News Releases and Op-Eds
Finlayson: BC's Carbon Tax Hurting Businesses (Vancouver Sun)
Carbon taxes have been attracting renewed attention. In late July Ottawa-based think-tank Sustainable Prosperity issued a report claiming that B.C.’s carbon tax has triggered a substantial and rapid-fire decline in fossil fuel consumption, leading to a sizable drop in provincial emissions of greenhouse gases.
Then a few days ago The Sun published an opinion piece from a local consulting firm suggesting that the average household in B.C. benefits financially from the carbon tax because of offsetting personal income tax relief measures introduced by the government.
Within North America, B.C. is certainly a pioneer in carbon pricing. Initially set at $10 per ton of emissions in 2008, the carbon tax rose to reach $30/ton in July 2012. The government has now frozen the tax for five years.
To date, no other province or state has instituted the type of broad carbon pricing regime found in B.C.
What difference has it made? Sustainable Prosperity says the carbon tax has had a dramatic effect on energy consumption, despite its short life. They estimate that fossil fuel consumption in B.C. has plummeted by 17.4 per cent, measured on a per-person basis, since 2008. Relative to the rest of Canada, the decline is even greater — almost 19 per cent.
Importantly, SP attributes the reported drop in fuel consumption almost entirely to the carbon tax. To an economist, this is a surprising assertion and is inconsistent with mainstream economic analyses indicating that the demand for energy is price inelastic. Most consumers, in response to a modest increase in tax-inclusive energy prices, are unlikely to significantly change the amount or type of energy used. Altering households’ energy consumption is a long-term proposition and likely requires sharp price increases well beyond what a small jurisdiction realistically can consider undertaking on a unilateral basis.
For vehicle operators, B.C.’s carbon tax currently translates into an extra cost of 6.7 cents for a litre of regular fuel. In comparison, TransLink’s regional fuel tax is 17 cents/litre. Today, the carbon tax amounts to about five per cent of the retail price of a litre of gas in Metro Vancouver. It would be remarkable if motorists substantially reduced gas consumption solely due to a five per cent increase in the tax-inclusive price, especially given that retail gas prices often vary by 10 per cent in a single month (and by two to three per cent on a daily basis).
B.C.’s carbon tax also boosts the prices of other transportation fuels, such as diesel, on which local businesses rely to transport goods. Similarly, it raises the cost of other forms of fossil fuel energy, including natural gas to heat buildings and operate industrial facilities, and energy inputs used for resource processing and manufacturing.
In theory, the carbon tax should cause businesses to modify their energy choices and production processes. But since there are few or no cost-effective substitutes for fossil fuel in most transportation and industrial uses, in practice B.C.’s carbon tax creates incentives for some businesses to reduce output or shift production and investment to other locations where energy taxes are lower.
The SP report doesn’t examine other factors, apart from the carbon tax, that have influenced reported energy use in B.C. since 2008. These include the huge decline in production and employment in the forest sector following the collapse of U.S. housing markets (forestry is the largest industrial consumer of energy in the province); several developments that have dampened fuel consumption in the Lower Mainland (urban densification, completion of the Canada Line, higher regional parking taxes, the higher TransLink fuel levy, and steep increases in parking meter rates in Vancouver); and the effective mothballing of BC Hydro’s Burrard Thermal gas-fired power plant, which prior to 2008 made a meaningful contribution to domestic electricity supply.
Another relevant factor is the surge in cross-border shopping. The past five years have seen a doubling in the number of British Columbians visiting Washington state, most of whom fill their tanks while there (many B.C. truckers and commercial vehicle owners also buy fuel in the U.S. and in Alberta).
Growing cross-border fuel purchases artificially lower reported energy consumption here in B.C.
What about the economic effects of the carbon tax? SP argues it has had little impact on B.C.’s macroeconomic performance, because the carbon tax revenues have been fully recycled back into the economy through personal and business tax relief measures. This claim makes sense. However, the rising energy costs stemming from the carbon tax have hurt some of B.C.’s export industries, as well as manufacturers forced to compete with imports in the domestic market.
In aggregate, the government’s “tax shift” policy has imposed a net financial cost on businesses: the carbon tax paid by all B.C. enterprises (about $600 million per year) exceeds the revenues they save from slightly lower business tax rates. And with the provincial government’s recent decision to lift the corporate tax rate from 10 to 11 per cent, any economic benefits accruing to the business sector as a whole under the carbon tax regime will be further diminished.
Jock Finlayson is executive vice-president and chief policy officer at the Business Council of British Columbia.
Read more: http://www.vancouversun.com/business/2035/carbon+hurting+businesses/8739247/story.html#ixzz2apdG745t