Carbon tax in British Columbia

Author:  Dr. John G. Hollins^[i]  is the Chair of the Canadian Association for the Club of Rome. (This text represents his personal view.)

One might think that a carbon levy — any carbon levy — could do no harm in addressing global warming. One would be wrong, however, if an ineffective levy created the false impression among decision makers and citizens that nothing else needed to be done. The exiguous carbon tax in BC, touted as an example for others to follow, has had no evident practical effect on consumption. It is often given far more credit than it merits.

Background

The Government of British Columbia introduced a revenue-neutral carbon tax on Canada Day, 2008, the first to do so in North America.  The tax started at $10 a tonne of CO₂ (2.2 ¢/L gasoline) and increased by $5 a tonne on the anniversary of its introduction in each of the four following years.  It stalled at $30 a tonne in 2012 (just before the BC election in 2013).

Claimed effect

This carbon tax has been credited with having a dramatic effect on the consumption of motor fuels in BC, some putting the price elasticity^[ii] in the range of -3 to -4, widely divergent from the record. There have been many studies of the price elasticity of motor fuels. The general findings in rich countries have been short-term elasticity of between zero and -0.25 and long-term elasticity of about -0.5. The United States’ Energy Information Administration contrasts the elasticity of travel by automobile with that by air. Air travel, especially for vacations, tends to be highly elastic: a 10% increase in the price of air travel leads to a similar or even greater decrease in the amount of air travel. In contrast, travel by automobile is essentially inelastic. The short-term price elasticity of motor gasoline is currently estimated to be in the range of -0.02 to -0.04, meaning it takes a 25% to 50% change in the price of gasoline to change consumption by 1%.

Context

In the years leading up to the introduction of the carbon tax in BC, the price at the pump varied within any 12-month period by at least 25 ¢/L. As BC introduced its carbon tax of 2.2 ¢/L, the market dwarfed it in a dramatic tumble of about 60 ¢/L. The carbon tax amounted to 4% of the change in the retail price determined in the marketplace in the months following its introduction. It cannot have had any effect in the short term.

 Price volatility

So let’s look at what has happened to the retail price of gasoline in the following years and superimpose the carbon tax year by year (first graph, next page). The price at the pump varied between 78 ¢/L and 147 ¢ /L, a range of almost 90%. Throughout the period of the carbon tax, its size has remained modest in relation to the ongoing variation in the market price.

Sales of gasoline

The net sales of gasoline in BC between 2005 and 2015 varied between 4.35 x 10⁹ and 4.65 x 10⁹ L/y, a range of about 6% (compared with the range in price of 90%). The second graph combines the volume of sales of gasoline sold and the carbon tax for this period.

 

Commentary

The second graph shows that the BC carbon tax has had no effect on the sales of gasoline. While the carbon tax increased through five steps, the consumption of gasoline went up and down, and then up again.

This should not be a surprise:

• most Canadians really appreciate personal mobility and, except for people who can barely afford a vehicle, adjust somewhere else in their budget;
• members of the CAA know that fuel represents only about 20% of the cost of running a car (small changes in this fraction are irrelevant for most car owners);
• similarly, the federal government allocates 11.6¢/km for fuel in its reimbursement rate of 51.5 ¢/km.

In a commercial setting, a carbon levy is likely to work because business decisions are based primarily on technical analysis of only one set of variables: economic costs and returns.

The behaviour of citizens, as a community of independent actors, is much more complex. Economic cost is only part of the decision-making of consumers, whose decisions are generally made without formal analysis and depend on many other variables, some far more important to individuals, such as convenience and appearances. The first law of cybernetics (Ashby’s law) applies: the management of a complex system requires as many variables as the system itself. A single management tool on its own to influence consumers — a carbon levy — is unlikely to work.

So why did a provincial government that collects a transit tax of 25¢/L in the Vancouver area on top of the federal excise tax of 10¢/L and a GST of 5%, for a total of about 40 ¢/L, imagine that adding just 7¢/L for carbon would lead to a significant change in behaviour? A carbon levy at this scale is futile and represents wishful thinking — or delusion. It may be comfortable to imagine that a small, revenue-neutral carbon tax can make a substantial difference, but the superordinate challenge of global warming requires clearer thinking, political courage, and effective action by citizens, corporations and governments.

A nominal carbon levy could perhaps serve as an element in a broad campaign to alert the general population to the enormity of the issue and its consequences. A more effective starting point for the Government of Canada would be to fulfil its commitment to phase out subsidies to fossil-fuel producers of $3.3 billion a year and then go on to examine and apply the various other levers it possesses that would actually get the job done, rather than fiddling while the planet burns.

At the same time, it should make a substantial effort to enable Canadians to prepare for the inevitable changes that lie ahead, a practical approach that, at the same time, would reinforce the moral case for reducing emissions.

2017 May 2

^[i]    Dr. Hollins is the Chair of the Canadian Association for the Club of Rome. (This text represents his personal view.)  https://canadiancor.com

^[ii]   Price elasticity describes the relationship between demand and price, other things being equal.