’s a wee bit of an exaggeration, because the territory of Nunavut is the “least taxing place” in Canada, according to TurboTax.

Among provinces, BC does have the lowest average personal income taxes for individuals earning between $30,000 and $125,000 (BDO Canada 2013 Tax Facts, 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, p. 14).

In short, proponents give the carbon tax too much credit for making BC a low-income tax province. Let’s also not forget that (except by sheer accident) 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.

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.

Moreover, environmental and property rights concerns today preclude construction of large dams like BC’s Mica, Gordon M. Shrum, and Revelstoke, which generate over half of its electricity, even where favorable geology and climate might exist.

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.

BC’s $30/ton carbon tax translates into gasoline tax of 6.7¢/liter, or roughly 23¢/gallon 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 still lower than those in Ontario, Quebec, Newfoundland and Labrador. 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 (Ministry of Finance, p. 14). 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 Neutral?

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 operate in a vastly different fiscal arena. 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. Politicians most interested in a carbon tax will be those looking for a new cash cow to milk.

A Grand Bargain?

Moylan 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 (Ministry of Environment, p. 10), and no one expects the carbon tax alone to achieve those targets. The Ministry of Finance states that the tax will be “integrated with other measures” such as “cap and trade.”

Similarly, the Ministry of Environment views the carbon tax as one element of a climate policy regime that includes 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.

Cap-and-trade and carbon taxes are both carbon pricing schemes, which is why they supposedly are more efficient than regulatory mandates. Note that the only cap-and-trade bill ever to pass in a chamber of Congress – the Waxman-Markey American Clean Energy and Security Act of 2009 – did not contemplate the repeal of a single regulation but instead would have added a raft of new energy efficiency standards, a carbon capture and storage mandate for new coal power plants, and a first-ever nationwide renewable electricity standard.

Their regulatory zeal has not dimmed in the interim. 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 clarifying that payment of carbon taxes does not affect any entity’s compliance obligations under other laws.

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.

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