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Section 1.2: Carbon Tax and Revenue Recycling

Introduction

The government of British Columbia intends to introduce legislation to implement a revenue neutral carbon tax based on GHG emissions from fossil fuel combustion effective July 1, 2008.

A rare consensus has formed in BC among individuals, certain business interests, environmental organizations, and economists that a carbon tax is a key and necessary tool in the move to reduce GHG emissions, with one significant proviso. With few exceptions, the advice of all these groups has been “if there is a new tax, the additional revenue must be recycled to taxpayers through reductions to other taxes”.

A carbon tax is usually defined as a tax based on GHG emissions generated from the burning of fossil fuels within a jurisdiction.1 It puts a price on each tonne of GHG emitted, sending a price signal that will, over time, elicit a powerful market response across the entire economy resulting in reduced emissions. It has the advantage of providing an incentive without favouring any one way of reducing emissions over another. Businesses and individuals will be free to choose whether to pay the tax or to avoid it by reducing usage, increasing efficiency, changing fuels, adopting new technology or any combination of these approaches.

The National Roundtable on the Environment and the Economy (NRTEE) in its January 7, 2008 report, Getting to 2050 – Canada’s Transition to a Low Carbon Future,2 provides a compelling argument as to why putting a price on GHG emissions is important and how a carbon tax is an important element of an effective climate action strategy, along with other types of measures that will be facilitated by Budget 2008.


1  Some experts have suggested that a carbon tax should also include the GHG emissions generated by industrial processes and all fugitive emissions. The government will consider expanding the tax base in the future to include these GHG sources.
2  http://www.nrtee-trnee.ca/eng/publications/getting-to-2050/intro-page-getting-to-2050-eng.html.

Principles

The British Columbia carbon tax is based on the following principles:

  • All carbon tax revenue will be recycled through tax reductions – The government intends to introduce legislation that includes a legal requirement to present an annual three year plan to the legislature demonstrating how all of the carbon tax revenue will be returned to taxpayers through tax reductions. The money will not be used to fund government programs.
  • The tax rate will start low and increase gradually – Starting low gives individuals and businesses time to make adjustments and respects decisions made prior to the announcement of the tax. There is also certainty about rates for the first five years.
  • Low income individuals and families will be protected – A refundable Climate Action Tax Credit will ensure that those with lower incomes are compensated for the tax, and that most will be better off.
  • The tax will have the broadest possible base – All emissions from fossil fuel combustion in BC captured in Environment Canada’s National Inventory Report will be taxed, with no exemptions except those required for integration with other climate action policies in the future and for efficient administration.
  • The tax will be integrated with other measures – The carbon tax will not, on its own, meet BC’s emission reduction targets but it is a key element in the strategy. To avoid unfairness and what might effectively be double taxation, the carbon tax and complementary measures such as the “cap and trade” system will be integrated as these other measures are designed and implemented.

How does the tax work?

The carbon tax applies to the purchase or use of fossil fuel within the province. The amount of GHGs emitted when a unit of fossil fuel is burned depends fundamentally on the chemical makeup of the fuel, particularly on the amount of carbon in the fuel. That fact allows for a relatively simple administrative principle for applying the carbon tax.

Administratively, the carbon tax will be applied and collected at the wholesale level in essentially the same way that motor fuel taxes are currently applied and collected. This minimizes the cost of administration to government and the compliance cost to those collecting the tax on government’s behalf. Even though the carbon tax applies to a broader range of fuels and fuel uses than existing motor fuel taxes, with few exceptions, the same mechanism and administrative infrastructure can be used for both purposes. See the accompanying Topic Box for more detail on the tax base.

The tax rates starting on July 1, 2008 are based on $10 per tonne of CO2-equivalent3 emissions, increasing by $5 per tonne each year for the next four years to $30 per tonne in 2012 (see Table 1.1). Some environmentalists and economists have suggested starting with a higher level of tax, arguing that a low initial tax rate will have little immediate effect. However, allowing this relatively long phase-in period up to the $30 per tonne level is intended to give people and business time to adjust their habits and purchasing patterns, and to respect decisions taken before the tax was announced, such as vehicle purchases.


