Course:ECON371/UBCO2009WT1/GROUP6/Article1
Group 6: Carbon Tax in Canada
Article: B.C. Carbon Tax Boosts Prices At Gas Pump
Summary
This article was written one year after the day the B.C. government brought in the carbon tax. Initially set at 2.4 cents per litre of gasoline, the tax has been increased to 3.4 cents per litre, and will be raised periodically with a 30% reduction target in CO2 emissions by the year 2020. Finance Minister Colin Hansen believes the carbon tax could raise up to 550 million dollars in revenue this year; money that will be redistributed to British Columbians through various income and business tax cuts. The article also mentions that support for this sort of tax seems to be on the rise across the country, suggesting the tax is working - that is, making people more aware of the problems that CO2 emissions create, and showing a willingness of the people to change their behaviour and lower their consumption of fossil fuels like gasoline.
Analysis
Introduction: Costs and Benefits
With the strengthening causal link between greenhouse gases and increases in global temperature, there is an increased demand to reduce carbon emissions. However, though carbon emissions are costly in environmental degradation and corresponding effects on our health, prior to the carbon tax, carbon emitters in British Columbia did not pay for that resulting cost.
The BC carbon tax is an incentive-based policy aimed at reducing the amount of carbon dioxide produced in the province. By the BC government levying a tax on fossil fuels, now at $15 per tonne of carbon emissions, they are in effect putting a price on pollution. That price is aimed to reconcile the previously low marginal cost of emitters with the true social cost of their emissions.
The addition of a price on carbon, unlike a regulation, does not limit carbon emissions, it merely offers an incentive for emitters, people and firms, to release less of it. One way for busineses to lower emissions is to increase research and development spending which could lead to innovation in more efficient manufacturing practices and overall cleaner technology.
Demand of Fossil Fuels
With the instatement of an emissions tax many people will search for alternatives to emitting carbon. For example, by increasing the price of gas at the pump, the demand curve for fossil fuels shifts left. Customers either buy less gas or completely take their business elsewhere. Possible substitutes to fossil fuels are fuel efficient cars, such as hybrids, or the increased use of public transit. As the demand for fossil fuels decreases, the demand for these substitutes increases, and the demand curves for both public transit use, and for the purchases of hybrid cars, will shift right.
Just as substitutes for fossil fuels will be inversely affected by the rising gas prices, its compliments will also be affected. An example of such a compliment would be the money spent on car repairs. As gas prices rise, people will drive their cars less often, and because of this, fewer car repairs will be necessary, due to less usage. Therefore the demand curve for car repairs will shift left, which is the same direction as the demand curve for fossil fuels.
Levels of Provincial Support
Our article highlights the fact that not all provinces feel the same way about the carbon-tax. Alberta and Saskatchewan the least supportive, while the rest are showing higher levels of approval.
Alberta and Saskatchewan were found to be less supportive of a similar tax, this could be possibly understood when we look at the main industries of these two provinces. Alberta’s main source of wealth is oil, the carbon tax’s main goal is to decrease demand of oil which would affect the revenue gained. In addition the extensive extraction and basic refining processes underway in the Wild Rose province emit large volumes of CO2, with a tax on said emissions, the firms involved would have substantially higher production costs. As seen in Graph 1 (statscan), Alberta's carbon emissions rank first among all provinces and territories, what is especially troubling is this is not based on per capita emissions. So where Alberta has roughly a third of Ontario's population, it as a province produces more CO2.
Like Alberta, Saskatchewan has a thriving oil industry, the prairie province is now Canada's second largest oil producer. Saskatchewan also gains a lot of revenue from agriculture which releases large amounts of CO2 from fuel usage and soil and organic materials. If a carbon tax is put in place the cost of supplying grain and other agriculture products will increase. Graph 1 demonstrates Saskatchewan's higher proportion of CO2 emissions when compared to the similar populated province of Manitoba. Since both provinces have relatively similar levels of population, Saskatchewan's vastly higher emissions levels could offer some explanation as to why there is less support for a carbon tax.
The Maritimes at close to 50%, as mentioned in the article, are polled to be among the highest supporters of the carbon tax, this could be explained by the fact that they have the lowest emissions as seen in Graph 1. Though the low levels could be a result of less carbon dependent industries, it is unclear due to the region's small population.
Though an industry explanation is likely to be a contributing factor in the differing levels of support among provinces, there must be other factors considering the differences in ratios between provincial support and provincial emissions. Where Alberta has exponentially higher emissions than the Maritimes, the levels of support for a carbon tax only differ by approximately 6%. Possible explanations for this is that the environment is a normal good, and as the oil industries produce more wealth for both Alberta and Saskatchewan, there is a greater demand for environmental protection. This idea is supported by the fact that Alberta which has become wealthier as a result of its oil production, though it has by far greater emissions, is more supportive (at 44%) of a carbon tax than Saskatchewan (at 41%), which has comparatively generated less wealth from its oil industry.
Negative Externality
This diagram shows the deadweight loss caused by a negative externality, such as carbon dioxide emissions. In an attempt to reduce, or even eliminate the deadweight loss caused by carbon dioxide emissions, BC's provincial government brought in a tax on fossil fuels, hoping to lower public demand for those fuels, and thereby lower carbon dioxide emissions. Without the tax on fossil fuels, the marginal costs of production (including social costs caused by CO2 emissions) are far greater than the benefits recieved from the corresponding consumption of fossil fuels (Q*). It is the hopes of the government that by incrementally increasing the price of fossil fuels each year through the carbon tax they can lower public demand for fossil fuels, causing continuous shifts along the demand curve until a socially efficient level of emissions is reached (where S' = D, or marginal social cost equals marginal social benefit), and the deadweight loss will be eliminated.
Conclusion: Carbon Tax Consequences
This article touchs on many important results of the carbon tax, the most important being a step closer toward environmental sustainability. Another result of the tax is its affect on the distribution of wealth. Where the tax affects all consumers of carbon, regardless of their income, poorer people will pay a higher proportion of their wages to purchase gas and other basic fuels. In addition, as the BC government is using revenues generated from the tax to cut income and business taxes, this tax restributes money away from those who are in poverty. People earning below a taxable income will still have to pay the carbon tax, but the money they pay is going to cover the costs incurred by lowering the income and business taxes of others.
Support for a carbon tax varies among provinces, and in review of each provinces emissions, the tax would affect each province differently. In the short-run Alberta would bare the greatest impact of a carbon tax, and as such the idea of a carbon tax may not be too palitable. Politicians could eventually gain support for the idea though if the focus is made on the long-run of environment sustainability. After a carbon tax, with competition, the many large firms in Alberta would invest in new technologies that have lower marginal abatement costs, and levels of production would continue to grow with less of an impact on the environment.
In conclusion though British Columbians are immediately affected by the increase in gas prices, they will later be rewarded. In time they will have made the transition away from the overuse of fossil fuels and the environment will benefit enormously from the decrease in carbon emissions. The BC government has set up a system to reimburse taxpayers using the revenue generated from the tax. They plan on making tax cuts, for both business taxes and income taxes. This acts as an incentive to gain support from the public, and to increase the amount of carbon emission cutbacks that the public will be willing to make.
Prof's Comments
Nice analysis. Your challenge is going to be finding new angles and different aspects of the carbon taxes to discuss, so that you are not simply repeating the same analysis with every article.