Carbon Taxes: Climate Savior or Trojan Horse?

By Jonathan Marshall

A tax on carbon emissions to curb global climate disruption is “largely a no-brainer,” declared Harvard economist Greg Mankiw, former chief economic advisor to President George W. Bush. Carbon taxes also have been endorsed by Republican statesman George Shultz; by Sen. John McCain’s economic advisor, Douglas Holz-Eakin; and even by members of the conservative American Enterprise Institute.

The theory is simple. Such a tax would make individuals and businesses take into account some of the social costs of carbon-intensive fuels. Issuing that price signal, rather than command-and-control regulations, would encourage millions of market participants to discover low-cost ways to reduce emissions while growing the economy. The resulting higher price on fossil fuels would encourage investment in renewable energy and energy efficiency. And, to sweeten the deal, the government could offset carbon tax revenues by lowering income or business taxes that discourage work and investment.

British Columbia imposed its first carbon tax in 2008. To offset the revenue, the provincial government cut business and personal income tax rates and provided tax credits for many low-income residents. (Photo by hellobc.com.)

But even before last month’s 237-176 vote in the House of Representatives to prohibit any kind of price on carbon emissions, you would be hard pressed to find anyone in Washington who thought carbon taxes stand any kind of political chance.

“We are not going to put a price on carbon,” said Rep. Joe Barton (R-Texas). “Ain’t going to happen. There is no way.” A recent Washington Post editorial lamented, “The carbon tax is one of the best ideas in Washington almost no one in Congress will talk about.” A column published in the August 1 New York Times by four former Republican heads of the Environmental Protection Agency said, “A market-based approach, like a carbon tax, would be the best path to reducing greenhouse-gas emissions, but that is unachievable in the current political gridlock in Washington.”

The tax is opposed by industry groups such as the National Association of Manufacturers, Petroleum Marketers Association, Industrial Energy Consumers of America, and American Farm Bureau Federation. Many conservatives, who once supported pollution taxes as an efficient alternative to traditional regulations, today either question the science of climate change or fear that carbon taxes are a Trojan Horse to expand the size of the federal government.

Both sides of the argument can bury you in position papers and theoretical studies. Personally, I find the study of recent historical experience more instructive. That’s why I’m intrigued by a new study of British Columbia’s experiment with carbon taxes over the past several years, slated to appear in the journal Canadian Public Policy.

The Canadian province imposed its first carbon tax on July 1, 2008 — under the leadership of the center-right Liberal Party. The tax started at $10 per metric ton of carbon dioxide, and increased $5 a year to its planned limit of $30 last year. The tax covers all major fuels, including natural gas and coal, and increases gasoline prices about $0.25 per gallon.

To offset the revenue, the provincial government cut business and personal income tax rates and provided tax credits for many low-income residents. British Columbia last year had the lowest personal income tax rate and one of the lowest corporate income tax rates in Canada.

According to the new study, British Columbia’s fuel consumption since 2008 has fallen almost 19 percent relative to the rest of Canada, without reducing its economic growth. Greenhouse gas emissions in the province fell 10.0 percent from 2008 to 2011, compared to a dip of only 1.1 percent in the rest of Canada. Carbon taxes likely had much to do with those results, though it would take a more precise analysis to determine just how much.

“BC’s experience shows that it is possible to have both a healthier environment and a strong economy — by taxing pollution and lowering income taxes,” said the report’s lead author, Stewart Elgie, a professor of law and economics at the University of Ottawa.

The province’s experience also suggests that such taxes can become politically popular over time. In a poll released late last year, nearly two-thirds of British Columbians surveyed said they strongly or somewhat support the carbon tax as a way to fight climate change, the highest level of support since the tax took effect.

Email Jonathan Marshall at jonathan.marshall@pge.com.

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