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Policy
| 09/22/17

B.C. overturns carbon tax revenue-neutrality

TCE

British Columbia’s Green-supported NDP minority government unveiled a budget update earlier this month, with climate action taking pride of place, including nixing the revenue-neutrality of the province’s carbon tax.

Carole James, minister of finance, said government would deploy some of the revenues raised via the tax to fund energy retrofits and public infrastructure in support of climate mitigation and adaptation. Revenue neutral taxes would otherwise use monies to pay for income and corporate tax cuts elsewhere, or rebates and dividends.

The move follows Alberta’s decision to opt for a non-revenue-neutral carbon tax in 2016. There, some two thirds of revenues raised from the carbon tax go toward clean infrastructure, energy efficiency, clean-tech innovation (notably encouraging carbon capture and utilization), incentivizing the build out of renewable energy, and retraining and other cushions for displaced fossil fuel-sector workers.

But what difference does this make, and why have two provinces now opted for such a system?

The purpose of a carbon tax is to try to change the behaviour of individuals and organizations away from the purchase of goods and services that are carbon-intensive. As the introduction or increase of taxes tends to be unpopular amongst some voters and corporations, carbon tax proponents have long suggested that it be revenue neutral, so that no one is out of pocket any more than they would otherwise have been, and the economy as a whole bears no additional tax burden.

However, there are many climate mitigation and adaptation actions that are necessary but that are unlikely to be driven by a carbon tax. For example, changing consumer behaviour is unlikely to build out a true east-west electricity grid, which would allow clean-energy provinces such as B.C. to more readily share its electricity with provinces such as Alberta that are more dependent on coal and gas. The government would likely have to build this sort of infrastructure directly. Likewise, even if renters want to use low-carbon methods of heating their homes, a rising carbon price will have no influence on their behaviour, as they don’t own their building.

By using some of the funds raised from the carbon tax on these sorts of actions, the government can fill some of the gaps in climate action that a tax on its own cannot. And if the government is the actor responsible for funding such infrastructure and retrofits, then the tax burden to an economy will have to increase somewhere else anyway.

Removing its revenue-neutrality carries a political risk in that the government could now be described as having raised taxes. Alberta’s move has been criticized by free-market-oriented think tanks for this very reason.

The province has yet to outline precisely what form the retrofits and infrastructure will take, but climate watchers will be keeping a close eye on the details as the government rolls out its legislation for this file in the coming years.

During the budget update, B.C. also announced a $5 per tonne hike to the carbon tax in April 2018, kicking it up to $35 per tonne, with annual increases at the same rate until 2021, topping out at $50 per tonne.

The government is also expanding the low-income credit. This rebate was originally introduced alongside the CO2 tax when it was introduced in 2008, but while the tax has increased since that time, the rebate has not, leading some progressive critics to suggest that this has placed a greater burden on lower income households than wealthier households. The bump to the low-income rebate aims to correct this.

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What difference does it make whether a carbon tax is revenue-neutral?

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