Taxes and caps: great cost, little benefit

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Appeared in Business in Vancouver

Since 2001, the BC Government has done much to attract business and workers back to the province. The combination of restrained spending growth, lower taxes, and regulatory reductions have quickly and dramatically improved BC’s investment climate. The results have been stunning. BC is now among the top provinces in economic growth, job creation, and business investment.

Recently however, the government’s focus has increasingly shifted away from pro- economic growth policies towards environmental initiatives. Unfortunately, many of the green initiatives, whether already implemented (i.e. carbon tax) or still at the draft stage (i.e. cap-and-trade system), threaten BC’s improved investment climate. More worrying, the damage will likely be done without achieving the intended results.

The new carbon tax, the cornerstone of the 2008 budget, increases the price of fuel to encourage individuals and businesses to reduce greenhouse gas (GHG) emissions. It applies to all fossil fuels (gasoline, diesel, jet fuel, natural gas, propane, and coal) and will triple over the next four years. For example, the additional tax on gasoline will increase from 2.4 cents per litre this year to 7.2 cents in 2012.

BC is also planning to implement a cap-and-trade system as part of the Western Climate Initiative (WCI), a collaboration involving several US states and BC, Ontario, Quebec, and Manitoba. Under a cap-and-trade system, an overall regional limit (cap) on GHG emissions will be negotiated among the members of the WCI.

Based on the regional cap, each state and provincial government will be apportioned an annual GHG allowance which it will then need to distribute as GHG emissions quotas to “entities” (businesses) in their respective jurisdictions. If an entity cannot meet its quota it must purchase allowances from other entities in the region that have produced lower emissions than their quota allows (i.e. trade).

If it sounds bureaucratic, that’s because it is. While cap-and-trade is often described as a “market” system, it is ultimately a heavily politicized mechanism that significantly increases the costs of producing goods and services.

While the carbon tax is revenue-neutral overall (the estimated $1.85 billion raised over the next three years will be used to reduce other types of taxes), many households and businesses will end up paying significantly more in taxes. Much of the offsetting tax relief is aimed at lower income British Columbians through a new climate action tax credit and reductions in the bottom two income tax rates. As a result, many middle and upper income families will see their taxes increase despite “revenue-neutrality.”

The costs imposed by the cap-and-trade system, and indeed a significant portion of the costs imposed by the carbon tax, will likely fall on BC workers and businesses. This is especially true in energy intensive industries such as manufacturing, utilities, forestry, oil and gas, mining, and transportation. Freer trade and competitive markets make it difficult to pass along such cost increases to customers.

A more likely outcome is that the amount of re-investment in businesses (retained earnings) will fall due to increased costs/taxation. This means less investment in the plants, machinery, equipment, and new technologies that make workers more productive. Since higher worker productivity drives wages, lower levels of investment ultimately means lower wages for BC workers.

In the longer term, investment will move to other jurisdictions that offer higher rates of return and with similar risk. Notably, the premiers of both Alberta and Saskatchewan have thus far rejected carbon taxes and cap-and-trade systems. Given that BC actively competes with both provinces for investment (especially in the resource sector), investors will increasingly look to nearby Alberta and Saskatchewan to invest their capital. The movement of investment and production out of BC means fewer opportunities for workers and less productivity-enhancing capital.

In addition to the potential economic damages, consider the limited impact, if any, that carbon taxes and cap-and-trade systems will have. These initiatives to limit the use of fossil fuels are based on the premise that global warming is caused by man-made emissions of carbon dioxide. In fact, there exists considerable uncertainty about the interplay between CO2 and global temperatures, and there is no consensus about the causes or consequences of climate change. Moreover, even if we assume the climate alarmists are correct, the reduction or even elimination of man-made carbon-based emissions in BC would be too insignificant a reduction to make any difference.

British Columbia is one of the best provinces in which to work and invest. Unfortunately, the provincial government has embarked on a dangerous road. Environmental taxes and regulations impose significant economic costs and are not likely to deliver the intended results.

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