Far from being a problem, new carbon taxes and tariffs could bring jobs home to a cleaner, greener economy

By Cheryl Slusarchuk

Public opinion on carbon taxes in Canada currently ranges from flat opposition to strong approval. In particular, there is a growing concern that carbon taxes, together with cap-and-trade systems, could lead to a further loss of North American jobs to developing countries, where labour and energy costs are much cheaper.

Coming Home
These concerns about the offshoring impact of carbon pricing were recently addressed by CIBC lead economist Jeff Rubin in his report, Coming Home. Rubin predicts that within a few years of introducing a domestic carbon price - either through a tax or cap-and-trade mechanism - carbon tariffs will be imposed on importing countries that do not have a carbon price. This imposition of carbon tariffs would level the playing field and result in manufacturing jobs "coming home."

Rubin’s scenario starts from the proposition that once developed countries start taxing their own carbon emissions, their tolerance for those who do not will quickly fade, resulting in a carbon tariff for imported goods. Further, with crude oil around US$100 per barrel and carbon emissions in the process of being taxed and regulated, competitiveness will change, and energy costs and their carbon trail - not just labour costs - will become a key cost driver for manufacturing and machinery industries.

To give a sense of the size of the energy and emission difference: North America’s energy efficiency is about 30 per cent higher than China’s, and its energy mix is much less coal-intensive than China’s. Last year, the carbon emissions on imports from China to the U.S. were over 1 billion tonnes. If those goods had been manufactured in North America, the carbon emissions would have been half that value. If crude oil is at US$100 per barrel and carbon is priced at $30/tonne, the resulting cost savings from using less energy and a reduced carbon trail on over 500 million tonnes is significant - and becomes relevant in comparison with the cheaper labour advantage.

BC’s consumption-based carbon tax
While many provincial governments are in the process of considering a carbon tax or cap-and-trade mechanisms, B.C. recently introduced a broad-based revenue-neutral carbon tax as one component of its 2008 Budget. A majority of B.C. residents support the tax, according to recent polls, and criticism of it has been surprisingly muted. The Vancouver Board of Trade called it "smart" and gave the Budget an "A" grade.

The key question is, "How did the BC government introduce a new tax without incurring a political backlash?" The answer is two-fold: first, the tax is revenue neutral; and second, it starts low and then gradually moves up to a per tonne cost as carbon markets more fully develop.

The carbon tax is revenue neutral because every dollar raised from the carbon tax must be used for the reduction of personal and corporate income tax. The B.C. government has committed to include this mandate in the legislation so that neither the current nor future governments will be able to give in to the temptation of using the carbon tax money for special projects or expenses.

This approach of taxing carbon-intensive activities while increasing the amount of money in the economy and in the hands of businesses and consumers reflects the underlying strategy of the B.C. government of dealing with global environmental issues while developing the local economy. When addressing these issues in the Budget Speech, Finance Minister Carole Taylor emphasized the government’s plan to twin economic development and innovation.

Province-specific approaches
The carbon tax is expected to generate about $1.85 billion in the first three years, and all of that will be returned to businesses and individuals in reduced income tax. General corporate income tax will be reduced from 12 per cent to 11 per cent, with small business corporate income tax reduced from 4.5per cent to 3.5 per cent both from July 1, 2008. Personal income taxes on the two lowest tax rates will be reduced by two per cent in 2008 and five per cent in 2009.

Starting July 1, 2008, the price for carbon will be $10 per tonne and will rise $5 per tonne for the following four years. This means that in the first year, gasoline prices will increase by $.0241/litre, and diesel by $.0276/litre. Purchase or use of biofuels such as biodeisel and ethanol are exempted from the carbon tax. B.C.’s carbon tax is similar to a consumption tax as it is payable by the end user at the point of purchase or use.

B.C.’s carbon tax is only one of a variety of possible approaches, depending on the province’s carbon characteristics and view on the role of government. For example, Quebec introduced a form of carbon tax last year that supports developing green technology by collecting just under one cent a litre from petroleum companies, a move that raises about $200 million a year. What may work in B.C. may not work in other provinces, of course. In Alberta, for example, the oil sands significantly skew that province’s carbon characteristics, just as in B.C., significant hydro-electric resources allow electricity generation without significant reliance on fossil fuels.

Over the next couple of years, it will be challenging for businesses to remain current on the variety of policies and regulation each province and jurisdiction will be introducing to deal with carbon emission and economic development in their region. Staying on top of these issues, however, will be essential.

Cheryl Slusarchuk is a partner in the Vancouver office of McCarthy Tètrault LLP practising in the business law and technology groups. She is the president of the B.C. Premier’s Technology Council and serves as Chair of the B.C. Climate Action Team.

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