By Dr. Mir F. Ali

The majority of people have accepted that rising concentrations of carbon dioxide (CO2) and other greenhouse gases (GHG) are altering the Earth’s climate. While the amount of damage associated with the warming remains uncertain, there is an appreciation for the risk that it could be catastrophic. One of the techniques to mitigate environmental risk is the concept of a carbon tax. As the B.C. election heats up, with the province’s carbon tax a hot-button issue, it’s worth reviewing how such taxes have worked so far.

A carbon tax is a tax on the carbon content of fossil fuels (coal, oil, gas). The idea of carbon tax is that polluters should pay for the environmental damage that they are responsible for. This is based on the understanding that a carbon tax may encourage polluters to avoid/minimize the amount of carbon emission in the atmosphere by changing their behaviour or help pay for offsetting the carbon credits that other individuals or industries have earned.

In other words, policymakers would levy a fee for each ton of CO2 emitted or for each ton of carbon contained in fossil fuels. The tax would motivate entities to cut back on their emissions if the cost of doing so was less than the cost of paying the tax. As a result, the tax would place an upper limit on the cost of reducing emissions, but the total amount of CO2 that would be emitted in any given year would be uncertain. Therefore, the following three key criteria are considered for articulating and implementing a carbon tax system:

1. The potential to reduce emissions efficiently;
2. To be implemented with relatively low administrative costs; and
3. To create incentives for emission reductions that are considered to be consistent with incentives in other countries.

In Canada, the notion of a carbon tax also has deep-rooted political undertones. Alberta, in particular, sees it as an updated version of the National Energy Program and a direct attack on its way of life. As the county's biggest oil and gas producer, Alberta can't help but be affected by any commodity-wide increase in energy price. A national carbon tax, if it came to that, could have a direct impact on big projects, like in the oil sands, that are pegged to projected demand and tight schedules.

Ontario's long-running Fair Tax Commission in the early 1990s took a hard look at carbon taxes and decided against them, arguing they would distort too many key sectors of the economy, manufacturing and transportation in particular. Proponents had argued that shifting hauling from trucks to rail would represent a large-scale energy savings. But the tax commission concluded the savings would be much more limited and that in today's just-in-time economy such a shift could be counterproductive.

Quebec implemented Canada's first carbon tax in October 2007, collecting just under one cent a litre from petroleum companies in the province, with the expectation to raise about $200 million a year to pay for energy-saving initiatives such as improvements to public transit. The tax amounts to 0.8 cents on every litre of gas sold in Quebec, and 0.9 cents on each litre of diesel fuel.

On July 1, 2008 British Columbia began to phase in a fully revenue-neutral carbon tax with built-in protection for lower income British Columbians. By taxing the burning of fossil fuels such as gasoline, aviation fuel and natural gas, a carbon tax is aimed at reducing their use. In BC, the tax is built into the price for the consumer. All businesses, individuals and visitors to BC, who purchase or use fossil fuel in the province, will pay the carbon tax. Fuel producers and manufacturers of fuel in BC, such as oil and gas companies or coal mines, who use their own fuel in the course of their operations, will also pay the carbon tax on the fuel they use.

The BC carbon tax started at a rate based on $10 per tonne of associated carbon, or carbon-equivalent, emissions and will rise by $5 a year for the next four years, reaching $30 per tonne by 2012. This works out to 2.41 cents per litre for gasoline, rising gradually to 7.24 cents a litre by 2012. For diesel and home heating oil, it works out to 2.76 cents per litre, rising to 8.27 cents over the same five-year period. Overall, the government estimates the carbon tax will bring in revenues of about $1.85 billion over the first three years, all of which will be returned to businesses and individuals.

The BC carbon tax is revenue neutral. Legislation will require a plan to be tabled in the legislature each year, showing how the revenue raised will be returned to taxpayers. All revenue generated by the carbon tax will be returned to individuals and businesses through reductions to other taxes. None of the carbon tax revenue will be used for expenditure programs. The following graph illustrates the total estimated revenue and distribution (click on image to view fully):



A recent article on the subject reported that most economists are skeptical of the merits of a carbon tax but there are notable exceptions. Among them, the internationally acclaimed Jeffrey Sachs, of Columbia University, who has long argued for a global carbon tax, to be designed and administered by the UN so as to keep countries on an even footing.

Sachs says such a tax, of up to 35 cents a gallon in richer countries, would raise $750 billion US for the UN and could be used to eliminate Third World poverty and disease. More recently, he has also argued that a carbon tax would help change destructive environmental behaviour and that it would be welcomed by privately-owned utilities in particular so they can justify clean technology to their profit-demanding shareholders.

It is true that not every country that implemented carbon tax has been a success story. It didn’t help them to decline major emissions as expected in most of these countries. In the case of Norway, the Wall Street Journal reported that GHG emissions have actually risen 15 per cent, and industries deemed vital to the nation’s economy or image were spared the tax or given sweet deals. Though the oil and gas industry has become more eco-friendly, Norwegians are driving more than ever. Norway puts a positive spin on the admitted failure of the tax. The country has seen unprecedented economic growth since 1990, with GDP up 70 per cent. And the government receives almost a third of its funding from taxes on petrodollars. But in a rural nation, even with gas prices around $10 a gallon, there are more cars on the road than ever.

In addition to Norway, Denmark, Finland, The Netherlands, Sweden, Italy, and the U.K. implemented carbon taxes in the 1990s. Monica Prasad, an assistant professor of sociology, in her article "The Politics of Free Markets," noted that the one country in which carbon taxes have led to a large decrease in emissions is Denmark, whose per capita CO2 emissions were nearly 15 per cent lower in 2005 than in 1990. Denmark accomplished this while posting a remarkably strong economic record and without relying on nuclear power. There were two major lessons to be learned from Denmark:

1. Denmark avoids the temptation to maximize the tax revenue by giving the proceeds back to industry, earmarking much of it to subsidize environmental innovation; and
2. Carbon tax worked in Denmark because it was easy for Danish firms to switch to cleaner fuels. Danish policy makers made huge investments in renewable energy and subsidized environmental innovation.

Unfortunately, British Columbia didn’t follow the Denmark model. Instead of giving the proceeds back to industry to encourage environmental innovations, they decided to return the total anticipated tax revenue (Minus operating overheads) back to businesses and individuals.

Furthermore, the government of BC didn’t make any significant investments in renewable energy to subsidize environmental innovations. The general opinion in the province is that the distribution of $395 (borrowed money) in the name of Lower Income Climate Credit - $100 per adult per year and $30 per child per year, rising by 5 per cent in 2009 - was a huge mistake and they feel that that money could have been invested in environmental innovations. Additionally, British Columbians were not impressed with the fact that the government distributed 18,000 cheques to people who shouldn’t have qualified for the credit. They are now spending money as well as time to recollect that money. 

Dr. Mir F. Ali mir@turnerlane.com is a Sustainability Analyst with Turner Lane Development Corporation, a real estate development company with a commitment to build sustainable communities.

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