Party Positions on BC’s Carbon Tax

Carbon taxWith the release today of the NDP’s fiscal plan in advance of the May 14 election here in British Columbia, we are now finally able to assess where the major parties — Liberals, New Democrats, Greens, and Conservatives — stand on the province’s carbon tax. In my opinion, there are four primary questions by which their respective carbon tax proposals are to be judged:

  1. Will the tax be raised?
  2. Will the tax base be expanded?
  3. Will the tax remain revenue neutral?
  4. How will equity concerns be addressed?

This is not to say that these four criteria are the only relevant ones in carbon tax policy. But I believe they are the most important.

First off, the only thing that needs to be said about the Conservative position is that the party opposes the carbon tax and plans to eliminate it in the unlikely event that a Conservative government is formed. A similar policy was adopted by the New Democrats four years ago, which did not end well for them. I can’t see it going any better for the Conservatives. ‘Nuff said.

Raising the Tax

As for the other three parties, let’s start with where they stand on raising the carbon tax. The Liberals — who introduced it back in 2008 at $10 per tonne, raising it incrementally until it reached $30 in 2012 — have now promised to keep the tax frozen at its present rate for five years to allow other jurisdictions a chance to “catch up” to BC’s “leadership.” The NDP’s fiscal plan indicates that the likely next government will be taking roughly the same position. Only the Greens (full disclosure: I’m a party member) are pledging to increase BC’s carbon tax to $50 per tonne and to continue nudging it up from there until it gets the job done.

Expanding the Base

On the subject of the tax base, let’s note that the carbon tax, as currently constituted, applies to only about two-thirds to three-quarters of emissions in the province. Exempt are certain mostly industrial emissions coming from oil, gas, cement, aluminum, and other sectors. The Liberals have announced no plans to change this, while the NDP says it will expand the tax to some areas (such as oil and gas) but not others (such as cement and aluminum), and the Greens promise to tax all greenhouse gas emitting industries.

Revenue Neutrality

The issue of revenue neutrality is one which I think is not nearly as important as it is commonly assumed to be. So, counterintuitively, here is a lengthy digression on the subject:

Currently, the carbon tax is required by legislation to be revenue neutral (it’s actually revenue negative, but who’s counting?), with every dollar coming in going back out in the form of tax credits and cuts to personal and corporate income taxes. The rationale is something along the lines that if people are aware that their tax burden will be no greater (on average) with a carbon tax than without, then they will be more likely to support it because, after all, everybody hates taxes. What the Liberal government did not count on, however, was that many would not be convinced of the carbon tax’s effectiveness unless they saw its revenue being put to productive use. There is a certain poetic justice in the idea of a tax on greenhouse gas emissions being used to pay for public transit and other eco-friendly projects.

Political optics aside, the best argument for revenue neutrality is that the base for a carbon tax (i.e. greenhouse gas emissions) should be declining over time, assuming that the tax is doing what it was designed to do. Such an unstable revenue source will not provide reliable funding for important government services — green or otherwise — so it is better not to depend on carbon taxes for revenue at all.

On the other side, opponents of revenue neutrality might acknowledge that perhaps carbon taxes are not ideal sources of government funding, but we are not exactly spoiled for choice. Not nearly enough is being invested in green initiatives at present, so why not exploit whatever revenue we happen to have at our disposal, regardless of how imperfect it might be?

Personally, I consider both these arguments to be about equally convincing (or unconvincing) and find myself in the rare position of being pretty much neutral on revenue neutrality. I support carbon taxation and I support green government spending, but what do I care whether or not funding for the latter comes strictly from the former? I could simply go either way on the issue.

BC’s political parties don’t quite see things the same way. The Liberals seem to be holding the line in favour of revenue neutrality (even if their latest budget has altered the tax cuts which were originally part of the revenue neutral deal, but never mind), whereas the New Democrats have long supported investing carbon tax revenue in public transit and other such projects. The Greens, officially, are on the side of revenue neutrality, but they have indicated that they might be open to compromise.

Equity

Finally, there is the question of equity. Carbon taxes on their own, like all consumption taxes, are well known for being regressive, meaning that on average the poor have to pay a larger percentage of their incomes (although lower absolute amounts) than the rich. For this reason, most fair carbon tax proposals include some kind of mechanism to compensate for this regressive element. BC’s carbon tax includes a low-income tax credit meant to do just that, but unfortunately, a study by the Canadian Centre for Policy Alternatives shows that the current program does not go nearly far enough and that our carbon tax is still, on balance, regressive.

