by Clayton Welwood, 2017 candidate for North Vancouver-Seymour
From a political point of view, there’s much to dislike about carbon taxes. But from an economic point of view, the idea behind a carbon tax isn’t a bad one: the potential harms caused by greenhouse gas emissions are delayed, dispersed and difficult to determine, but still likely real, so a putting a price on these emissions will incentivize producers to reduce them, and motivate consumers to seek lower or zero emission alternatives.
For such a scheme to be effective in combating climate change, it would need to meet a number of criteria:
- result in a high enough “price” on carbon to significantly change patterns of energy production and consumption
- provide a framework where real innovation is possible and potentially profitable
- not make people poorer
I’ll address each of these criteria separately, explain why they’re necessary, and show why the provincial government’s new CleanBC Plan doesn’t do a good job of meeting them.
Let’s first acknowledge that for any GHG emission plan to have an effect on the climate, there needs to be similar efforts across the globe. British Columbia only produces a fraction of 1% of the world’s GHG emissions, and so from a practical point of view what we do here may not matter much, even though from a moral point of view, it’s important that we try to do our part to avert serious environmental harms. So, for this thought experiment, let’s assume other jurisdictions are also pulling their weight.
Let me also state that I believe there is a moral case for a carbon tax that some libertarians could accept. The standard libertarian view is that harms from pollution should be settled in the courts, e.g. if you can prove that my factory’s smoke caused your lung disease, I’ll have to pay you compensation. The thing with CO2 and some other greenhouse gasses is that they aren’t pollutants in this sense, and it’s a long chain of causation dispersed across time and space before anyone is harmed. It’s possible that private actors on their own will come up with solutions that reduce GHG emissions enough to avoid severe warming, or that mitigate its impacts so that few people are harmed. But given that the earth may hit a point of no return in the next couple decades where rapid global warming becomes irreversible, it may be prudent for governments to set a framework that fosters this innovation. If governments can do this in a way that on net, doesn’t make citizens significantly poorer or less free, then imposing such a carbon tax is probably better than doing nothing. And yes, taxes are extortion; but at least with taxes on the sale of particular goods, you can forego the purchase of those goods (assuming there’s an alternative, which is exactly the point of a carbon tax).
Getting the Price Right
The BC government’s goal with the CleanBC plan is to reduce GHG emissions to 40% below 2007 levels by 2030, and 80% below by 2050, which seems to be in line with the level of cuts the Intergovernmental Panel on Climate Change is recommending. The CleanBC plan states that the carbon tax will contribute 1.8 Megatonnes in GHG reductions towards BC’s 2030 target. This represents about 10% of the total, with the rest of the reductions coming from regulatory measures, such as mandating that all new vehicles sold in BC be zero-emission.
BC’s carbon tax is currently $35 per tonne, going up $5 a year until it reaches $50/tonne in 2021. That works out 7.8 cents per litre of gasoline and 6.6 cents per cubic meter of natural gas at current rates. The demand for gasoline is relatively inelastic, and this carbon tax cost (one of many taxes on gasoline) on its own is not enough to make many consumers look for alternatives. Even with government rebates, the cost of purchasing an electric vehicle is out of reach for most families in BC, and even many urbanites aren’t willing to make the sacrifice in convenience that comes with alternate modes of transportation such cycling or public transit. A carbon tax at this level may however encourage some people to choose more fuel-efficient cars or make fewer trips by car.
To really change people’s transportation habits would require a much higher carbon tax. If it were 10 times higher, say 78 cents per litre on gasoline, it would make driving much less attractive. Likewise, if natural gas were 66 cents/m3, many consumers would switch to electric appliances and heaters.
But this would result in massive costs. Just think about what would be involved in removing natural gas fired boilers in every building and replacing them with electric space and hot water heaters. Even if electricity prices didn’t increase, such an outlay for new equipment would make everyone significantly less well-off, which conflicts with requirement #3 above.
Making Real Innovation Possible
Again, we have to assume that the rest of the world is on a similar path, and that they’re developing low-carbon technologies that we can adopt here in BC. However, some local innovation is also required, even if only in the form of process innovations that allow local organizations and communities to run more efficiently.
