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What we can learn about carbon taxes from British Columbia’s experiment

BC
Would you tax this?
(Shutterstock)

In 2008, the Canadian province of British Columbia instituted a tax on carbon. It is "revenue neutral," which means that all the money raised by the tax is used to reduce other taxes — the government doesn’t get any new revenue to spend.

Ever since BC passed the tax, climate hawks have been arguing about it. Is it a success? A failure? What are its political implications for other jurisdictions?

Now there’s a carbon tax on the ballot in Washington state that is explicitly modeled on the BC tax. (It’s called I-732; I wrote a feature story it.) It has split the left, cast the state’s climate community into chaos, and, yes, renewed the proxy battle over BC’s tax.

So let’s dig into that proxy battle a little and see if we can get some clarity.

On the anti-tax side, we have a new report from the old-school activist enviro lefties at Food & Water Watch (FWW): "The British Columbia Carbon Tax: A Failed Experiment in Market-Based Solutions to Climate Change."

On the pro-tax side, we have this response from the Carbon Tax Center’s indefatigable Charles Komanoff: "Fighting in the Trenches Doesn’t Excuse Ignorance on Carbon Taxes."

There are technical details involved, but I just want to focus on the central point of contention: namely, the effect of the tax on BC’s carbon emissions.

BC’s carbon tax reduced emissions either a little or not at all

FWW’s beef is pretty simple: BC’s carbon tax doesn’t seem to have had much of an effect. Sales of gasoline and diesel fuel (which account for more than half the emissions subject to the tax) have risen since the tax was passed. If you start measuring in 2009, the first full year the tax was in effect, emissions subject to the tax have actually risen slightly — even as emissions not subject to the tax declined.

bc carbon tax (FFW)

FWW says that 2009 is the proper year to start measuring the tax’s effect. There was a sharp drop in emissions in 2008 due to the recession; it would be wrong to attribute that drop to the tax, which only went into effect in July 2008.

Komanoff calls this an error. A proper comparison, he says, should take 2007 or 2008 as its pre-tax baseline. If you start there, emissions from fossil fuel combustion in BC have fallen by 1 percent.

But this methodological quibble strikes me as silly. BC carbon emissions are influenced by a wide range of factors, from demographics to overall economic growth to the price of oil to the province’s many other policies targeting carbon emissions. Picking all those causal strings apart is impossible, especially over such a short time frame. To give the tax credit for a slight drop in emissions (if you start in 2007) or a slight rise in emissions (if you start 2009) is about as valid as reading goat entrails.

The fact is, the carbon-tax signal simply isn’t strong enough to stand out clearly from the noise of other factors.

And that’s the point. It’s just not a particularly significant climate policy one way or the other. (Senior economist Marc Lee of the Canadian Centre for Policy Alternatives makes that case in more detail.)

The question is, what’s the political lesson to draw from that?

There is no such thing as a generic "carbon tax"

I think FWW goes too far calling the BC carbon tax, much less carbon pricing in general, much less market-based climate policy in general, a "failure." When you pass a modest policy and it has a modest effect, the policy is a success. It did what it was designed to do.

But by the same token, it’s absurd for Komanoff and other carbon tax advocates to point to BC as some kind of shining policy example, proof of their case for carbon taxes.

The BC example may show that it is possible to pass a revenue-neutral carbon tax. But it doesn’t show that it’s possible to pass one that does what’s needed. As a climate policy, the BC carbon tax is weak. It is weak along the metrics that matter most for climate policies: It doesn’t reduce emissions much, doesn’t spur much innovation or deployment of clean energy, and doesn’t seem popular enough, at least at the moment, to build on itself or spread to other jurisdictions. Other policies in Canada, like Ontario’s decision to ban coal plants, have reduced emissions much more dramatically. (See Mark Jaccard, a professor of sustainable energy at Simon Fraser University, for more on this.)

