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British Columbia's Carbon Tax After Five Years

BC Carbon Tax

In 5 years, debates about BC’s carbon tax have generated much heat and little light, but Stewart Elgie and Jessica McClay of the University of Ottawa have just released a good effort to rectify this situation. Comparing fuel consumption (gasoline, diesel, propane, fuel oil, etc.) in BC with the rest of Canada, before and after the imposition of the carbon tax, they detect a significant change. Prior to 2008, BC’s petroleum fuel use changed in lock-step with the rest of Canada. But afterwards it fell 17.4% per capita in BC while rising 1.5% in the rest of the country. They also noted that BC’s economy performed as well or better than other provincial economies, a partial response to the much-touted argument that BC’s economy would suffer terribly because of the tax. (Stephen Harper repeatedly claims that carbon taxes destroy economies, with zero evidence in support – which some people would call lying.)

Of course, people will still argue that the BC carbon tax had no effect, or even perverse effects, and no amount of evidence will change the minds of some. But, interestingly, BC’s aviation fuels, which are not subject to the carbon tax, did not diverge from the Canadian pattern, supporting the argument that the carbon tax really did have an effect. And BC’s disconnect from the rest of the country was evident for all taxed fuels, not just gasoline; so the argument that BC’s divergence is caused by increased cross-border shopping for gasoline is not supported.
 
Sensible people (especially academics like Elgie and McClay) know that correlation does not prove causation. But this is why talented researchers like Nic Rivers (also at the University of Ottawa, where he is a Canada Research Chair) conduct sophisticated statistical studies in which they try to extract the influence of anything else that might have caused the BC divergence, including weather, economy, and other policies. In a not-yet-published paper with Brandon Schaufele he has found strong statistical evidence that the BC carbon tax is having an effect, already quite profound. (I will blog on this when it is released.)
 
None of this comes as a surprise to people trained in the field of energy economics. As a researcher and reviewer for academic journals, I have read countless papers showing that when energy prices change, some people (not all) respond by changing their behavior or technologies. The carbon tax changes energy prices and some people respond. Researchers like Elgie, McClay, Rivers and Schaufele are starting to detect this response, although it will take many more years to get a firmer sense of the full effect of the tax. (Scandinavian countries have had carbon taxes for two decades and the response is easy to detect and agreed upon by all leading researchers.)
 
But does this new study make me a devotee of the carbon tax? No. While my position on many things has changed over the last 20 years, the repeated evidence – including from the BC experience – has only reinforced my opinion on the strengths and weakness of the carbon tax. Yes, it is the most economically efficient way of reducing emissions. Yes, I will desperately support any elected politician who implements one – or who wants my help to design one.
 
But I never tell politicians that they must implement a carbon tax to reduce greenhouse gas emissions. If they ask me to assess their climate policy options, I always say that other compulsory policies, like cap-and-trade or regulations on technologies and fuels, can reduce emissions as effectively as a carbon tax, not as cost-effectively as a carbon tax, but just as effectively. If a committed politician prefers one of these, because he or she fears the political difficulty of succeeding with the carbon tax, I tell them I can design these with enough market flexibility to almost (!) approximate the economic efficiency of the carbon tax.
 
We humans have amply demonstrated over the last 20 years that we are incapable of acting effectively on global warming. Why on earth would we worsen bad odds by insisting that politicians do a carbon tax when there are less-politically-difficult ways of achieving the same, already-incredibly-difficult objective?
 

Mark Jaccard's picture

Thank Mark for the Post!

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Discussions

Bob Meinetz's picture
Bob Meinetz on Jul 30, 2013 8:04 pm GMT

Mark, I’m curious why you still support cap-and-trade seeing as every attempt to make this scheme work has failed. The mechanism seems almost predisposed to loopholes and fraud.

Also, what “regulations on technologies and fuels” could remotely achieve the same scale of carbon reduction as a simple economic slap on the wrist?

Christos Makridis's picture
Christos Makridis on Jul 30, 2013 10:49 pm GMT

Thank you for the contribution Mark!

 

@Bob: Arguing that the EU ETS failed to draw inferences about the theory of a permit scheme is tricky because it was not implemented according to theory. Many issues that are outside the scope of the discussion, but two relevant ones are: (1) grandfathering of permits and (2) ambiguity about price emissions levels. First, grandfathering and exemptions led to large transfers in endowments — going all the way back to Larry Kaplow’s Harvard Law Review article, grandfathering tends to be a political solution for expediency, not economic efficiency. Second, there was great uncertainty about emissions levels at early stages — when emissions were announced to be lower than expected, the price of permits collapsed. With better monitoring — or at least more transparency — and firm rules, this need not happen. Unfortunately, it seems all proposed plans lack the transparency that is desired.

Bob Meinetz's picture
Bob Meinetz on Jul 31, 2013 12:49 am GMT

Christos, I suppose the argument would be whether it is even possible to implement cap-and-trade as it exists in theory.

Grandfathering, endowments, banking and borrowing, allocation, and tracking emissions levels are problematic because each introduces a new level of complexity. Like the financial derivatives which sent U.S. markets tumbling in 2008, they offer an exponential increase in opportunities to exploit the system for profit, with or without a corresponding reduction in carbon.

