Monday, August 19, 2013

Carbon Tax Has Little Effect On Fuel Consumption

VANCOUVER, BC, Aug 18, 2013/ Troy Media/ – Carbon taxes have been attracting renewed attention. Last month Ottawa-based think tank Sustainable Prosperity (SP) issued a report claiming that B.C.’s carbon tax has triggered a rapid-fire decline in fossil fuel consumption, leading to a sizable drop in emissions of greenhouse gases (GHGs). Then a few days later a local consulting firm published a paper suggesting that the average household in B.C. benefits financially from the carbon tax because of offsetting personal income tax relief measures introduced by the government.

Within North America, B.C. is a pioneer in carbon pricing. Initially set at $10 per ton of GHG emissions in 2008, the carbon tax rose to reach $30/ton in July 2012. The government has now frozen the tax for five years. To date, no other province or state has instituted the type of broad carbon pricing regime found in B.C.

What difference has it made? Sustainable Prosperity says the carbon tax has had a dramatic effect on energy consumption, despite its short life. They estimate that fossil fuel consumption in B.C. has fallen by 17.4 per cent, measured on a per person basis, since 2008. Relative to the rest of Canada, the decline is even greater – almost 19 per cent.

In explaining this big decline in per capita fuel consumption, the SP authors focus largely on the role of the carbon tax. To an economist, this is a surprising assertion that seems inconsistent with mainstream economic analyses indicating that the demand for energy is price inelastic. This means that most consumers, in response to a modest increase in tax-inclusive prices, are unlikely to significantly change the amount or type of energy used.

For vehicle operators, B.C.’s carbon tax currently translates into an extra 6.7 cents for a litre of regular fuel (which today costs $1.45 in Metro Vancouver); in comparison, Translink’s regional fuel levy is 17 cents/litre. It would be remarkable if motorists substantially reduced gas consumption solely due to a five per cent increase in the tax-inclusive price, especially given that retail gas prices can easily vary by 10 per cent in a single month (and by 2 to 3 per cent on a daily basis).

B.C.’s carbon tax also boosts the prices of other transportation fuels, such as diesel, on which local businesses rely to transport goods. Similarly, it raises the cost of other forms of fossil fuel energy, including natural gas to heat buildings and operate industrial facilities, and energy inputs used for resource processing and manufacturing. In theory, the carbon tax should cause businesses to modify their energy choices and production processes. Some have undoubtedly done so. But since there are few or no cost-effective substitutes for fossil fuel in most transportation and industrial uses, the carbon tax also creates incentives for some B.C. businesses to reduce output or shift production and investment to other locations where energy taxes are lower.

The SP report doesn’t examine other factors, apart from the carbon tax, which have influenced reported energy use in B.C. since 2008. These include the sharp decline in production and employment in the forest sector following the collapse of U.S. housing markets (forestry is the largest industrial consumer of energy in the province); various developments that have dampened fuel consumption in the lower mainland (completion of the Canada Line, higher regional parking taxes, the rising TransLink fuel levy, and steep increases in parking meter rates in Vancouver); and the effective mothballing of B.C. Hydro’s Burrard Thermal gas-fired power plant, which prior to 2008 made a meaningful contribution to domestic electricity supply.
Another relevant factor is the surge in cross-border shopping. The past five years have seen a doubling in the number of British Columbians visiting Washington state, most of whom fill their tanks while there (many B.C. truckers and commercial vehicle owners also buy fuel in the U.S. and in Alberta). Growing cross-border fuel purchases artificially lower reported energy consumption here in B.C.

What about the economic effects of the carbon tax? SP argues it has had little impact on B.C.’s macroeconomic performance, because the carbon tax revenues have been fully recycled back into the economy through personal and business tax relief measures. This claim makes sense.
However, the rising energy costs stemming from the carbon tax have hurt some B.C. export industries, as well as manufacturers that compete with imports in the domestic market. In aggregate, the government’s “tax shift” policy has imposed a net financial burden on businesses: the carbon tax paid by all B.C. enterprises (about $600 million per year) exceeds the revenues they save from slightly lower business tax rates.

And with the provincial government’s recent decision to lift B.C.’s corporate tax rate from 10 to 11 per cent, any economic benefits accruing to the business sector as a whole under the carbon tax regime will be further diminished.

Jock Finlayson is Executive Vice President of the Business Council of British Columbia.


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