Take public transit, for example. While the Skytrain is good for those that have access to it, bus service in many parts of BC, and even greater Vancouver is very infrequent and slow compared to a trip in a private automobile. Private alternatives to public transit, such as carpooling, ride-hailing services like Uber, or privately-run mini-bus services would be much more attractive to consumers if a high carbon tax were in place. The resultant demand for such services could be enough to push the government to deregulate the transportation sector to allow such private for-profit operators.
The problem with the CleanBC plan is that it combines a carbon tax with specific regulations on how emissions reductions targets are to be achieved in each sector. A few examples: the step building code lays out the details on how buildings are to be constructed to reduce heating requirements; a mandate for 15% of natural gas used to be renewable; a requirement that by 2040 all new cars and light-duty trucks sold be zero-emission.
What if these measures conflict with other social goals, such as making life more affordable for regular British Columbians (which is supposed to be the center-piece of the NDP’s policy agenda)? For example, the step code will raise the cost of housing when British Columbians already pay 31% of their income towards shelter (more than any other province), and the required renewable component will complicate supply-chain logistics for natural gas providers, increasing the cost for consumers.
And what if these aren’t the best steps to get us to a low-carbon future? What if greater reductions in emissions can be achieved at a lower cost by converting vehicles to run on natural gas instead of gasoline? What if the money spent on expensive building retrofits could go further if spent on public transit? What if the best bang for our buck can be achieved by developing technologies that can pull carbon out of the atmosphere?
No one knows for certain what the best approach to fighting climate change is, but history has shown us that when the price of one good becomes too high, markets are able to generate alternatives. The freer the market, the faster the alternatives appear and are adopted. The CleanBC regulations limit the scope for innovation that a high price on carbon is supposed to foster.
Not Making People Poorer
Many of the proposals favoured by governments to deal with climate change involve making fossil fuels more expensive, pushing consumers to switch to other sources of energy. But if the green energy sector hasn’t developed renewable alternatives enough to provide energy at equivalent prices, instruments like heavy carbon taxes or bans on coal-fired power plants can condemn people to energy poverty. This is exactly what happened in Ontario, where due to such policies by the previous government, energy prices rose 71% over a decade, forcing families of limited means to choose between heating and eating. Such policies are broadly unpopular, and were a major factor in voters deciding to remove Kathleen Wynn’s Liberal government in favour of Doug Ford’s Conservatives.
Such policies are not only politically difficult, they also represent a step backward in the larger trend towards a wealthier populace and a cleaner environment. The Environmental Kuznets Curve describes the relationship between per capita income and a clean environment, hypothesizing that once a society reaches the level of economic development where the majority of people’s basic needs are met, further growth leads to less pollution and better environmental stewarship.
But if necessities like home heating and transportation suddenly become a lot more expensive due to government carbon policies, this could cause people to de-prioritize environmental issues and make them suspect of future environmental reforms that come in the form of taxes, bans and restrictions. If the goal is to eliminate the use of fossil fuels over the course of a generation or two, such approaches may be counter-productive if they provoke too much public resentment. The yellow vest protests in France, which have lasted for two months and are the country’s largest since the 1968 uprising, indicate that this may have already happened. Carbon taxes are the issue that sparked the protests, which spread from Paris to the rest of France and have been picked up in various places around the world.
The gold standard for a carbon tax is a revenue neutral one; in other words, one where the increased tax on fuel is offset by other tax reductions, meaning people aren’t on net any worse off. BC was the first province in Canada to implement a carbon tax, and as promised, for the first few years after its introduction in 2008, it was revenue neutral, with the offset coming in the form of reduced income tax. This doesn’t mean that no one was made poorer by it. It’s pretty easy to imagine someone who pays little income tax (let’s say a start-up entrepreneur who hasn’t yet turned a profit, but still requires a significant amount of fuel to run her business) who would be paying much more in carbon taxes than she gets in income tax reductions. Still, the economic damage of the early-years BC carbon tax was kept to a minimum, which is more than we can say for most taxes.
