POLICY:

British Columbia survives 3 years and $848 million worth of carbon taxes

As it nears its third anniversary, British Columbia's carbon tax is loved by some, hated by others, and yet forgotten by many Canadians.

John Hunter despises it.

"I've already insulated my house to be energy efficient. I already turn down my thermostat. Why should I have to pay $20 on my natural gas bill for something that is doing nothing for me?" the 64-year-old engineer said in an interview from his home in North Vancouver, British Columbia. His anger about the C$21.85 charge on his C$263 December bill prompted a protest op-ed in a local Vancouver paper. (One Canadian dollar equals roughly 1.02 U.S. dollars.)

But in another part of the province, in the Resort Municipality of Whistler, community manager Ted Battiston says the tax played a role in switching out propane tanks for solar panels and geothermal pumps in the heating unit of the local swimming pool. The tax allowed for economic modeling showing that the renewable sources would get about a 3 percent better return on a C$900,000 investment than without the levy, he said.

"The tax should go higher," he said.

As North America's only large-scale carbon tax approaches its birthday, many economists say the tax is too small at this point for a full economic assessment. Yet there are early signs that the tax is changing behavior. Heavy greenhouse gas emitters such as cement manufacturers are warning that they are on the verge of "disastrous" layoffs and shutdowns, while businesses with a small carbon footprint seem happy with the tax.

Behavior in Washington, D.C., on the other hand, continues to be polarized. Motivated by young tea party enthusiasts, many Republicans are deeply concerned about the growing federal deficit, but the idea of raising money with a carbon tax might not mesh with their skepticism about global warming. While many U.S. economists support a carbon tax as a simpler way to address climate change, Democrats chose the now defunct idea of a federal cap-and-trade program instead.

Yet British Columbia's prolonged experiment may show there is life beyond the political grave for carbon solutions that generate money, analysts say. It offers a preview of how a tax works on a wide scale, and shows the political hazards involved in implementing it.

The province, which is often dubbed "the California of Canada" because of its liberalism, jumped through a policy window, pushed by an aggressive premier, Gordon Campbell, in 2008. He wanted the tax and a better environment at a time when former U.S. Vice President Al Gore's "An Inconvenient Truth" was a focus of conversation.

Polls show majority support

The policy stalled nationally in Canada, though, when another politician, Stéphane Dion, ran for prime minister on a carbon-tax platform as part of what he called a "green shift" in 2008. He was soundly defeated, an event his critics later dubbed the "the green shaft."

Undaunted, Canada's California pressed ahead. There are uncertainties about whether the tax will peter out in British Columbia, with many saying that one province in Canada cannot continue moving forward unilaterally on a global policy problem.

"If the rest of the planet does nothing, we should just have a party," said Mark Jaccard, a professor at Simon Fraser University who consulted government advisers on the tax. "British Columbia's emissions are too small to do this alone."

Initially, more controversy surrounded the tax proposal in British Columbia, but it subsided after the sky did not fall on the economy and, according to some polls, support for the measure grew.

Environics Research Group Ltd. documented an almost 10-percentage-point rise in support among British Columbians for the carbon tax between when the tax was about to be implemented in 2008 and when it had been in place for a year in 2009, for example. Last month, researchers at three universities reported that an even stronger majority, or 56 percent of Canadians, supported a carbon tax costing $50 a month.

"Initially, some people heard the 't' word and went into a tizzy," said Robert Gifford, a professor at the University of Victoria and an expert in environmental psychology. "Then the end of the world didn't happen, and people just accepted the tax."

British Columbia opposition party follows the polls

The growing acceptance included the opposition political party in British Columbia, which campaigned against the tax in 2009 but now has some members coming out in support. New Democratic Party leadership hopeful John Horgan said in February that his party misread the public mood on the issue, and called for a tax expansion, rather than a decrease.

Enacted in July 2008, British Columbia's carbon tax currently requires purchasers and users of fossil fuels to pay C$20 per ton of carbon dioxide-equivalent. That adds up to about C$.18 to the price of the average gallon of gasoline, although that number will increase to around C$.27 in July of next year when the tax rises to C$30 a ton of CO2-equivalent. The cost for other fuels, such as natural gas or coal, varies by their carbon content.

The tax has little effect on electricity users, considering that 85 percent of the province's juice comes from hydropower, a low-carbon source. Instead, the majority of the tax is being paid by drivers and by industries or individuals using natural gas, propane or coal for heating and the operation of factories. It covers about three-fourths of provincial emissions, with the exclusion of greenhouse gases not resulting from combustion, such as methane seeping from landfills.

All of the C$848 million raised by the tax since 2008 has been returned to corporations and British Columbia residents via cuts to corporate and individual income tax rates. The idea is to make the tax revenue-neutral for the government and innocuous to the economy overall, while forcing industries and consumers using the most fossil fuels to reduce emissions by, say, buying electric cars or updating boilers.

How much of that is happening is a matter of debate.

Cement industry and truckers want financial help

So far, there are loud complaints about carbon leakage, or the process of emitters -- and emissions -- simply moving to other jurisdictions without a similar tax, resulting in no global reductions in CO2. That is happening with the province's cement industry, said Jock Finlayson, an executive vice president at the Business Council of British Columbia.

"We are now importing cement from Washington state," said Finlayson. "We used to export it." Similarly, cement imports from Asia rose from 5 percent in 2008 to 20 percent now, said John Cuddihy of the Cement Association of Canada.