I have not heard the Liberals or the NDP say anything about changing this. The Greens meanwhile have promised to “exempt” (whatever that means) people below the low-income cut-off from the carbon tax. The lack of detail on offer from parties across the spectrum suggests to me that the issue of equity is not being treated as seriously by opinion makers as it deserves to be.

Final Assessment

  • Green Party: B+
  • New Democratic Party: C+
  • Liberal Party: C-
  • Conservative Party: F (orĀ I for Incomplete)

Note, these grades reflect the parties’ carbon tax proposals only. Carbon taxation is not the sole dimension of a comprehensive climate policy, but it is an incredibly important piece of the puzzle. I find it encouraging to see three of the four major provincial parties openly embracing an idea which is still considered taboo on the federal level. That being said, it would be even more encouraging if they would step up their game. Climate change is the key challenge of our generation, and a well-designed, progressive carbon tax ought to be considered part of any reasonable set of solutions.

So hop to it, BC parties! The stakes are high and time is short.

Carrots and Sticks: How to Fund Public Transit

TransitIf we as a planet are going to avoid passing over the two-degree threshold to runaway climate change, we are going to have to start rationing greenhouse gas emissions. Efficiency gains in transportation will inevitably need to be part of that project. Put another way, emissions per person per kilometre will have to go down, which means a dramatic expansion in public transit infrastructure.

Unfortunately, as is so often the case in the unchanging climate of public sector cost-cutting, the chief obstacle is the issue of funding. But noble attempts to solve this quandary abound. Here in the Metro Vancouver region, the Mayors’ Council on Regional Transportation, one of the governing bodies of TransLink, has written BC Transportation Minister Mary Polak with a series of proposals.

Of the five options put forward, the one generating the most news coverage is the suggestion of a 0.5 percent regional sales tax. I do not usually like sales taxes, as they are notoriously regressive, but considering the relatively small size of the tax, the estimated yield of $250 million per year, and the undeniable progressiveness of what it would go to fund, I have to admit the idea is tempting.

Its major problem, or at least limitation, is the fact that due to the urgency of the fight against climate change, the best policies are those which provide not just carrots, but also sticks. We cannot afford simply to make public transit (not to mention cycling and walking) easier and then idly contemplate our achievements. Driving must be made more costly as well.

A regional sales tax fails to consider this angle, as does one of the other five mayors’ proposals, leveraging land value along transit corridors, netting $30 million annually. The other three suggestions, however, may be onto something.

These include a vehicle registration fee worth $50 million per year and some kind of long-term road pricing scheme of undetermined (but potentially high) value. In principle, these are much better ideas, for the carrot-and-stick reasons outlined above, but they are still not perfect. While they would impose costs on drivers, these costs would not vary by fuel efficiency or distance, or if they did, would do so rather imprecisely.

No, the best of the five proposals put forward by the Mayors’ Council is a regional $5-per-tonne carbon tax, expected to generate an annual $90 million in revenue. Such a tax would provide funding for public transit while at the same time (in concert with our provincial carbon tax) discouraging greenhouse gas emissions.

Of course, even this idea comes with some downsides. Carbon taxes on their own, like sales taxes, are regressive, which is why, as I have written before, all the best carbon tax proposals offer to return a significant portion of the revenue generated to low- and middle-income households. The mayors’ letter makes no mention of such a corrective mechanism, perhaps because it would diminish the amount of revenue available for transit.

But while I would prefer a carbon tax that is as progressively designed as possible, part of me is willing to look past the mayors’ apparent oversight. After all, public transit — the project which the carbon tax is meant to fund — tends to benefit those with low incomes. I do not mean to claim that all transit users are poor or that all car owners are rich; the real world is never so simple. But one of the impacts of a carbon tax of the kind suggested by the Mayors’ Council would be a shift in wealth, on average, from the slightly-more-well-off to the slightly-less-well-off.

In other words, what we have here — or at least can have — is something that is both good for the poor and good for the environment. In my own peculiar little red-green world, this is known as “two birds with one stone.”

