Where’s the tax in BC’s carbon tax?

British Columbia’s carbon tax has been getting some high praise lately. A recent article in the Atlantic called it “the crown jewel of North American climate policy”. Such assessments need some tempering. BC’s carbon tax can tell us important things about the limits of fiscal policy today, which in turn questions the potential it has for fostering significant environmental change.

Tales of the tax’s effectiveness focus on its environmental impacts. Almost six years since its introduction, it is indisputable that the carbon tax has had some impact on resource use and emissions. This is clearly a good thing. There is debate about the extent of this impact and where it is concentrated but it’s there – see these charts.

The carbon tax is presented as not being as problematic as other “market-friendly, eco-friendly” measures such as cap-and-trade. These end up being largely corporate giveaways – new sources of commodification and profit. BC’s carbon tax has been hailed as a policy that rather than giving money back to corporations brings revenue back to the people.

Yet as opposed to those who make the carbon tax out to be an unqualified success, I think any hurrah-optimism needs to be seriously qualified.

Indeed, as a tax rather than simply an environmental measure, BC’s carbon tax demonstrates the poverty of tax policy today. It is an expression of the dogma of give-and-take. The economist’s term for this is “revenue neutrality”: any revenue flowing into government coffers from a new tax should be accounted for by corresponding tax cuts elsewhere.

However, as many, including myself, have argued, we currently face a growing crisis in government revenue. As a percentage of GDP, government revenues, both federally and provincially, have been mostly steadily declining for the past three decades and are near record lows. Revenue neutrality at best serves to perpetuate this status quo, both in fact and in giving it further ideological support.

Revenue-neutrality makes it easy to overestimate the tax cuts necessary to compensate for the new tax revenue. At least in the case of BC’s carbon tax, the Ministry of Finance has been erring on the side of caution since the tax was instituted and the revenue gap between the tax cuts that are meant to offset the carbon tax is only projected to grow. Furthermore, the percentage of the tax cuts that has been going to corporations has also been steadily rising.

Figure 1. Revenues from BC’s carbon tax and resulting tax cuts, current and projected. Source: BC Budget 2008-14.
Figure 1. Revenues from BC’s carbon tax and resulting tax cuts, current and projected. Source: BC Budget 2008-14.

More pervasively, the focus on revenue-neutrality undermines the notion that the carbon tax is bringing money back to the people. Rather than the focus being on taxes as a redistributive mechanism that has the potential to return some economic power to the poor and working majority, the focus is on taxes as a means to manage market imperfections. Technocracy is bolstered over democracy.

Seen from the perspective of ideology, revenue-neutrality aligns the carbon tax with other more clearly market-focused measures. BC’s carbon tax works in no small part because it doesn’t question the broader neoliberal framework of smaller government and tax reduction. It is all the more so problematic because it claims to be redistributive.

While funnelling some of the revenue generated by the carbon tax into income credits that offset its proportionately higher impact on the poor and the working class is redistributive to an extent, the offsets are currently not large enough and the tax is increasingly regressive. Since it was instituted in 2008, the carbon tax has tripled from $10 to $30 per tonne, while the low-income tax credit has grown by a fraction of that – from $100 to $115.40. The end result is a highly regressive tax where those in the bottom two income quintiles as clear losers and those in the top two quintiles clear gainers.

Consumption taxes like the carbon tax are highly regressive to start with and thus fit well into the trend to replace progressive income and corporate taxes with more regressive measures and user fees.

Fundamentally, there is absolutely no a priori need for revenue-neutrality, in particular at a time when revenues are falling anyhow. Imagine using some of the revenues from the carbon tax to reduce or eliminate transit fares, build new transit and other green infrastructure and so on. Cutting taxes across the board on individuals as well as on corporations (whose tax cuts end up going to the rich who own the majority of corporate stock) under the auspices of fighting climate change is problematic.

The current design of the carbon tax ultimately undermines its main purpose: reducing emissions and slowing climate change. It promotes technocratic solutions as opposed to deeper systemic changes. It entrenches current power dynamics that leave the majority that is feeling and will increasingly feel the effects of climate change with less of a voice. It promotes the view that the problem lies with particular markets rather than more generally with capitalist markets that feed on growth and intensive resource use.