BC’s carbon tax hasn’t been revenue neutral for years though, and the current NDP-Green government has no intention of making it so, even if they are offering a Climate Action Tax Credit of $135 per year to low income British Columbians. But if you’re making over $50k per year, you won’t be eligible for that, so the current carbon tax makes most British Columbians on net worse off.
Carbon Taxes: Nice in theory, poor in practice
BC is estimated to take in $865 million in the current fiscal year from the carbon tax. As Kenneth P. Green from the Fraser Institutes argues, it would take only a 2% cut in provincial spending to achieve $865M in savings, which could be returned to taxpayers to make the tax revenue neutral again. As the price on carbon rises, the BC government expects revenue to grow by 16.5% per year for the next 3 years, making it a more vital source of revenue, and the possibility of it becoming revenue-neutral again more distant.
Because political opportunism nearly always trumps good science and good economics, the carbon tax is for me, a dead-end in dealing with climate change. Notice how now that the feds are forcing a carbon tax on the entire country, none of the other provinces are seriously considering making their carbon taxes revenue neutral, now that BC has given up on the idea. If Libertarians held the balance of power in the legislature, or even had a vocal MLA there, there would be hope revenue neutrality could be restored. The BC Libertarian Party’s approach to taxes and spending goes further than that; we want to triple the basic exemption for income tax, which would put British Columbians in a much better position to absorb the costs of transitioning to a low carbon economy.
First, do no harm (with subsidies)
When libertarians look at any problem, one of the first things we ask is “how is government aggravating it?” Politicians and bureaucrats are very quick to blow their own horn on all the things they’re doing to fight climate change (however ineffectual) but not so quick to mention the things they do that keep a fossil fuel economy entrenched.
While BC doesn’t directly subsidize its oil and gas industry, the province does offer several royalty credit programs that can offset the costs of drilling new wells or building infrastructure. There’s a sensible logic to this: government coffers will be better off in the long run the more such royalty and tax-paying operations start producing. These programs may have been a good idea when they were introduced a decade or so ago, when gas prices were high, but with the massive increase in shale gas drilling in the US in recent years, the price of natural gas is lower and looks to remain so indefinitely. The price of oil has fared even worse, especially over the past year.
If the government’s goal is to increase tax and royalty revenue, the main problem isn’t the amount of resources being pulled out of the ground, it’s the fact that they sell for so little due to inability to reach markets in other parts of the country or overseas. A much better approach for the provincial government to take would be to streamline the complicated approval and regulatory regimes that seem to be preventing pipelines from being built, and publicize these efforts to restore some level of investor confidence in BC’s oil and gas sector. A healthier investment climate would make it easy for the province to scale back or get rid of royalty credit programs, and allowing these resources to be shipped by pipeline instead of train would also reduce the amount of fossil fuels burned in transportation.
Second, stop keeping highways artificially cheap
Transportation represents the second largest source of GHG emissions in BC, after industrial activities. BC’s highways are paid for in part by a fuel tax of 14.5 cents per litre on gasoline and other motor fuels (25.5 cents in Vancouver and 20 cents in Victoria, as there are additional levies for public transit). If the goal is to fund the highways through a tax that motorists have a hard time avoiding, then the fuel tax does its job, but it does a poor job of making those who use the provincial highways the most pay for them. In effect, those who drive mostly on city streets paid for by their municipal taxes are subsidizing drivers who use the highways all the time.
The other problem is that without some kind of fees for use of the highways, the sections that bring commuters in and out of major city centers get backed up on a regular basis. The rush hour traffic on highway #1 going in and out of Vancouver is truly awful, not only resulting in hundreds of wasted hours per year for each commuter, but also no small amount of unnecessary GHG emissions. Instead of trying to develop some kind of rational pricing scheme, the province has gone the other way, getting rid of the tolls on the Coquihalla and the Port Mann.
Replacing the fuel tax with a system of modest tolls on the highways would allow commuters to make more rational decisions on how they get around. It would make carpooling and public transit more attractive, and result in fewer emissions from idling vehicles. Speaking of carpooling, in the absence of any data to show that HOV lanes have been of any use in encouraging it, a better idea may be to go the route Seattle has, and convert them to express toll lanes.
