Last week I wrote about B.C.'s carbon tax and some of it's unintended consequences. The main problem is that we tax carbon generated in BC, instead of taxing products and services consumed in B.C. based on their final carbon content. In an increasingly globalised world, where production can easily be outsourced to another continent, not only does this system fail to meaningfully reduce carbon emissions, but it puts B.C.'s economy at an unnecessary disadvantage compared to our trading partners. Fortunately, there are solutions.
My first real job was as a tax policy economist in Ottawa. I remember two lessons from that time that are very relevant to the implementation of the carbon tax in B.C. First, when it comes to any mobile factor of production, governments cannot set tax levels at any level they wish; instead they must compete with other jurisdictions around the world. This is why we have seen tax levels on capital, and corporate income drop dramatically in most countries over the past twenty years. Property, by definition, is not mobile and that is why it is the only type of tax that has not reduced dramatically in recent times, (citizens of Prince George know this only too well!). So if we are going to tax carbon as its used in industry, we need to ensure it is not so high as to drive away that industry to other countries such as China or the US.
The other major tax policy principle we should try to achieve is to not tax industrial production at all but instead focus on final consumption. After all, it's the end consumer who ultimately decides to purchase a product and trigger the carbon emissions associated with the entire supply chain. This is the principle on which the GST operates. For example, the federal government collects GST on lumber bought in Prince George to be consumed here. It does not collect a cent of GST on lumber produced in this region that is exported abroad. This means that our local sawmills and the people who work at them can compete in the global economy. The carbon tax should work in a similar fashion.
B.C. should work to refine its carbon tax based on these fundamental principles. In order to do so it must coordinate with other jurisdictions who already have or will soon have a carbon tax. Some American states like Oregon and Washington may soon have carbon taxes. Japan already has one. Also, many other countries are looking at introducing "cap and trade" systems that are similar to carbon taxes. When looking at these carbon taxes in economies that B.C. competes with, we should ensure that the level of our carbon tax is similar to the level in other jurisdictions. We should also look at taxing imports to B.C based on their carbon content as Japan already does. Finally, we should also ensure that our carbon taxes are compatible in the sense that carbon tax paid in one jurisdiction will be recognised in other similar jurisdictions.
While I have my reservations, I think carbon taxes are here to stay. Refining them to ensure B.C.s international competitiveness will ensure our carbon tax is both effective and efficient.