BC’s fee-and-dividend arrangement, which is not really a tax at all, has been successful by virtue of its simplicity. What happens to carbon after “point of entry” is irrelevant, eliminating any measurement problems or ongoing bookkeeping. Its inherent symmetry, which rewards leaving carbon in the ground in the first place, not only achieves the goals of reducing emissions but does it in a way which is intuitively within grasp of the public. That’s extremely helpful for turning closed-door discussions into ballot initiatives which can eventually become law.

Mark Jaccard's picture
Mark Jaccard on Jul 31, 2013 4:10 pm GMT

Is cap-and-trade inherently flawed? I don’t think so. I think it can be done badly. I think carbon tax can be done badly. It all depends how it plays out politically. I tend to be not so picky since the default for over two decades of political intentions is no policy or ineffective policy (voluntary measures, subsidies, moral injunction). Also, someone asked about regulations. My friend David Montgomery of NERA modeled California’s climate policies a couple of years ago and showed that with its various regulations (RPS, VES, LCFS, effciency regs, etc) it would achieve about 90% of the reductions to meet is 2020 target – without doing a carbon tax or the cap-and-trade it most recently implemented. Would an economist be able to show that this mash of regulations were economically inefficient? Sure. But if this is all we could get done politically, then the default again is no policy or completely ineffective policy. Arguing against these policies is like arguing against immediately turning the Titanic away from the iceberg because the steering system is non-optimal.

Bob Meinetz's picture
Bob Meinetz on Jul 31, 2013 5:36 pm GMT

Mark, I would be interested to see David Montgomery’s model. Has he posted it online?

There is a fundamental problem associated with tracking carbon emissions, and that comes down to a very simple assessment of CO2’s properties: it’s an invisible, odorless gas. Mix that with the profit motive to minimize emissions reporting, and you have a situation where all of the wonderful predictive forecasting in the world will with certainty underestimate the amount of actual emissions, limited only by the ingenuity of the emitters themselves. In short, 80MMTCO2e reduction on a sophisticated spreadsheet does not translate to 80MMT less CO2 in the atmosphere.

In contrast – because carbon producers are eager to account for the product of their hard work, the profit motive plays nicely into a carbon tax model, assuring that every ounce of carbon is accurately accounted for at point of entry. That’s how they’re paid, after all.

With David’s model, CA regs would still result in 5% less carbon reduction, in nearly twice the amount of time as BC’s program. Is that the best California can do? Possibly. But it’s interesting to note that public opinion in BC has flip-flopped in 5 years from 60% opposed to 60% in favor. This kind of success is not the result of accepting what is politically possible, but defining it.

Mark Jaccard's picture
Mark Jaccard on Aug 2, 2013 4:10 am GMT

Bob

You can contact him at NERA I presume. I see him every year at Energy Modeling Forum meetings at Stanford or DC.

I am not following your story about modeling policies versus real world happenings. I, like all modelers I know, don’t believe we have perfect foresight. But we critique each other based on performance over time and subjecting ourselves to rigorous critique by independent, anonymous experts – as part of the peer-review publishing process. You hane an alternative, better approach?

Statistics on carbon in fuels – and hence in emissions – is no different whether we are using carbon tax, cap-and-trade or regulations, so I fail to see your next point.

No, David’s analysis is pretty close to other people modeling the California policies, both within and outside of the state. These policies in combination are having a bigger percentage reduction effect than BC’s carbon tax. Of course, the issue is stringency, so this is a false discussion anyway. A more stringent carbon tax will do more than a less stringent cap-and-trade, and vice versa.

Public opinion in BC has not flipped flopped in the surveys I have seen. It was slightly positive to the carbon tax when first announced, then went slightly negative as oil prices rose in 2008, then went slightly positive again. But I note that most opinion polls are designed by people who want a certain outcome. My PhD student recently surveyed 400 British Columbians on carbon tax and other policies. What was interesting was that the carbon tax had about something like 40% of people strongly opposed. In contrast, our zero-emission electricity regulation, which stopped two coal plants and a natural gas plant that were about to be built in 2007-2008, has had a much bigger effect on emissions than the carbon tax and yet has only 1% of people were opposed to it. (More than 95% had no idea it existed.) Even without surveys like we do, astute politicians can sense this. And I think this helps explain why not a single North American jurisdiction has copied the BC carbon tax. Maybe one day. Like you, I hope so. But meanwhile, I am ready to support whatever compulsory policy we can get a politician to implement. Most likely we will get nothing. Let’s not make bad odds even worse by insisting on a particular policy.

 

 

Mark Jaccard's picture
Mark Jaccard on Aug 2, 2013 4:19 am GMT

Not really interested in countering hyperbole. I’ll do it just this once. You say “every attempt to make cap-and-trade work has failed”. I suggest you read some environmental economics textbooks. In my decades of teaching this subject, I went through countless examples where cap-and-trade played a not insignificant role in environmental improvement.

I am not a huge fan of any particular compulsory environmental policy. I do have considerable confidence, based on the evidence of over two decades, that without compulsory policy that puts a price on emissions and/or regulates technologies and fuels, we will not significantly decrease emissions over the coming decades in developed and then developing countries. Fighting over “which” compulsory policy seems silly when we are unable to get “any” compulsory policy. I repeat myself in saying that this is like fighting over the best way to steer the Titanic when what we should be doing is turn the ship with whatever mechanism is available to us.

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