Third, discourage clearcut logging on crown lands
Forestry is regulated in BC through a system of Tree Farm Licences that allow forestry companies to cut timber on crown lands. Environmental regulations apply, but clearcut logging remains the standard practice in the province. Companies are, however, required to replant the areas they cut.
Aside from the oceans, forests are the earth’s largest carbon sinks, storing roughly 100 times as much carbon per acre as fields planted with crops. But if new trees are planted to replace the ones cut down, there’s no net increase in GHG’s, right? Some recent scientific studies cast doubt on that by showing that up to 50% of the carbon stored in mature forests is stored in the soil, and because clearcut logging seriously disturbs the soil, some of this carbon may end up in the atmosphere. Branches, stumps and other wood waste left behind also release CO2 as they rot or are burned. Furthermore, consider the fact that a mature tree adds more wood mass each year than a young tree, meaning that mature forests pull much more carbon out of the atmosphere than young forests.
A different land tenure system for forestry, one that allowed for longer term leases, smaller parcels, or outright private ownership, could likely make selective logging a more viable business strategy. Setting the stumpage rate (royalty for timber cut on crown lands) higher, and removing the heavy government involvement in how timber is priced and sold (i.e. allowing a free market in logs) could also aid the shift from clearcutting to selective logging, which would help BC’s forests become better carbon sinks.
Lastly, reduce business regulation and let innovation flourish
The main problem with the CleanBC plan is that by specifying how GHG’s are to be reduced, the best opportunities for private sector technological solutions to climate change spurred on by a rising price on carbon may be missed. Furthermore, the amount of business regulations (not just environmental regulations), the shortage of land zoned for industrial use, and business taxes (including the new payroll tax to replace MSP) all act to discourage entrepreneurship. As much as the CleanBC plan touts BC as a center for the development of green tech, this industry could be much larger if the provincial government and municipalities had regulatory frameworks, taxes, and land-use policies that were more business-friendly. Instead, the province has opted to keep these barriers to entrepreneurship in place while creating tax credits and subsidies for green projects bureaucrats and politicians know and favour.
What they don’t realize is that the big technological breakthroughs that have a real shot of averting or mitigating climate change probably aren’t on their horizon yet. Whether it’s bio-diesel produced on a massive scale by algae farms, grand forests of synthetic or genetically engineered trees to capture mega-tonnes of CO2, a new method of generating renewable energy that doesn’t require huge capital investments, or some other solution no one has heard of yet, BC could the place where it is developed if the conditions for innovation and investment are right.
But what if whatever BC does, climate change still occurs?
It will, we can bet on that. The climate has been changing since the earth was formed, no reason it’s going to stop now. Human beings will be able to adapt to climate change, as long as we have the resources to do so. It’s important we don’t sacrifice the fundamentals of our prosperity (a free enterprise economic system, rule of law, and a culture that embraces innovation and entrepreneurship) in the battle against climate change. If these fundamentals can be preserved, it’s safe to assume that our children and grandchildren will be wealthier than we are and in a good position to deal with negative effects on the climate.
BC’s ecosystems, however, aren’t getting wealthier generation by generation. Increased human activity, including the logging of old growth forests and the conversion of marine, river and inland habitats to other uses, means that maintaining the health of these ecosystems is already challenged. I believe that the province’s environmental efforts should focus on restoring these local ecosystems rather than fighting a global problem that may well occur no matter what we do. Restoring salmon spawning areas, protecting wetlands from being turned into low-density housing, and starting or expanding breeding programs for threatened species are just some of the initiatives that private sector environmental organizations can take the lead on. But the provincial government can still play an important role in terms of collecting data on ecosystem health and ensuring that resource extraction on public lands is carried out in an environmentally sensitive way. Ultimately though, it would be good to see more of BC’s public lands turned over to First Nations, municipalities, conservation trusts, and private owners, who are in a better position and have better incentives to steward their land, than bureaucrats in Victoria.