British Columbia rethinking carbon tax plan

British Columbia's greenhouse British Columbians are feeling a little lonely in their bid to save the planet. Five years ago, the Canadian province enacted a bold set of climate change policies designed to reduce its greenhouse gas (GHG) emissions dramatically. At the time, B.C. lawmakers assumed the United States would follow suit with federal climate change policy. To the south and east, a coalition of seven U.S. states and four Canadian provinces were establishing the Western Climate Initiative (WCI), with a regional carbon cap-and-trade system.
The home of the Spirit Bear, which already has more land conservation area than any other Canadian province, was leading the way in protecting the atmosphere.
Then, U.S. progress on federal climate policy skidded to a halt. And the WCI began to falter. Six states withdrew last November, leaving just California and four Canadian provinces still participating. With its general election one year away, the government of British Columbia, headed by the Liberal Party (known to be more conservative than its rival, the New Democratic Party), is now questioning the future of the climate initiatives it enacted.
"I think it is safe to say that we expected more jurisdictions to be coming up and joining us in this kind of public policy," said Terry Lake, British Columbia's minister of the environment, in an interview. "That hasn't happened."
Front and center in the debate is the province's carbon tax, which has been stepped up every year since 2008, with the final legislated increase set for this July. Carbon tax proponents say that to meet its ambitious targets for GHG emissions reductions by 2020, British Columbia will need to increase the tax dramatically.
But sectors of industry that rely heavily on the use of fossil fuels—from cement to agriculture—say the tax puts them at a competitive disadvantage. Seen by many as a sign of its weakening commitment, the government recently called for a comprehensive review of the carbon tax to consider constituent concerns.
"This is a good time to pause and examine how the carbon tax is affecting our economic competitiveness," said B.C. Finance Minister Kevin Falcon, in a recent budget speech. "To that end, we will carry out a comprehensive review, examining the tax's impact—both positive and negative—on every economic sector."
An Ambitious Start
In 2007, B.C.'s then-premier, Gordon Campbell, led the way to establishing a Climate Action Plan that included not only the carbon tax, but also a commitment to carbon neutrality for all public institutions and participation in the WCI. The plan set ambitious targets for B.C.'s GHG emissions reductions—reducing them by 33 percent from 2007 levels (68 Megatons of carbon dioxide equivalent or CO2e) by 2020, and 80 percent by 2050.
Because British Columbia gets more than 80 percent of its power from carbon-free hydroelectricity (instead of a fossil fuel like coal), its GHG emissions are already relatively low, accounting for just 9 percent of Canada's emissions. Transportation accounts for the largest share, followed by the province's rapidly growing oil and gas industry.
The carbon tax went into effect in July 2008 at a rate of $10 (U.S. $10.13) per ton of CO2e. It has risen by $5 per ton per year and will reach $30 per ton this July. It covers all fossil fuels burned in the province, accounting for an estimated 77 percent of British Columbia's domestic GHG emissions, according to the government.
B.C.'s remaining 23 percent of emissions, which are exempt from the carbon tax, come from non-energy agricultural uses, non-combustion industrial process emissions, and fugitive emissions from coal, oil, and gas extraction.
While B.C.'s motorists pay more in fuel taxes than drivers in other Canadian provinces, the difference is a matter of a few cents per liter. Whether this has made a difference in fuel consumption is a matter of debate. Environment Minister Lake said that gasoline consumption has decreased by three percent in the province because of the carbon tax.
But Marc Lee, senior economist at the Canadian Center for Policy Alternatives in Vancouver, said the carbon tax is currently too low to influence people's behavior. "The carbon tax is currently about 6 cents per liter of gasoline and when it first came on in the middle of 2008 it was 2.3 cents," he said. "If someone can argue that that's going to drive a 3 percent reduction in fuel consumption I think that's beyond the pale."
Lee notes that the price of gasoline at the pump in Vancouver can swing 10 to 12 cents every week due to the usual roiling market, effectively swamping any impact of the carbon tax. "It is also true that in Canada we have higher fuel taxes in general, federal and provincial, irrespective of the carbon tax," he says. "I think all of those things lead to less driving per capita . . . I think hanging any of that on the carbon tax is probably a stretch."
Tax Breaks Win Out
Consumers and businesses receive tax breaks and credits to offset the price of the carbon tax, in a government effort to make the carbon tax "revenue neutral." In practice, the tax has been revenue negative, with the value of the tax cuts and credits exceeding the carbon tax receipts. In 2011, the losses amounted to $192 million (U.S. $194.6 million)—with $1.15 billion in tax cuts and credits swamping the $960 million in tax revenue. Future increases in the carbon tax could close this gap, said Lake.
The early government modeling on the carbon tax suggested that the rate increases planned through this year would reduce British Columbia's emissions by 3 million tons, or about 4 percent relative to business-as-usual (BAU) in 2020. But to reach the targeted goal of a one-third reduction at 2007 levels, the tax eventually would have to go up further, because it would need to generate a reduction relative to BAU of 40 million tons, according to a Canadian Centre for Policy Alternatives report, Fair and Effective Carbon Pricing: Lessons from BC.
The most recent government figures show a 2.3 percent decrease from 2008 to 2009 in overall GHG emissions in British Columbia, from 69.2 Mt to 66.9 Mt CO2e. But Lake notes that the economic recession was likely a factor. "Reduced economic activity usually results in reduced greenhouse gases," he said. The government plans to release emissions figures from 2010 sometime this year.
To reach the 2020 targeted goal, Marc Lee argues in favor of a steep hike in the carbon tax. "I actually think we should be driving the carbon tax up to about [Canadian] $200 per ton by 2020, which would essentially close the gap between prices here and what you pay typically in Europe," he said.
But some industries argue that any increases in the carbon tax will put them at a competitive disadvantage. "The problem for B.C. is that no other provinces or U.S. states have chosen to follow the same path since B.C.  instituted its carbon tax in 2008," said Jock Finlayson, executive vice president of the Business Council of B.C.  in an email. "So while the 'cost' of carbon is rising in B.C., it is not rising in tandem in our principal competing jurisdictions."
Michael Sweeney, president of the Cement Association of Canada testified last September to the Select Standing Committee on Finance and Government that the carbon tax will cost his industry more than $20 million (U.S. $20.7 million) by July 1, 2012.
Since the carbon tax was instituted in 2008, he told the committee, imports of cement have risen from 4 percent to 23 percent of market share, slicing into the share produced within the province.
The agriculture industry, another energy-intensive sector, has also expressed concern about maintaining competitiveness in a global market. In April, the government awarded a one-time $7.6 million grant to the province's greenhouse vegetable and flower growers to compensate for the costs of the carbon tax on natural gas and propane consumption based on fuel used in 2011. In addition, British Columbia Finance Minister Kevin Falcon said the government will "pay particular attention to agriculture," in its upcoming review.
But in deciding the future of its climate change efforts as the 2013 election nears, British Columbia's leaders must walk a tightrope between industry interests and popular sentiment. Polling last year by the Pembina Institute showed that 70 percent of B.C. residents wanted the province to continue showing leadership on climate change without waiting for other jurisdictions to catch up.