A Model Carbon Tax

Canada once again leads the way – this time on how a carbon tax can fight climate change while growing the economy.

This fall, voters in Washington State could become the first in the country to pass a carbon tax. If approved, Initiative 732 (I-732) would levy a $25 per ton tax on carbon emissions from fossil fuel, which would in turn fund a one percent cut in sales taxes as well as rebates for lower-income households.

Many economists agree that one of the most efficient ways to reduce the carbon emissions that contribute to climate change is to tax it.  But as appealing as it might be in theory, could a carbon tax work in practice?

In the Canadian province of British Columbia (BC), the answer seems to be “yes.” In fact, BC’s carbon tax – levied in 2008 – might be an ideal model for how a carbon tax could help to combat climate change without damaging economic growth.

BC’s carbon tax started at C$10 per metric ton, and has been $C30 per metric ton (about $23 in U.S. money) since 2012. In real-world impacts, the effect of this tax has been to raise the price of gasoline by 6.67 Canadian cents per liter (roughly 25 U.S. cents per gallon).

The tax has had undeniably significant effects on the province’s consumption of fossil fuels and, as a consequence, its carbon emissions. Stewart Elgie, a law and economics professor at the University of Ottawa, calculates that petroleum use per capita fell more than 16% in BC in the first five years of the carbon tax, while it rose 3% in the rest of Canada during the same period. “To put that accomplishment in perspective,” Elgie writes,  “Canada’s Tokyo target [in global climate change accords] was a 6 percent reduction in 20 years.”

As a result, according to researchers Alan Durning and Yoram Bauman, energy-related greenhouse gas emissions per capita in BC also dropped by 6% from 2007 to 2011.  A significant chunk of this decline could be attributed to lower consumption of gasoline and diesel; in 2008, transportation produced 36% of BC’s greenhouse gas emissions, the largest emissions source in the province.

BC’s carbon tax appears to be an economic home run as well. BC’s tax is required to be revenue-neutral, which means that carbon tax revenues must be used to offset other taxes.  Consequently, BC’s corporate tax rate is currently the lowest of any Canadian province. The revenue also finances BC’s Low Income Climate Action Tax Credit, which gives quarterly payments to households earning less than C$38,193 (about $29,000 U.S.) to help offset the tax’s regressivity.  (As with any consumption or sales tax, the burden tends to fall more heavily on lower-income households, who spend a larger share of their income on consumption.) This year, a family of four gets payments totaling C$1,200 (about $900 U.S.) over the course of the year.

Furthermore, the carbon tax has not hurt BC’s overall economy. For the last eight years, unemployment in BC has been consistently lower than the Canadian average. And the Conference Board of Canada, a non-profit research organization, expects BC’s economy to grow by 3% in each of the next two years – twice as fast as Canada as a whole. These factors, combined with the province’s reduced levels of petroleum use and carbon emissions, indicate that a carbon tax can indeed help the environment without hindering the economy.

In fact, many in the BC business community want to raise the carbon tax still further. In March 2016, more than 160 businesses sent an open letter to BC’s premier, Christy Clark, calling for the tax to rise by another C$50 per ton over five years. They argued that a higher carbon tax, combined with incentives to invest in clean energy technologies, will boost the province’s economy while making its businesses “better partners in reducing carbon pollution.” Other experts also support increasing BC’s carbon tax, in order to expand the tax reductions for low-income households.

Washington State’s proposed carbon tax adopts much of the same structure as the BC tax and therefore could confer similar benefits. Revenues from the tax, for example, would be used to cut the state’s sales tax, and to create a Working Families Rebate, based on the federal Earned Income Tax Credit (EITC), to boost the incomes of low-income households. While some say this rebate doesn’t do enough, it would be still be an important step toward making Washington’s tax system, one of the most regressive in the country, fairer to low-income households.

As intractable as the problem of climate change seems to be, the example set by British Columbia shows that progress is possible. This fall, Washington State could help pave the way for broader change in the United States as well.

Michael Purzycki

Michael Purzycki is a public policy researcher and writer based in Somerset, New Jersey.