What we can learn from British Columbia’s carbon tax

For seven years, the Canadian province of British Columbia has had a carbon tax. It is, on its own terms, a resounding success — carbon emissions are falling even as the economy continues to grow.

Not only is it effective, but it is, from a policy standpoint, incredibly elegant:

• It is predictable, rising according to a set schedule (though it topped out in 2012 — more on that later).
• It is broad, covering 70 percent of the province’s emissions.
• It is simple, levied on a relatively small number of fossil fuel extractors and importers, piggybacking on an existing tax, thus requiring almost no additional administration or enforcement resources.
• It is revenue-neutral, offset entirely by cuts to other taxes, mainly corporate and personal income. (In fact, each year the B.C. government publishes a table showing what tax cuts were enabled by the carbon tax.)

It all sounds like an economist’s wet dream. The one substantial flaw is that the tax remains far too low to achieve the radical reductions that will be required from B.C. (and all of the developed world) by 2050. But then, that’s true of all extant climate policies.

How did B.C. pull off this policy triumph?

Research and advocacy group Clean Energy Canada had a simple but rather brilliant idea: it asked! Last fall, it interviewed 14 key figures, including some of the plan’s political architects (like B.C.’s then-premier and then-finance minister) as well as experts from business and academia who were involved in the process.

CEC has now released a report distilling what it learned from those interviews: “How to Adopt a Winning Carbon Price.” There are 10 key takeaways. I’ll list them all, but I’m only going to dig in on a couple. See the report for more (it’s short and readable):

1. A carbon tax and a thriving economy can co-exist.
2. You need strong political leadership to get a carbon tax in place. (Public concern about climate disruption helps, too.)
3. Keep it simple: Design a policy that’s easy to administer thanks to broad coverage and minimal exemptions.
4. Commit from day one to a schedule of price increases, and stick with it.
5. Start with a low price.
6. Revenue neutrality helps address private-sector concerns and makes the policy more durable.
7. On the other hand, revenue neutrality doesn’t get you very far with voters.
8. A carbon tax can’t do everything; it needs to be just one component of a full suite of climate policies.
9. Prepare for motivated, vocal — and not necessarily fact-based — opposition. You’ll need active, engaged supporters and targeted communications strategies to counter the critics.
10. Expect a cleaner environment, an enhanced reputation, and a thriving clean technology sector.

A lot of this I take to be self-explanatory, or self-evident. I certainly hope tax advocates take heed of No. 8! But a few are worth digging into a little.

First, No. 2. Numerous interviewees made special mention of the importance of political leadership. Former B.C. Premier Gordon Campbell took the tax on as his signature budgetary initiative and was instrumental in designing it and pushing it forward. It was personal to him. And in then-Finance Minister Carol Taylor, he had an eloquent and energetic champion. “I wouldn’t pretend that everybody in the [centrist B.C. Liberal] party thought it was a good idea,” said Taylor, “but there was strong leadership from the premier and myself — so they didn’t love it, but they accepted it.”

The report highlights this leadership, but also notes that several other favorable political conditions were in place in 2007-2008, when the battle over the tax played out and it was finally passed. B.C.’s economy was strong. Its population, relative to the rest of Canada, was intensely invested in environmental protection.

And in a fateful twist, the farther left party, the B.C. New Democratic Party, came out in opposition to the tax. This extraordinarily boneheaded decision had several important consequences. To those on the left, it made Campbell’s centrist B.C. Liberal party look like it was the one that really cared about climate, thus peeling off some young, climate-concerned voters. To those in the middle, it made the tax plan look like a sensible compromise — after all, anything opposed by both right and left must be on the right track.

Most importantly of all, the Liberal party had a majority in the legislature and — U.S. readers may find this puzzling, but try to follow along — in the Canadian parliamentary system, when you have a majority, you can pass your policies.

I think I would put more emphasis than the report does on those enabling conditions. If you transplant the same motivated politicians to a different political system, they might find themselves thwarted.

