August 15, 2008

Oh Canada! B.C. ratifies North America’s first carbon tax

Dr. Robert Peltier, PE

Virtually every American news organization, industry pundit, and blogger was preoccupied with the recent U.S. Senate debate of the Lieberman-Warner Climate Security Act (L-W) that proposed to reduce carbon emissions in the U.S. by using the now-familiar cap-and-trade approach. Americans’ preoccupation with Washington’s heavy-handed approach to legislating carbon dioxide (CO₂) emissions distracted us from an arguably more important event: The Canadian province of British Columbia (B.C.) imposed the first comprehensive carbon tax in North America on July 1—Canada Day.

In theory, carbon taxes work by raising prices: Higher prices on fossil fuels should induce conservation, stimulate development of more-efficient technologies, reduce emissions, and make alternative forms of energy more economically attractive. Most industry analysts accept this economic theory, but some differ in how to implement the tax.

For example, in his Commentary in this magazine’s July 2008 issue, Jim Rogers, CEO of Duke Energy, said an economy-wide carbon tax with a declining national carbon emissions cap is more to his liking than L-W. On that point we agree. However, most utilities, especially those with large coal-fired generation resources, seem to favor a cap-and-trade approach. Congress seems to agree with the latter group, but for a different reason: The T-word is anathema to politicians preoccupied with burnishing their “I feel your pain” credentials before the November elections.

I think it’s important to carefully examine the B.C. legislation for one good reason: It’s likely to be adopted as a carbon control cause celebre as L-W is retooled and other revenue-raising options are considered by the next Congress.

What’s unique about this legislation is that B.C. politicians unabashedly call it a tax—but one that is “revenue neutral,” where all the tax proceeds are returned through reductions in personal and business taxes. “Revenue recycling” is the latest euphemism coined by the B.C. government to describe the new tax.

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