POLICY:

'Sky didn't fall' after British Columbia lowered income tax, dropped fuel use with carbon tax

British Columbia's carbon tax shift is celebrating its fifth year since being launched in 2008 as an ambitious initiative to reduce greenhouse gas emissions.

A study that will be published in the upcoming issue of Canadian Public Policy examined how the carbon tax shift contributed to significant reductions in overall fossil fuel use and created one of the lowest personal and corporate income tax rates in Canada.

A part of the study, published by the environmental think tank Sustainable Prosperity, found that British Columbia's fuel consumption declined 17.4 percent per capita, and 18.8 percent compared with the rest of Canada, from 2008 to 2012.

Economists and industry analysts say that the tax shift's results may outpace the greenhouse gas emissions reductions in seven European countries that implemented a similar policy more than two decades ago.

"Let's learn from the evidence and move away from the politics of it," said the study's lead author, Stewart Elgie, a professor of law and director of the Institute of the Environment at the University of Ottawa.

"At the end of the day, the most cost-effective way to reduce greenhouse gas emissions is by putting a price on carbon," Elgie added. "You create an economic incentive for people to become more fuel-efficient."

The policy is designed to be revenue-neutral, meaning that financial returns inject funds into corresponding tax cuts, such as in corporate or personal income tax. The income tax rate has dipped by 5 percent, and the revenue provides a low-income tax credit for northern and rural homeowners.

The carbon tax shift was initially set at 10 Canadian dollars per metric ton of carbon dioxide equivalent and was intended to rise by C$5 each year until it reached C$30 per ton in 2012. C$1 equals roughly $1.

No adverse economic impacts

British Columbia, which borders Washington state and is part of the Western Climate Initiative, did not experience adverse economic effects as a result of the tax, according to the study.

"What was supposed to be the kiss of death has withstood elections," said Barry Rabe, a professor of public and environmental policy at the Gerald R. Ford School of Public Policy at the University of Michigan.

Rabe has written extensively about the economics and politics associated with carbon tax and cap-and-trade strategies for publications and think tanks, such as the Brookings Institution.

"Polling suggests that revenue neutrality and the reallocation projects has worked pretty successfully, that this has contributed to a decline in emissions, but it hasn't spread elsewhere," Rabe added.

He noted the example of placing excise taxes on cigarettes, which significantly reduced purchases, as a classic case of implementing consumption costs.

The provinces of Alberta and Quebec have similar carbon tax programs, but the biggest emitter, Ottawa, does not have a policy that limits or puts a price on carbon.

Any forms of carbon tax are a tough political sale in Canada and more so in the United States. The cap-and-trade policy of 2010 failed to pass in the U.S. Congress.

U.S. more allergic to 't' word

Opinion has shifted, a trend that Rabe calls "reverse diffusion." Before the Copenhagen, Denmark, climate talks in 2009, there were 23 U.S. states and 4 Canadian provinces that supported the strategy. Today, there are 10 states and two provinces: British Columbia and Quebec, according to Rabe.

The business community was mildly supportive of the carbon tax, which was adopted by Canada's central party.

Then-British Columbia Premier Gordon Campbell, the architect of the tax, lost in an upset election to Christy Clark of the Liberal Party.

"If anything, the American people are more allergic to the 't' word than Canadians," said Kathryn Harrison, a political science professor at the University of British Columbia and author of "Passing the Buck: Federalism and Canadian Environmental Policy."

Political resistance in the United States against a form of carbon emissions limit reaches back to President Clinton's 1993 "Btu Tax," a proposal to tax all sources of energy fuel. The bill passed in the House but failed in the Senate.

In recent Congresses, carbon tax proposals have rarely advanced to the stage of committee review and hearings.

Another effort in Congress

Earlier this month, Rep. Chris Van Hollen (D-Md.) addressed his plans to reintroduce a climate bill driven by a cap-and-dividend system, which would limit carbon emissions on upstream emitters while providing payments to the public (ClimateWire, July 12).

California, New York and Massachusetts are leading the way with regulations on carbon emissions.

"If states have taken steps to reduce greenhouse gas emissions, would EPA give those states latitude or the flexibility to develop their own policies?" Rabe asked.

Last month, President Obama directed U.S. EPA to regulate carbon emissions from new and existing power plants under the Clean Air Act. "If there's a carrot and stick, then it should be state by state, because no two states are treated similarly under the Clean Air Act," Rabe said of the states that have taken the initiative to regulate carbon emissions.

EPA may offer incentives to the states that innovate or harness renewable energy sources; "that's where federalism comes to play," he added.

In British Columbia, the aim is to reduce its carbon emissions by 33 percent below 2007 levels by 2020.

"We're starting to accumulate evidence that it's working better than we expected," Harrison said. "The sky didn't fall. People got on with their lives and, in subtle ways, adapted."

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