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Nic Rivers, Canada Research Chair in Climate and Energy Policy, University of Ottawa

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Integration of Carbon Pricing with Fiscal Reform: The Case of British Columbia's Carbon Tax

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Nic Rivers, Canada Research Chair in Climate and Energy Policy, University of Ottawa

  1. 1. Integration of carbon pricing with fiscal reform The case of British Columbia’s carbon tax Nicholas Rivers Graduate School of Public and International Affairs and Institute of the Environment University of Ottawa North American Climate Policy Forum June-22-23 2016, Ottawa
  2. 2. BRITISH COLUMBIA’S CARBON TAX Carbon tax on all combustion greenhouse gases implemented in July 2008. Initially $10/t CO2, increased to $30/t CO2 by 2012. Works out to about 7 c/L on gasoline. Tax raised about $1.2B in 2015. Equivalent to 5% of provincial government tax revenue, or 0.5% of provincial GDP. All revenue from tax used to: Reduce personal income taxes Reduce corporate income taxes (There has been a move away from broad-based reductions in taxes to more targetted reductions since 2013) BC now has amongst lowest income taxation in Canada (for corporations and individuals earning up to $75,000) OECD refers to policy as “a textbook example of good climate policy” (simple, cost effective, environmentally effective)
  3. 3. FUEL USE IN BRITISH COLUMBIA Simulation model suggests roughly 10% reduction in provincial greenhouse gas emissions due to tax (Beck, at al., 2014) Overall, a body of evidence suggests that the carbon tax is responsible for a 5-15% reduction in greenhouse gas emissions in BC (Murray and Rivers, 2015).
  4. 4. OVERALL ECONOMIC PERFORMANCE IN BRITISH COLUMBIA No empirical evidence that overall GDP growth worsened as a results of carbon tax (Metcalf, 2015) This is consistent with model-based simulations of the carbon tax (Beck et al., 2015) CGE model simulation suggests that BC carbon tax reduced income in the province by 0.06% (about $30/person/year) Results from CGE model suggest that recycling of revenue by cutting taxes cut economic impact of carbon tax in half Emerging empirical evidence suggests that carbon tax had a positive impact on overall employment in BC (Yamazaki, 2015), creating about 5,000 new jobs/year.
  5. 5. IMPACT OF THE CARBON TAX ON SECTOR PERFORMANCE A major concern of policy makers is the distributional impact of a carbon tax. New evidence is emerging about sectoral impacts of BC carbon tax. Rivers and Schaufele (2015) find no impacts of the carbon tax on agricultural commodity trade. Yamazaki (2015) uses aggregate sector data and finds a significant shift in economic structure from dirty (manufacturing/extractive) to clean (service) sectors as a result of the carbon tax. Yamazaki (2016) uses plant-level data for manufacturing firms only. His results suggest a contraction of the manufacturing sector by about 5-7% in BC due to the tax.
  6. 6. IMPACT OF THE CARBON TAX ON DISTRIBUTION OF HOUSEHOLD INCOME A persistent concern associated with carbon pricing is that it could be regressive. The carbon tax in BC was designed to offset carbon tax payments for low-income households with tax credits. There is mixed evidence on whether these are large enough to completely compensate low-income households (Lee and Sanger, 2009; Beck et al., 2015).
  7. 7. IMPACT OF THE CARBON TAX ON DISTRIBUTION OF HOUSEHOLD INCOME (2) In response to complaints from Northern/Rural British Columbians , a new tax credit was introduced. A modeling study (Beck et al., 2016) suggests that: 1. this tax credit was mostly unnecessary 2. it over-compensated Northern/Rural households 3. it reduced support for the tax in Northern/Rural areas
  8. 8. POLITICAL SUPPORT FOR THE CARBON TAX Polls suggest that the tax was initially met with opposition, but that respondents have become more supportive. More than half of respondents now typically support the tax. Opposition is strongest in older males with medium to low income, living in smaller communities. (Support is strongest in younger females with high income, living in large urban areas). Rivers and Murray, 2015
  9. 9. WHAT HAVE WE LEARNED? British Columbia went through a bold experiment in environmental tax reform. What have we learned? Environmental tax reforms can be effective in addressing environmental problems Modest environmental tax reforms can be implemented with little or no aggregate economic cost There is some evidence of a structural shift in the economy in response to the carbon tax Overall, support for the carbon tax is fairly high, but remains low in certain populations Deep greenhouse gas reductions require a much higher carbon price than currently in place in British Columbia

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