3  There are several greenhouse gases, three of which are produced by fossil fuel combustion ? CO2, methane and nitrous oxide. Both methane and nitrous oxide have a greater impact per tonne on the greenhouse effect than CO2. CO2-equivalent is a measure of the total greenhouse effect created from all GHG emissions, with the non-CO2 emission levels adjusted to a CO2-equivalent basis. See the National Inventory Report, 1990-2005, Environment Canada, Section 1.1, page 18. (http://www.ec.gc.ca/pdb/ghg/inventory_report/2005_report/tdm-toc_eng.cfm)

Table 1.1.

Since different fuels generate different amounts of GHG when burned, $10 per tonne of CO2-equivalent must be translated into tax rates for each specific type of fuel. Table 1.2 shows the per unit rates for selected fossil fuels in 2008. For example, in 2008 the rate for gasoline will be 2.41 cents per litre. The tax rate for diesel used for road transportation will be slightly higher at 2.76 cents per litre due to the higher carbon content of the fuel while the tax on propane will be lower on a per litre basis.

Table 1.2.

Revenue Recycling

A key principle, reinforced in legislation, is that all the revenue generated by the carbon tax will be recycled through tax reductions. None of the carbon tax revenue will be used to increase spending.

In addition, Budget 2008 includes a Climate Action Dividend, an initial payment of $440 million to all British Columbians to help begin the transition to a lower carbon lifestyle. This payment is not part of the 2008 revenue recycling and is being paid out of the 2007/08 surplus.

Accountability for full revenue recycling will be achieved primarily through a legislated requirement that each year the budget include a three-year plan for carbon tax revenue recycling. The first plan is included in the Revenue Neutral Carbon Tax Plan topic box. It shows that for 2008, the revenue will be recycled through a refundable tax credit, the Climate Action Tax Credit, as well as reductions in personal and corporation income tax rates. The legislation implementing the recycling tax cuts for 2008 and 2009 is tabled with Budget 2008. Failure to table a revenue neutral plan will mean that the Minister of Finance is ineligible to receive the 10 per cent salary holdback.

There will also be annual reporting on the actual amount of carbon tax collected and revised estimates of revenue reductions due to the revenue recycling measures. In next year’s budget, a revised estimate for 2008/09 will be provided based on results for the first three fiscal quarters. In future years, the report will also include year end amounts as reported in the Public Accounts.

By necessity, the revenue recycling plan in the budget must be based on estimates and the actual carbon tax revenue and revenue recycling costs may vary from those estimates for a number of reasons. If the actual amount of revenue recycled is less than the amount of carbon tax revenue collected for a given year, the plan will also show how the government intends to return the excess to taxpayers through additional tax reductions. This ensures that there will be full, transparent, ongoing revenue recycling.

Table 1.3 shows the impact of the personal income tax revenue recycling reductions on various taxpayers. It also demonstrates how the Climate Action Tax Credit will assist those with low incomes. This refundable tax credit will be paid quarterly, along with the GST Tax Credit, ensuring that low income earners do not have to wait until they file their tax returns to receive the benefit.

The tax reductions apply regardless of how much carbon tax an individual pays. This will allow individuals and families to make their own choices about how to adjust to a lower carbon lifestyle.

Table 1.3.

Carbon Tax Implications

Carbon Tax Impact on Individuals

The main impacts of the carbon tax on individuals are related to their transportation and heating costs.

For those who use private vehicles for transportation, the impact of the tax will depend on four factors – distance driven, fuel efficiency of the vehicle, the type of fuel used, and driving habits. All of these can be adjusted over time to reduce the impact of the tax. For example, in the near term by careful planning, trips can be combined to reduce kilometers driven. In the first year, driving roughly 10 km less per week would reduce fuel cost by enough to offset the impact of the carbon tax.