So I hope that Mary Polak will respond to the mayors’ letter with an open mind (or more realistically, that her successor will do so after the May election). And I hope that TransLink and the various municipal governments of Metro Vancouver take a close look at the idea of a regional carbon tax. Perhaps it can be used in combination with some of the other options put forward. Perhaps decision makers will agree to raise the tax beyond $5 per tonne or include some kind of additional compensation for people with low incomes.

In any case, increased funding to public transit is urgently important — and so is a reduction in fares.

The Point of Taxes

Taxes

What follows is my submission to BC’s Select Standing Committee on Finance and Government Services. Any other British Columbians interested in influencing next year’s budget have until October 18 to do so by clicking here.

Taxation has three major purposes: raising government revenue, redistributing wealth, and discouraging “bads.”

The first is the most obvious. Taxes — “the price we pay for civilization,” in the words of Oliver Wendell Holmes Jr. — provide for such crucially important public goods as health care, education, welfare, parks, and transportation infrastructure. However, cuts that have taken place for more than a decade here in BC have left us unable to adequately deal with the urgent problems we now face as a society, like climate change, child poverty, and rising health costs. The only feasible solution — an unpopular solution to be sure, but a necessary one — is to raise taxes.

This directive leads to two reasonable follow-up questions: which taxes, and on whom? To answer, we must consider taxation’s other two purposes.

In order to effectively achieve their redistributive aim, taxes must be progressive, that is, they must apply at a higher rate to the rich than to the poor. In BC, however, according to a report by the Canadian Centre for Policy Alternatives (CCPA), the rich pay a smaller portion of their incomes in overall taxes than the poor, as a result of the government’s increasing reliance on regressive measures like sales taxes and MSP premiums. In order to solve this problem, corporate and upper-tier income taxes must be increased dramatically. Even middle-tier income taxes will probably have to be increased moderately. And while it may not be practical to eliminate regressive taxes entirely (in the short term anyway), they can at least be lowered — provided that revenue is recouped via a progressive tax shift.

Finally, taxing “bads” rather than “goods.” Taxation can be used to introduce socially beneficial incentives, one example of which is BC’s carbon tax. There are two major problems with our carbon tax, however (as well as several other minor problems). First, it is not nearly high enough to effectively get us where we need to go in terms of greenhouse gas emissions. And second, according to another CCPA report, it is regressive, thus violating the redistributive criterion for good tax policy. Fortunately, both problems are easy to fix. All we need to do is to continue raising the carbon tax rate year after year — probably quite drastically. And the CCPA recommends devoting fully one half of carbon tax revenue to a tax credit for people with low and moderate incomes (considerably more than what we currently do), so that on average, they would actually gain from carbon taxation.

I urge you to deal with taxes in the 2013 budget in a way that is mindful of the three purposes I have outlined. Over the long term, I agree with the CCPA that the government must set up a Fair Tax Commission to gauge the public’s true priorities on how and why we raise revenue. Only then will we as a province gain momentum on the road to equity, sustainability, and the common good.

A Taxing Debate

Tax

The gloves came off yesterday on Parliament’s first day back after its summer break, with Stephen Harper dealing the NDP what he evidently considers a fatal insult. According to the synchronized taunts of the Prime Minister and his Conservative minions, Her Majesty’s Loyal Opposition wants nothing more than to impose upon our struggling economy — brace yourselves, gentle Canadians — a carbon tax!

Boo?

Thomas Mulcair and his New Democrats played their part flawlessly in Harper’s script by denying the government’s charge, pointing out they actually prefer another form of carbon pricing known as cap-and-trade. But, according to the impeccable logic of a Conservative Party “fact check,” “A ‘price on carbon’ is a tax on carbon. That makes it a carbon tax.” Never mind the commonly reported inconvenience that as recently as 2008, the Conservatives too favoured a cap-and-trade system.

So what exactly is the difference, if any, between these two carbon pricing mechanisms? They both seek to limit carbon dioxide emissions, and they both require emitters to pay for the privilege of emitting. The difference is in the order. With a carbon tax, government starts by setting a price, and in response to this economic incentive, polluters reduce their emissions. By contrast, under cap-and-trade, government starts by setting a cap, a maximum level of aggregate emissions, but polluters are free to buy and sell their emission permits amongst themselves for whatever price the market demands.

