A Tax Even the Tea Party Could Love
October 27, 2010
Here’s a tax idea that Republicans and Democrats can both rally around. It’s the revenue-neutral carbon tax. Introduced in British Columbia in 2008, it’s actually put $194 million back into the pockets of B.C.-taxpayers while reducing greenhouse gas (GHG) emissions and stimulating new green jobs.
How does a tax put money into taxpayers’ pockets?
Here’s how it’s working in B.C. The province imposes a tax on purchase or use of fossil fuels based on the amount of GHGs emitted when a unit of the fossil fuel is burned. As the provincial government collects the new carbon tax, it must simultaneously reduce personal or corporate income taxes by at least an equivalent amount. In the 2+ years since the tax started, the province has cut these other taxes by $194 million more than they’ve collected from the new carbon tax. The Ministry of Finance claims that as a result of these policies, “B.C. now has the lowest income tax rates in Canada for people earning up to $118,000, B.C.’s corporate taxes will be the lowest in the G7 group of countries, and B.C.’s small business tax rates will be the lowest in Canada by 2012.”
This kind of tax policy simultaneously promotes sustainability, innovation, and job growth. By increasing the cost of fossil fuels, the carbon tax encourages users of those fuels to reduce their consumption through reduction, efficiency improvements, or turning to cheaper alternatives. The search by fossil fuel users for efficiency improvements and alternatives, in turn, promotes innovation and investment by those firms who stand to profit by serving those customers. Low corporate tax rates tend to attract investment and job creation, even in industries that have nothing to do with clean energy.
We’re seeing this virtuous cycle at Harvest Power’s operations in B.C. Two of our existing customers are large users of fossil fuels. They’re actively looking for ways to cut their carbon tax burden. They’ve asked us to increase our output of a wood-based alternative fuel we obtain from local waste so it can displace some of their fossil fuel consumption. In order to meet that demand, we’re looking at investments we can make in new, cutting-edge equipment. Such capital spending, as any economist will tell you, is vital to job creation and economic recovery.
That’s just one example. More broadly, the B.C. carbon tax fits into the province’s wide-ranging Energy Plan and Climate Action Plan that are designed to reduce the province’s GHG emissions 33% by 2020 while creating up to 89,000 new jobs and becoming a global economic leader in clean energy technologies. As businesses and individuals try to evade having to pay the carbon tax, they’ll turn first to local businesses for help, just as Harvest’s customers have done. As those businesses compete to serve their B.C. customers, they’ll innovate and develop the competencies and expertise to compete in the global clean tech race.
Another virtue of the revenue neutral carbon tax is that it’s administratively simple. The GHG emissions from burning a unit of each type of fossil fuel are well known. Once the tax rate is set (say $25 per ton of CO2 equivalent emitted), it’s easy to calculate the tax to be imposed on a unit of each type of fuel. The tax can be imposed and collected at the wholesale level the same way that most motor fuel taxes are collected today. No need for complicated “cap-and-trade” systems or for emissions measuring systems, which require armies of measurers and validaters.
More US states and Canadian provinces should take a look at the revenue neutral carbon tax as a way to promote both economic and environmental benefits. It’s a market-based approach whose appeal could span the usual ideological divides.
By Wayne H. Davis, Vice President, Incentives & Regulatory Affairs, Harvest Power Inc.
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