Many mainstream environmental organizations have pointed out that the rate of BC’s carbon tax needs to be higher if the province is to seriously try to meet its greenhouse gas reduction commitments. British Columbia already has some of the lowest personal and corporate tax rates in the country. A higher tax is politically less and less feasible when those best placed to speak to the dangers of climate change are just fighting to get by on reduced public services and stagnant standards of living.

Between green-coloured optimism and debilitating catastrophism of impending ecological disaster lies the hard work of building solidarity and economic power that will allow for meaningful environmental change. Until it takes taxation as revenue-generation and power redistribution seriously, BC’s carbon tax in its current form is no model for such change.

9 thoughts on “Where’s the tax in BC’s carbon tax?

  1. As you point out, revenue neutrality is not a feature of the carbon tax as a policy. You can think of it as the BC government introducing a package of tax changes, including a carbon tax and some tax cuts. So just because we think the tax cuts shouldn’t have been a part of the package, it doesn’t mean the carbon tax is not a good model. Just like we can’t conclude that income taxes are a bad model because loopholes have been introduced or rates were cut. I think the model is good, but the BC implementation could have been better.

  2. Good post. I have a more recent study on BC’s carbon tax and other carbon pricing that would be of interest to you, Michal: https://www.policyalternatives.ca/publications/reports/fair-and-effective-carbon-pricing

    In public opinion research I’ve seen people reject revenue neutrality — don’t trust the government on it, and don’t “get it” philosophically. People may not like paying taxes but when they do they want to see that money put to work. So we suggest taking half the revenues for a souped up credit (with broader coverage) and the other half for useful climate action investments like transit.

  3. Thanks Iglika and Marc! Glad to see Political Eh-conomy fomenting splits in the CCPA…I kid of course! 😉

    On a serious note, my argument is that the current implementation has deeper, ideologically-based sources that go a fair ways beyond minor tinkering. While revenue-neutrality is not a necessary component of any tax, the current carbon tax model makes it out to be just that. BC budget documents often refer to it as the “revenue-neutral carbon tax” rather than just “carbon tax”. These are just words on paper of course but they are suggestive. Revenue neutrality is more than a loophole and needs to tackled head on.

    Looking at the broader context of the carbon tax allows us to realistically face up to the difficulties in crafting effective climate policy, whether tax-based or otherwise. The same mechanisms that have taken the teeth out of even this very modest carbon tax are the same ones that are making it more difficult to agitate for different fiscal policy more generally. There is a feedback mechanism that leads people to come to expect less and to have to hustle more just to get by.

    I think the surveys Marc refers to are interesting in this context and a way into the vicious circle. There is space to make a bolder statement against revenue-neutrality and break away from the technocratic conversation. Speak more honestly about public services, etc but this requires that we reorient ourselves and reframe the debate. The right has been successful at precisely this but these surveys indicate where this success is not total.

  4. I prefer to use the policy of government regulation than market forces that a carbon tax is much more than just semantics- it is actually quite a massive difference. In any social democracy that I do believe maybe somekind of carbon tax could work- even within that space- one would have to be extremely delicate with a carbon tax to ensure it is not regressive. When one starts stealing food from the fridge to pay for carbon- it is a problem in my books- as someone else will be driving around in large suv’s and oblivious to any problems with climate. This means there is no such thing as a revenue neutral carbon tax- there are massive differences in the opportunity costs of having disposable income and cash flow. So for the bottom end – I just do not see a carbon tax being neutral no matter how well a policy is implemented- it affects us all differently and essentially the behaviour modification is asymmetrically allocated.

    Change the source of polluters is what I say and ensure the monopolies do not pass the cost down- targeted taxes at polluters would do it with enforcement. We have to somehow ensure that externalities as they currently exist are internalized but a carbon tax is not the way I would endorse. It is not that difficult to figure out that fossil fuels are the problem- and alternative energy is the solution- and carbon taxes have not shown in theory or practice that they have the capacity to deliver change in the time frame one wants- but making carbon the enemy of all people is an unequal means of treating the problem- a dollar is just not a dollar for all- and minimizing painful transition such as that what a carbon tax induces is not the way.

    Market forces will only allow the rich and the monopolies the status quo option they just tack it onto the cost of doing business.

    The BC tax was so small that I do not think it had any impact on anything- to small to make a difference for anybody- not sure where it is at now, but when it was implemented it was so tiny that essentially debating about doing something else.

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