With a bounty of shale gas underground, coal in the mountain tops and an economy needing a boost, tax and climate change policy are likely to be closely linked going forward. As always, there will not be a single solution to either issue, but rather a mix of solutions debated. One currently being debated by both sides of the aisle is based on Canadian province British Columbia’s (BC) “carbon tax” policy.
The idea is simple enough: Use a revenue neutral tax “swap” to tax more on what you don’t want (carbon) and less on what you do want (income and jobs). In BC, a revenue-neutral carbon tax puts a price on carbon emissions to encourage individuals, businesses, industry and others to use less fossil fuel and reduce their greenhouse gas emissions. Each dollar it raises offsets other taxes levied on individuals and businesses.
This is different than a “cap and trade” solution to climate change or a straight consumption tax. According to the BC Ministry of Finance, “every dollar generated by the tax is returned to British Columbians through reductions in other taxes.” This includes tax credits for low income individuals, 5% cuts to the personal income tax rates of higher earners and a reduction in business taxes.
Does it work? According to the Ottawa-based think-tank Sustainable Prosperity (SP), “the tax seems to have had a positive environmental impact without harming the economy.” In a recent report, SP concluded the average British Columbian’s consumption of fuels subject to the tax have dropped 15.1%, while the rest of Canada’s per capita sales have increased by 1.3%. Further, since the BC carbon tax went into effect in 2008, corporate taxes have dropped from 12 to 10% and Greenhouse gas emissions are down 4.5% even as population and GDP are moving higher.
Of course what works in British Columbia to combat the effects of climate change will not necessarily work in the United States—although the idea does have support on both sides of the political spectrum. Former South Carolina Republican Congressman Bob Inglis has just launched a think-tank called the Energy and Enterprise Initiative (EEI) to promote the idea and conservative icons like former Secretary of State George Shultz and economist Arthur Laffer are also proponents. On the EEI site, Laffer believes it is a good idea to “reduce taxes on something we want more of—income—and tax something we arguably want less of—carbon pollution. It’s a win-win.”
Joseph Stiglitz, a noble-prize winning economist from further left of the political center also agrees. In 2010 the Columbia University Professor and former World Bank chief economist wrote in regard to climate change:
Perhaps it is time to try another approach: a commitment by each country to raise the price of emissions (whether through a carbon tax or emissions caps) to an agreed level, say, $80 per ton. Countries could use the revenues as an alternative to other taxes—it makes much more sense to tax bad things than good things.
But even with sweeping unanimity around the world about the need to reduce carbon emissions, using tax policy to do so would be untested waters here in the U.S. Critics argue that as carbon is reduced, revenue from the carbon tax will wither. They also point out that BC is just one relatively small player in the effort to reduce greenhouse gases and coordination with the United States and others is necessary to make a real impact.
“I think it is safe to say that we expected more jurisdictions to be coming up and joining us in this kind of public policy,” said Terry Lake, British Columbia’s minister of the environment, in an interview with NationalGeographic.com. “That hasn’t happened.”
Some final things to consider: New policies will continue to emerge around the world to deal with climate change, and investors are paying close attention. Curbing the appetite for fossil fuels will most likely change the investment landscape—and hopefully it will help reduce the environmental effects of green house gas along the way.