The metric where BC’s carbon tax most excels, namely "how much economists like it," doesn’t actually matter for shit in the real world.

economist
How many divisions do economists command?
(Shutterstock)

The problem is that too many people end up debating whether "a carbon tax" is good or bad. (Many lefties have concluded that Clinton is bad because she doesn’t endorse one.) But there is no such thing as generic carbon tax. A small carbon tax will have a small effect. A large carbon tax will have a large effect. They are different. Debating a carbon tax in the abstract, without specifying the level, just leads to a useless circle jerk.

FWW is being silly when it implies that carbon pricing cannot reduce emissions. For any given emission reduction goal, there is, almost axiomatically, some level of carbon tax that can achieve it. Crank a price high enough and eventually people will substitute alternatives. You don’t have to be an orthodox economist to believe that prices affect market behavior.

The important policy question is how high a carbon price has to get to achieve deep decarbonization by mid-century. And the truth is that no carbon pricing system in the world, with the possible exception of Sweden’s, has reached the level where the signal stands out from the economic noise that clearly.

We just don’t know enough yet to say with confidence what level of carbon price is needed, because very few carbon prices have gotten high enough to serve as a real-world test cases. BC’s carbon price certainly isn’t high enough to prove anything.

The political paradox of carbon pricing

And that brings us to the real conundrum, which abstract arguments over carbon pricing so often miss.

Why are there so few carbon prices in the world high enough to make a difference, when every wonk and economist agrees on the merits of carbon pricing?

The answer to that question gets right to the core of the carbon pricing paradox: If economy-wide carbon pricing is economically optimal, it is, in inverse proportion, politically difficult. People do not like having more money taken out of their pockets. Taxes are easy to oppose. Of all climate policies available, an explicit price on carbon is probably the single heaviest political lift.

And despite the fervid hopes and predictions of supporters, returning the revenue as tax cuts or dividends does not seem to appreciably increase taxes’ popularity, certainly not to the point where they can be cranked up to the needed levels.

So the lesson from BC is not that a carbon tax is good or bad, that it can or can't reduce emissions, but simply that it is politically difficult to pass a carbon tax high enough to make a difference.

carbon taxes around the world (MIT/Vox)

Now, what follows from that?

Even granting most of the (contestable) assumptions underlying the economic case for a carbon price, economists themselves will tell you that a carbon price lower than the "social cost of carbon" — the total cost eventually imposed by a ton of carbon emissions — leaves plenty of room for other policies to achieve cost-efficient carbon reductions. As long as your tax is too low, you need supplemental policies.

Happily, the world is full of such policies. Many of them have reduced more carbon than any explicit carbon price ever has. Many of them are more popular, easier political lifts, than a carbon price — think clean-energy mandates, feed-in tariffs, innovation prizes, pollution regulations, and investments in clean energy research and deployment.

How can those supplemental policies be funded? Here’s an idea: Fund them with the carbon tax revenue. Until your tax is high enough to do the job on its own, it is both substantively and politically daft to sacrifice the revenue to tax cuts.

Time to design policy for a world full of low carbon prices

There’s nothing wrong with a well-designed economy-wide price on carbon, whether it’s a tax or a cap. But by now it should be clear that, at least for the foreseeable future, any politically achievable price on carbon is going to be small. It’s going to have a marginal effect on emissions relative to other policies and broader socioeconomic trends. It will be a supplement, a backup, a steady-if-faint signal.

And that’s fine, as long as everyone keeps perspective. There’s no need to criticize or abandon carbon pricing just because it isn’t a silver bullet. But at the same time, merely implementing a carbon price is not, in and of itself, some grand historical victory. Until you’ve got policy that is seriously reducing emissions, your policy is not Good, even if economists love it.

A carbon tax is neither absolutely necessary nor remotely sufficient. It is merely useful. As long as that’s true, the revenue from a tax should be spent on additional carbon reductions. That is the right lesson to learn from BC.