Subsidizing green projects with revenue from carbon taxes may be politically popular but it’s fundamentally misguided policy
By Kenneth P. Green,
Elmira Aliakbari & Ashley Stedman
The Fraser Institute
In its first budget, B.C. Premier John Horgan’s government recently said it would raise the carbon tax rate by 66 per cent over the next four years. And it rejected revenue neutrality, undermining the case for an economically efficient carbon tax.
British Columbia’s carbon tax is now at $30 per tonne. As of April 1, 2018, the New Democratic Party government will increase the tax by $5 per tonne of CO2 equivalent emissions per year until it meets the federally-imposed floor price of $50 in 2021, a year before Ottawa’s 2022 deadline.
For carbon pricing to be efficient, it must replace regulations, not simply layer on top of existing regulations. The tax should be revenue neutral, meaning that the revenue collected should be offset by tax cuts. And the revenues should not be used to further distort the energy economy with governments funding pet projects or selective forms of energy production.
In 2008-09, when B.C.’s carbon tax was introduced by a former Liberal government, it was revenue neutral. But the NDP government is moving in the opposite direction. (It also proposes to raise personal income taxes and the corporate income taxes in the budget documents presented last week.)
Revenue-neutral carbon tax is intended to mitigate the costs the tax imposes on the economy, so there’s a net improvement in incentives for investment and, as a result, stronger economic growth. Economists generally agree that an ideal revenue-neutral carbon tax would reduce broad-based tax rates on personal and corporate income, ultimately reducing distortionary effects and increasing efficiency.
However, instead of returning this new revenue stream to taxpayers, the B.C. government has chosen to fund its favourite “green initiatives” to address “climate action commitments.” Subsidizing green projects may be politically popular but it’s fundamentally misguided policy.
Subsidizing wind, solar or other alternative energies distorts the energy market and prevents government and industry from identifying the cheapest ways to reduce greenhouse gas emissions.
B.C. is not the only province violating the key components of efficient carbon pricing policy. Consider Ontario’s cap-and-trade system, which the government estimated would bring in $2 billion in revenue per year. According to Ontario’s auditor general, about 83 per cent of the money collected in four years will be spent on subsidies to renewable energy, energy efficient programs, etc.
Alberta’s carbon tax moves from $20 of $30 per tonne in 2018. This tax is expected to generate almost $3.9 billion from 2017 to 2020. Part of the revenue will be used to subsidize Alberta’s emitters (granting a windfall to the very people producing most of the emissions). Low-income Albertans are receiving a small portion, ostensibly to ease the pain of higher power bills. The rest will be spent on government projects.
And finally there’s Quebec, which has a cap-and-trade system that has brought in $330 million with an expected $2.5 billion by 2020. Part of the revenue was rebated to emitters via free permits. The remaining revenue will be spent on “programs to fight climate change.”
Now that B.C. is no longer the role model for revenue-neutral carbon taxes, it’s likely other provinces will continue pursuing high-cost, low-benefit carbon pricing policies.
The B.C. government has violated the fundamental tenets of efficient carbon pricing, adding just another tax on citizens and businesses.
Kenneth P. Green is a senior director, and Elmira Aliakbari and Ashley Stedman are analysts at the Fraser Institute.