The strength of the Canadian dollar could be playing into that dynamic, he said, but the carbon tax is a huge factor, considering that cement production is highly carbon-intensive.

It won't take much of an increase in the carbon tax price for the entire British Columbia cement manufacturing sector to shut down or face "disastrous" consequences, said Cuddihy. The tax is hitting profits by equaling about 5 percent of the cost of the average ton of cement, he said. Similarly, Paul Landry of the British Columbia Trucking Association said the tax could be problematic for truck drivers if it increased significantly.

For this reason, some of the heaviest greenhouse gas emitters in British Columbia are quibbling with the how the carbon-tax revenue is recycled. Instead of the money going for tax cuts to every business, from restaurants to toy stores, more of the cash should go to help carbon-intensive companies improve efficiency, said Landry.

For his industry, that could mean more funds being used to help truck drivers buy anti-idling equipment, he said. The technology to reduce emissions is there, but the industry could use a financial boost to get it installed on a widespread basis, he said.

"Why not do that if the goal is to reduce emissions?" he said. Others say, though, that all of the proceeds need to go back to the public and business community, as they are currently doing, to avoid a "tax grab."

Heavy emitters "need to make a case that giving them money and thus having a lower rate of economic growth and less income and jobs for everyone else is a good idea. Seems a bit self-serving and counterproductive, doesn't it?" said Jaccard about the idea of helping energy-intensive businesses buy equipment to lower emissions.

Taxes push energy-saving decisions

There also are concerns about individual energy consumers like Hunter and about the impoverished. According to the Pembina Institute, an environmental think tank, tax credits funded by the carbon levy will not provide adequate protection for low-income families as of this year. There should be increasing funds for the poor if the tax increases over time, the group said.

There is a two-year lag in emissions reporting data, meaning that definitive information about 2009's greenhouse gas output still is not available. The overlap of the global recession during that time frame could make it difficult to tie any emission numbers to the tax. Yet there is anecdotal evidence that the still-low tax is working at the margins to cut greenhouse gas emissions, said Matt Horne of the Pembina Institute.

The University of Northern British Columbia, for example, said the fee played a significant role in the university's deciding to purchase biomass systems for heating, according to university official Robert van Adrichem. His school pays C$100,000 a year on the tax, creating an obvious incentive to try and cut emissions to avoid it, he said.

"I'd rather use that money to hire teachers," he said.

Similarly, Nancy Knight at the University of British Columbia said the tax helped the school decide to build to build a new C$85 million heating system that will use 20 percent less energy and save thousands of dollars from the tax.

Cuddihy of the Cement Association said his industry's complaints about the levy led to the British Columbian government's switching to portland limestone cement in its building codes. That type of cement is about 10 percent less carbon-intensive to produce, he said.

An increase after 2012 is not part of official regulations, and the province on Feb. 26 elected a new premier, Christy Clark, who has not stated her intent on the issue. The tax needs to rise to C$200 a ton for British Columbia to meet its emission reduction targets by 2020, according to the Pembina Institute.

Still, many in British Columbia doubt that Clark will have the political will to raise the tax. British Columbia intended to tie its policy to something similar in the United States, said Jaccard.

With climate legislation dead on Capitol Hill, gas prices surging and the tea party movement wielding influence in Congress, there may be little appetite for climate incentives moving in the United States in the near future.

Could the budget-strapped U.S. follow British Columbia's example?

This could be exacerbated by the United States' dependence on coal, which fires almost half of U.S. electricity and covers two dozen U.S. states. Hydropower -- which is British Columbia's electric lifeblood -- is a relatively small player in the United States, firing about 7 percent of electricity. Jaccard said that a third of revenue raised by any hypothetical carbon tax in the United States would have to be used to help the coal industry transition to a cleaner economy.

Yet there are some who think that, given the nation's budget problems, the idea of a U.S. carbon tax may not be far-fetched in the future. The idea has been tried in some U.S. localities, such as Boulder, Colo. It was also considered by some members of Congress in 2008, although cap and trade became the prevailing idea via a bill that passed the House but stalled in the Senate.

Paul Bledsoe, a senior adviser at the Bipartisan Policy Center, said that an energy tax is one of the few options for new sources of revenue if the federal government eventually takes a serious look at tax reform in conjunction with deficit reduction. One of the goals of reform would be to reduce taxes for corporations and individuals, which is something a carbon or energy tax could finance.

"The enormous political appeal of cutting corporate and individual tax rates as part of debt reduction has the potential to more than offset the political push back on a consumption tax, at the right moment," he said.

In November of last year, a Bipartisan Policy Center task force chaired by former Sen. Pete Domenici (R-N.M.) and ex-Clinton administration official Alice Rivlin released a plan on how to reduce the national debt. It did not endorse a carbon tax, but said many task force members thought the idea warranted further consideration as a debt-reduction tool.

Barry Rabe, a public policy professor at the University of Michigan, made a parallel argument about states or localities. The idea could become more appealing, Rabe said, if it were sold as a source of new funds for cash-strapped states without the word "carbon" tied to it. A similar thing happened to tobacco, he said, which was once considered a taboo taxing item but increasingly offered new sources of revenue and a means to cut other taxes, amid shifting cultural winds against cigarettes.

"A huge question we are facing is how to deal with budget problems," Rabe said. "Where are states going to get money? They don't have many choices, and carbon is one place to look."