Tables 1.4 and 1.5 show the annual carbon tax cost based on $10 and $30 per tonne of GHG for a variety of fuel efficiency and annual distance driven for gasoline and diesel vehicles. Table 1.8 shows the carbon tax cost for select late model vehicles.

The amount of carbon tax associated with heating and cooling of residential buildings and domestic hot water depend on the type of energy used, the energy efficiency of the equipment, the outside temperature, the level at which the thermostat is set and the energy efficiency of the building. Table 1.6 outlines the carbon tax costs that would result from various energy sources based on provincial averages.

Table 1.4.

Table 1.5.

Table 1.6.

Table 1.7 shows the net impact of the carbon tax and the associated tax cuts in 2008 and 2009 for two representative family types. It demonstrates that for many typical families the tax cuts will exceed the cost of the carbon tax.

Table 1.7.

Carbon Tax Impact on Business

Every business or other organization that purchases or uses fossil fuel for combustion in British Columbia will be subject to the carbon tax. The main uses of the fuel are for transportation, heating of buildings and providing heat for industrial processes.

The relative amount of tax paid and the impact on the business will depend on many things, including the industry, the particular configuration of each facility, the ability to use alternative fuel sources, and to make new investments to reduce the use of fossil fuels. As with individuals, in both the near term and further into the future, businesses will have choices that can be made in terms of how things are shipped, how much business travel is undertaken and what equipment and fuel is used, all of which will affect the amount of tax that will be paid.

The low initial tax rate is not expected to significantly affect the business community and the five year phase-in will allow time for businesses to adjust. The province hopes that other jurisdictions will also put effective mechanisms in place that put a reasonable price on GHG emissions. The cap and trade system, which will be implemented across a number of western jurisdictions will be an important step in that direction. Much of the carbon tax revenue will be recycled to business, initially through significant corporation income tax reductions, mitigating the net impact on the business community. In addition, the reduction to school property tax rates for the major industrial class announced in Budget 2008, while not a revenue recycling measure, will provide important tax relief to industrial facilities across the province and will help improve their competitiveness.

Impact on GHG Emissions

The carbon tax is purposely being started at a low rate compared to the rates at which some experts have suggested will ultimately be required to encourage significant changes in behavior. Even at $30 per tonne in 2012, some experts argue that a higher price will ultimately be required. As noted above, this phase-in is intended to provide individuals and businesses with time to adjust and to provide certainty about initial rates.

Table 1.8.

After being phased-in, further tax rate changes will depend on a number of factors including:

  • whether BC is meeting its emissions targets;
  • the expected future impact on emissions of other policies such as cap and trade and low carbon fuel standards;
  • the actions taken by other governments to reduce their GHG emissions and to set a price on carbon; and
  • the advice of the Climate Action Team.

A preliminary estimate by M. K. Jaccard and Associates suggests that in the absence of other GHG reduction policies, the carbon tax could reduce BC’s GHG emissions in 2020 by up to 3 million tonnes of CO2-equivalent annually. This is based on introducing the tax, increasing it to $30 per tonne of CO2-equivalent over 4 years, and then leaving tax rates unchanged thereafter. When formally assessed in combination with the other GHG reduction policies being implemented, the impact of the carbon tax will be somewhat lower.

Other Climate Action Tax Initiatives

To help families with the transition to a lower carbon lifestyle, the government is also introducing new incentives through the tax system totaling $64 million over three years. These measures are described in Table 1.9

Table 1.9.

Carbon Tax Conclusions

When implemented effective July 1, 2008, the carbon tax will provide British Columbia with an important climate action tool. By phasing in the tax based on an initial rate of $10 per tonne of GHG to $30 per tonne over five years, individuals and businesses will have time to make adjustments before the tax becomes more significant and recent purchase decisions will be respected. The revenue from the tax will be fully and transparently recycled by reducing other taxes, including the Climate Action Tax Credit specifically designed to help lower income families. The carbon tax will apply as broadly as possible to fossil fuel purchases and use by both individuals and businesses in BC, effectively putting a price on 70 per cent of provincial emissions.

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