Both systems have their advantages. Cap-and-trade has the benefit of certainty. After all, the goal of all climate policy is to reduce carbon emissions — something which cap-and-trade does directly by dictating what the overall level of emissions must be, thereby eliminating the guesswork involved in setting a carbon tax. However, carbon taxes have the strength of being generally more broad-based than cap-and-trade. For logistical reasons, it is difficult to set up a cap-and-trade system among any but the largest of large polluters, meaning that most emissions will probably not be covered. By contrast, there is nothing easier than levying a tax. Carbon taxes therefore have at least the potential of applying to 100 percent of emissions.

In my opinion, the advantages of carbon taxation are stronger than those of cap-and-trade, but the devil is in the details. I would take a well-designed cap-and-trade system any day over a poorly designed carbon tax. The effectiveness of each policy depends on how high the tax is set, or how low the cap.

Falling right into Harper’s trap yesterday, Mulcair claimed he preferred cap-and-trade because carbon taxes are “regressive.” This is a common myth. The truth is that all measures to combat climate change — whether they take the form of a tax, emissions trading, or traditional command-and-control regulation — result in higher energy prices at the retail level. No matter who pays directly, businesses will always pass on as much of the cost to consumers as they can possibly get away with. The solution does not lie in making false promises that only “big polluters” will have to pay and no one else. Rather, it lies in offering tax credits or other forms of compensation to people with low and moderate incomes. I have written in the past about progressive carbon tax proposals which use the revenue generated to ensure that the poor are better off than they would be in the absence of such a tax. It is no less incumbent upon cap-and-trade advocates to design their plans in such a way that the burdens are distributed justly.

In conclusion, despite the similarities, cap-and-trade is not a carbon tax, and the Conservatives are wrong in their boastful chorus of accusations. Nevertheless, New Democrats are advised to grow a pair and not let Harper define the debate. We all need to recognize that a well-designed, progressive carbon tax could do the planet a hell of a lot of good.

An Open Letter to Kevin Falcon

Dinner with Kevin Falcon

Kevin Falcon

Minister of Finance

Government of British Columbia

Dear Mr. Falcon,

During your budget speech yesterday, you announced that BC’s carbon tax will be frozen, and its place in our economy reexamined, after its final scheduled increase later this year. Forgive me if I am being presumptuous, but given the tepid support for environmental measures sometimes demonstrated by segments of your government, I fear that the future of the carbon tax may be in jeopardy.

May I suggest instead that you use the opportunity to make it better? This goal, should you choose to pursue it, can be measured by two vital criteria: effectiveness and fairness.

In order to be effective, a carbon tax, rather than being eliminated or frozen at $30 per tonne of carbon dioxide equivalent, must be increased. Quite drastically in fact. Having hardly made a dent in BC’s emissions at present levels, the tax should probably rise to somewhere in the neighbourhood of $100 to $200 per tonne at the very least. Moreover, it should be expanded to cover the roughly 25 percent of emissions (such as natural gas flaring) not currently included.

As for fairness, this can be achieved by compensating — overcompensating even — for any negative impact on those with low incomes. All else being equal, consumption taxes tend to be regressive — that is, they tend to cost the poor a higher portion of their incomes than the rich. According to research done by Marc Lee of the Canadian Centre for Policy Alternatives, BC’s carbon tax does not adequately address this concern. He suggests that fully one-half of carbon tax revenue be channelled into a tax credit for low- and middle-income households (with the remainder going to fund public transit and other environmentally friendly investments).

Another approach is the “fee and dividend” system advocated by climate scientist James Hansen among others, according to which all revenue would be returned to the population on an equal per capita basis. The benefit of this kind of carbon tax is that while the poor would individually pay the least in “fees” (in absolute terms, not as a portion of their incomes) because they emit the least carbon, they would get back just as much as the rich in “dividends.” In other words, this system has a built-in mechanism to make sure that most of those with low incomes come out ahead.

So please consider preserving and strengthening BC’s carbon tax. If you are concerned about its apparent revenue negativity in these tough fiscal times (another drawback pointed out by Marc Lee), a few tweaks could easily turn it into a money maker. What is a tax, after all, if not something that raises revenue? I personally would not miss the cuts to corporate and upper-bracket income taxes that were designed to offset costs to taxpayers, and neither would the majority of British Columbians who do not benefit from them.

The problem of climate change is one whose urgency is growing by the year. Now is not the time to get caught up in some fabricated tax revolt. Now is the time to get serious.

Sincerely,

David Taub Bancroft