BC’s carbon tax after 5 years

In 5 years, debates about BC’s carbon tax have generated much heat and little light, but Stewart Elgie and Jessica McClay of the University of Ottawa have just released a good effort to rectify this situation. Comparing fuel consumption (gasoline, diesel, propane, fuel oil, etc.) in BC with the rest of Canada, before and after the imposition of the carbon tax, they detect a significant change. Prior to 2008, BC’s petroleum fuel use changed in lock-step with the rest of Canada. But afterwards it fell 17.4% per capita in BC while rising 1.5% in the rest of the country. They also noted that BC’s economy performed as well or better than other provincial economies, a partial response to the much-touted argument that BC’s economy would suffer terribly because of the tax. (Stephen Harper repeatedly claims that carbon taxes destroy economies, with zero evidence in support – which some people would call lying.)

Of course, people will still argue that the BC carbon tax had no effect, or even perverse effects, and no amount of evidence will change the minds of some. But, interestingly, BC’s aviation fuels, which are not subject to the carbon tax, did not diverge from the Canadian pattern, supporting the argument that the carbon tax really did have an effect. And BC’s disconnect from the rest of the country was evident for all taxed fuels, not just gasoline; so the argument that BC’s divergence is caused by increased cross-border shopping for gasoline is not supported.

Sensible people (especially academics like Elgie and McClay) know that correlation does not prove causation. But this is why talented researchers like Nic Rivers (also at the University of Ottawa, where he is a Canada Research Chair) conduct sophisticated statistical studies in which they try to extract the influence of anything else that might have caused the BC divergence, including weather, economy, and other policies. In a not-yet-published paper with Brandon Schaufele he has found strong statistical evidence that the BC carbon tax is having an effect, already quite profound. (I will blog on this when it is released.)

None of this comes as a surprise to people trained in the field of energy economics. As a researcher and reviewer for academic journals, I have read countless papers showing that when energy prices change, some people (not all) respond by changing their behavior or technologies. The carbon tax changes energy prices and some people respond. Researchers like Elgie, McClay, Rivers and Schaufele are starting to detect this response, although it will take many more years to get a firmer sense of the full effect of the tax. (Scandinavian countries have had carbon taxes for two decades and the response is easy to detect and agreed upon by all leading researchers.)

But does this new study make me a devotee of the carbon tax? No. While my position on many things has changed over the last 20 years, the repeated evidence – including from the BC experience – has only reinforced my opinion on the strengths and weakness of the carbon tax. Yes, it is the most economically efficient way of reducing emissions. Yes, I will desperately support any elected politician who implements one – or who wants my help to design one.

But I never tell politicians that they must implement a carbon tax to reduce greenhouse gas emissions. If they ask me to assess their climate policy options, I always say that other compulsory policies, like cap-and-trade or regulations on technologies and fuels, can reduce emissions as effectively as a carbon tax, not as cost-effectively as a carbon tax, but just as effectively. If a committed politician prefers one of these, because he or she fears the political difficulty of succeeding with the carbon tax, I tell them I can design these with enough market flexibility to almost (!) approximate the economic efficiency of the carbon tax.

We humans have amply demonstrated over the last 20 years that we are incapable of acting effectively on global warming. Why on earth would we worsen bad odds by insisting that politicians do a carbon tax when there are less-politically-difficult ways of achieving the same, already-incredibly-difficult objective?