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FOR IMMEDIATE RELEASE

In January 2017, Alberta and Ontario will join British Columbia and Quebec as the only Canadian provinces with carbon-pricing plans, while Prime Minister Justin Trudeau recently proposed a national carbon “floor price” to be implemented by 2018. Across the border, carbon taxes are making the news nationally as Washington state voters prepare to head to the polls on November 8 to decide whether to implement the United States’ first revenue-neutral carbon emissions tax.

 

Professor Werner Antweiler of the UBC Sauder School of Business recently studied the effects of B.C.’s carbon tax, which was implemented in 2008. In his study published earlier this year, Antweiler found that per-capita gasoline demand in B.C. decreased by approximately 15 per cent between 2007 and 2014. He also determined that B.C.’s carbon tax has been effective in reducing fuel consumption and shifting car purchases towards higher fuel efficiency.

Here, Antweiler discusses the issues surrounding both the Canadian national carbon floor price and Washington’s proposed carbon tax in light of his findings in B.C.

 
Do you think the B.C. experience can be replicated in Washington state?  
 

Washington has a lot in common with British Columbia in terms of dominant industries and power generation, so there is every reason to believe that the lessons learned in B.C. will apply in Washington state.

Most of the adjustments would be borne by transportation and households, while electricity-intensive industries (in particular, IT) would face few additional costs. Initiative 732 would also be mostly revenue neutral, returning revenue from the carbon tax through a one percentage point reduction in the state sales tax, and additional reductions in business and personal taxes. As such, implementing a carbon tax in Washington would have similar environmentally-beneficial and economically-benign effects as it has in B.C.

However, there is opposition against I-732 on many fronts. On one hand, opinion polls suggest that public opinion about the urgency to tackle climate change remains divided south of the border. On the other hand, environmentalists have not fully embraced carbon taxes and have asked instead for a double-dividend green fund, which is similar to Quebec’s Green Fund and recycles revenue from the province’s cap-and-trade auctions. Subsidies fuelled by a double-dividend fund are more likely leading to opportunistic expenditures and showcase projects that use up the available funds without proper means-testing. Besides, governments have a poor track record of choosing cost-effective ways of reducing CO2 emissions, and markets are much better at finding the most efficient path by reacting to price signals.

Our research shows that fuel taxes of any level make a difference, so it is perfectly clear that carbon pricing in Washington will help reduce emissions slowly but steadily. But, new taxes remain eminently unpopular, as does tinkering with a state tax system that is already in some disarray. If voters reject I-732, which is more likely than not, eyes will shift from Washington state to Washington D.C. for climate leadership.

Do you believe other states will follow Washington’s lead by proposing a carbon emissions tax?
 

The state of California remains the environmental leader in the United States with its cap-and-trade system (joint with Quebec and soon Ontario). It is not very likely that other states will follow, even if Washington’s I-732 passes. Despite the significant merits of using market-based approaches to tackle climate change, namely carbon taxes or cap-and-trade systems, there is little appetite in the United States for any sort of new taxes. The most opportune approach would be simply to raise the federal fuel tax, stuck at 18.4¢/gal (about 5¢/L) since 1993. This would benefit the environment and at the same time fix a large part of the huge federal budget deficit. Nevertheless, the political climate in the US Congress is currently not conducive to considering higher fuel taxes.

This is in contrast with Canada, where the Liberal government recently announced that all provinces must levy a national floor price on all carbon emissions. Even though Canada’s emissions of greenhouse gases are only about 1.6 per cent of the world’s total (compared to China, for example, at 24.5 per cent), all countries need to do their bit. The countries that lead through technological innovation can gain a competitive edge in the newly-developing market for climate solutions. Improving energy efficiency can even be a win-win: it reduces greenhouse gas emissions at the same time as it reduces long-term costs for businesses.

At what level must carbon taxes be set in order to make a demonstrable difference in fuel consumption and greenhouse gas emissions?
 

Taxes are permanent and influence decisions related to driving behaviour and vehicle purchases three times more than price increases from volatile oil prices. Our research has found long-term effects from fuel taxes that are apparent through purchases of more fuel-efficient vehicles rather than changes in driving behaviour. It doesn’t matter what type of fuel tax it is: a carbon tax, a provincial excise tax (as Newfoundland’s 16.5¢/L increase in June 2016), adopting a harmonized sales tax (as Ontario’s jump from five to 13 per cent in July 2010), or local fees as in Montreal and Vancouver.

But even B.C.’s carbon tax amounts to just 6.67¢/L—a puny amount that pales in comparison to most fuel taxes in Europe. The new federal minimum carbon price of $50/tonne in 2022 would still amount to only 11¢/L. The effect of fuel taxes is also not immediate. It takes a few years for higher fuel prices to fully translate into purchases of more frugal vehicles. Carbon prices are no miracle cures—the economy needs time to respond to price signals through innovation and new investments.

 

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