B.C. budget abandons any hope for efficient carbon tax
In its first budget released earlier this week, Premier John Horgan’s NDP government raised the carbon tax rate by 66 per cent over the next four years and rejected revenue neutrality, undermining the case for an economically efficient carbon tax.
British Columbia’s carbon tax is currently at $30 per tonne. As of April 1, 2018 the government will increase the tax by $5 per tonne of CO2 equivalent emissions per year until it meets the federally imposed floor price of $50 in 2021, a year before Ottawa’s 2022 deadline.
For carbon pricing to be efficient, a set of conditions must be met. Carbon pricing must replace regulations, not simply layer on top of existing regulations. The tax should be revenue neutral, meaning that the revenue collected should be offset by tax cuts. And the revenues should not be used to further distort the energy economy with governments “investing” in pet projects or selective forms of energy production.
Back in 2008/09 when B.C.’s carbon tax was introduced it was, in fact, revenue neutral. Instead of continuing the same approach, the NDP government is moving in the opposite direction. (It also recently raised personal income taxes and the corporate income tax rate.)
At its core, the purpose of a revenue neutral carbon tax is to mitigate the costs such a tax imposes on the economy, so there’s a net improvement in incentives for investment and thereby stronger economic growth. Economists generally agree that an ideal revenue neutral carbon tax would reduce broad-based tax rates on personal and corporate income, ultimately reducing distortionary effects and increasing efficiency.
However, instead of returning this new revenue stream to taxpayers, the B.C. government has chosen to fund its favourite “green initiatives” to address “climate action commitments.” Subsidizing green projects may be politically popular but remains fundamentally misguided from a policy perspective.
Why? Because subsidizing wind, solar or other alternative energies distorts the energy market and prevents government and industry from identifying the cheapest ways to reduce greenhouse gas emissions.
B.C. is not the only province violating the key components of efficient carbon pricing policy. Consider Ontario’s cap-and-trade system, which the Ontario government estimated would bring in $2 billion in revenue per year. According to Ontario’s auditor general, about 83 per cent of the money collected in four years will be spent on subsidies to renewable energy, energy efficient programs, etc.
Alberta will implement a carbon tax of $30 per tonne in 2018. This new tax is expected to generate almost $3.9 billion from 2017 to 2020. Part of the revenue will be used to subsidize Alberta’s emitters (granting a windfall to the very people producing most of the emissions). Low-income Albertans will receive a small portion, ostensibly to ease the pain of higher power bills. The rest will be spent on government pet projects.
And finally there’s Quebec, which has a cap-and-trade system that has brought in $330 million with an expected $2.5 billion by 2020. Part of the revenue was rebated to emitters via free permits while the remaining revenue will be spent on “programs to fight climate change.” Now that B.C. is no longer the role model for revenue neutral carbon taxes, it’s likely other provinces will continue pursuing high cost, little benefit carbon pricing policies.
The B.C. government has violated the fundamental tenets of efficient carbon pricing, adding just another tax on British Columbians and B.C. businesses.