Ponder, for a moment, just how many of those conditions are lacking at the federal level in the U.S.: The economy remains slow and inequality high, concern over climate is shallow and isolated in urban pockets, partisanship runs deep, and most of all, a majority of legislators is not enough to pass a policy. How much conviction from politicians would it take to overcome all that?

Where you can imagine these circumstances partially replicating themselves is at the state level, albeit only in a few liberal states on the West Coast or in the Northeast. California’s climate policy, though messier, rivals B.C.’s. In Washington state, Gov. Jay Inslee’s cap-and-trade proposal is fairly clean. But outside liberal enclaves, climate/energy policy is weak and compromised at best.

The amazing thing about B.C.’s tax is there are effectively no loopholes, despite considerable pressure to create them. Policy considerations — retaining simplicity and fairness — won out over lobbying. I can’t even remember the last time I heard of something like that happening in a U.S. state.

It’s fair to say that both enabling conditions and motivated politicians are necessary, but in the U.S., the conditions of democracy are degraded to the point that the amount of motivation necessary to overcome them has become all but prohibitive.

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Second, let’s take a look at Nos. 6 and 7. Long-time readers know that I’m quite skeptical about revenue-neutral taxes as a magic bullet for climate policy. A big part of climate policy is investing, and foregoing an enormous new source of revenue seems short-sighted. In my view, the only reason to accept revenue neutrality is if it’s the only thing that can get the policy across the finish line.

Proponents of revenue neutrality, especially those pushing for “cap and dividend” or “tax and dividend” policies, are convinced that it is the key to unlocking support. But the CEC report offers a more mixed assessment.

It makes clear that the promise of revenue neutrality did almost nothing to sell the public on the tax. Many misunderstood the concept entirely, thinking it promised individual businesses, industries, or households revenue neutrality. (Of course it doesn’t — there will be losers.) Many others simply did not believe that the government would do as it promised and didn’t notice when it did. (A big new tax is noticeable; a small reduction in other taxes is often not.) There is, in short, no reason from B.C.’s experience to think that revenue neutrality generated any public support for the tax.

However, among the business community it’s a different story. Several interviewees in the report are convinced that revenue neutrality was crucial to gaining support — or at least muting opposition — in the private sector.

I don’t doubt this is true, but it’s worth thinking about why it appealed to businesses. It’s unlikely they had a strong independent preference for clean policy or macroeconomic efficiency. Far more likely is that they like the idea of a large tax cut. It’s a lot easier to sell a policy when you’re promising over a billion dollars in corporate and personal income tax reductions on the side.

The question of whether corporate and personal tax cuts are good policy is theoretically independent of the question of whether carbon ought to be taxed. Corporate and personal taxes are higher in B.C. than they are in many, many U.S. states, so it had some room to lower them. But taxes are simply too low in many revenue-starved states, so it’s not clear whether the dynamics would work the same way.

Regardless, in B.C., linking the carbon tax to tax cuts has proven politically effective in practice. Now that it is in place, abandoning the carbon tax would effectively mean a huge tax hike elsewhere to cover the revenue shortfall. B.C.’s corporate taxes are now below the international average, which gives politicians and businesses something to brag about and something with which to attract more people and businesses. They don’t want to lose that.

Also, there is still some room for spending in the policy, though it comes in the form of “tax expenditures” — targeted tax breaks paid for by the carbon tax. A small portion of the revenue is being directed toward green stuff now but it could rise in the future. Burying spending in the tax code is not ideal, but it’s better than nothing.

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B.C.’s carbon tax has been a success so far, but to continue being successful, it needs to continue rising — both to keep up with inflation and to keep pushing the economy to get cleaner. The scheduled increases in the tax topped out in 2012 at $30 a ton. That’s where it will stay (way too low) until there’s legislative action to get it rising again.

That brings me to one more takeaway I’d add to the list:

11. Peg your tax to inflation, so it rises whether or not anyone’s paying attention to it. That makes it predictable in the long term, which is important for business planning, and automatic, which is important politically.

It will be interesting to see if B.C. can get the tax going up again and maintain progress on other parts of its “suite of climate policies.” If it does both, it will make history, and strike a blow in favor of revenue neutrality that even a skeptic like me has to acknowledge.