B.C.'s Carbon Tax -- An update

According to the World Bank[1], at the end of 2018 there were 50 carbon pricing schemes in place globally — 44 currently implemented and 6 scheduled-to-be-implemented carbon pricing mechanisms. Of these, 27 are carbon taxes and 23 are emissions trading systems of various kinds. There are a further 23 carbon pricing schemes still “under consideration” (i.e., not scheduled to be implemented) — 5 may result in carbon taxes, while 15 could lead to emissions trading schemes and in 3 cases the mechanism is undecided.

The current split between the two carbon pricing options is 54% tax and 46% trading. If there is full implementation of the 23 proposals still under consideration, emissions trading will make up most global carbon pricing schemes. See table 1 below for details. The overall result, at present, is that ~20% of global greenhouse gas emissions are covered under some sort of established carbon pricing policy, with the schemes now in place generating an estimated US$33 billion in annual revenue (in a global economy where total output stands at ~US$85,000 billion).

Table 1
Carbon Pricing Mechanisms by Type and Status, 2018

Carbon Tax Emissions Trading Undecided Total
Implemented
National 21 5 26
Regional 1 1
Sub-National 2 15 17
Sub-Total 44
Scheduled
National 4 2 6
Regional 0
Sub-Nation 0
Sub-Total 6
Under Consideration
National 2 7 2 11
Regional 0
Sub-National 3 8 1 12
SubTotal 23
TOTAL 32 38 3 73
Source: World Bank.

The average international price of emissions (i.e., CO2e) for those jurisdictions with implemented systems is roughly US$21/tonne — the median price is ~US$7/tonne. But the average is based on a wide array of figures from as low as US$0.01 per tonne (Ukraine) to as high as US$126/tonne (Sweden). Before getting excited about the latter and concluding that there is ample room to hike government-mandated carbon prices in B.C or Canada, it is important to consider how much of the economy is covered and what is captured in the carbon pricing programs instituted in other jurisdictions.

Let’s use Sweden as an example, since it has a high carbon price/tax.

What is often missed is that Sweden’s carbon tax covers just ~40% of its economy, mostly household and commercial activities. Tellingly, all of industry — including companies and sectors that are exposed to international competition via trade channels — participate in the European Emissions Trading System (ETS), which covers industry in 31 countries (28 EU countries plus Iceland, Liechtenstein and Norway). That is, Swedish industry does not pay the country’s carbon tax. The EU maintains an extensive list of industries[2] who participate in the ETS, are “exposed to a significant risk of carbon leakage[3] [and which] receive special treatment to support their competitiveness.” What support do they receive? Free allowances, according to emission efficiency benchmarks, which exempt them from carbon prices on a base amount of annual production/emissions. The current price of greenhouse gas allowances in the ETS is US$18/CO2e tonne, far below B.C.’s CDN$35/tonne carbon tax (set to rise to CDN$40/tonne in April 2019).

In addition, it so happens that Sweden, like Canada/B.C., is an export-oriented economy with timber, hydropower, and iron ore forming core parts of the export sector along with other industries such as motor vehicles, telecommunications, pharmaceuticals, industrial machines, precision equipment, chemical goods, home goods and appliances, engineering, mining, steelmaking, and pulp and paper. Sound familiar?

What is the point? Four simple things stand out for B.C., based on the Swedish example:

  • British Columbia’s carbon tax applies equally to anyone who lives, works or does business in the province with two exceptions.[4] On a coverage basis, we top the list globally since all cap and trade systems usually apply only to industry rather than household and commercial operators.
  • Simple arithmetic shows that B.C.'s carbon price, as of April 1, 2019 at US$30/CO2e tonne (CDN$40),[5] is ~50% higher than what competitor industries pay in the European Union, including Sweden and other Nordic nations that Canadian environmental groups often cite as “climate leaders.”
  • There are NO provisions for dealing with carbon leakage in B.C., and only belatedly has the government seen the need to acknowledge let alone tackle the growing handicap to competitiveness and investment that the province’s carbon pricing policy has created in many of our most prominent trade-exposed industries. The possible use of a portion of the incremental CDN$5/tonne increases in the carbon tax above $30/tonne, through CleanBC, while welcome, will do little to address long-standing carbon leakage concerns consistently raised by the Business Council since 2008.
  • A steadily escalating B.C. carbon tax, together with other government-determined cost pressures such as higher corporate tax rates and the new Employer Health Tax as well as rising fees and regulatory costs, may lead to slightly lower greenhouse gas emissions — not because of reductions in GHG intensity or stepped-up innovation by B.C. industries, but rather because of shut-in or avoided investment in industrial activities and a shift of investment dollars elsewhere. Already we see evidence of this pattern in the natural gas, mining and forest industries, as well as in food processing and some other segments of manufacturing.

To put a more direct spotlight on price, how does B.C stack up against some other regions that have embraced carbon pricing if one compares the cost of emitting 100 tonnes of CO2e? Well, by our reckoning, as of April 1, 2019, B.C.’s carbon cost is 25% higher than that in our closest neighbour, Alberta. Our carbon costs are also ~140% higher than in the U.S. RGGI [6], 65% more than in Quebec and California, and ~38% more than in South Korea. In other words, we are “leader” in carbon pricing, but certainly not in overall industrial competitiveness.

Some data for China are shown below for interest and since Canada hopes to increase trade with the world’s second largest economy. There is much talk among Canadian ENGOs about steps taken to price carbon emissions in China. This appears true and is a good thing, but on closer examination it rings quite hollow given that the average price per tonne CO2e in China is ~US$3.50 – a miniscule number, when placed in context.

Table 2
Greenhouse Gas Pricing Select Regions

Location US$/tonne CO2e Coverage US$/100 tonnes
RGGI (C&T) 4.94 20% 494.00
Quebec (C&T) 15.52 50% 1,552.00
EU ETS 17.79 45% 1,779.00
Alberta Carbon Tax 22.92 45% 2,292.00
California (C&T) 15.52 85% 1,552.00
Korea ETS 20.10 68% 2,010.00
B.C. Carbon Tax (2017 value) 26.74 70% 2,674.00
Greenhouse Gas Pricing in China
Chongqing Pilot ETS 2.01 40% 201.10
Tianjin Pilot ETS 1.66 55% 166.00
Guangdong Pilot ETS 2.40 60% 240.00
Hubei Pilot ETS 4.15 35% 415.00
Fujian Pilot ETS 2.87 60% 287.00
Beijing Pilot ETS 6.30 45% 629.90
Shanghai Pilot ETS 5.18 57% 517.70
China Average 3.51
Source: World Bank.

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Footnotes:

[1] https://carbonpricingdashboard.worldbank.org/map_data and State and Trends of Carbon Pricing 2018.

[2] Current list for 2015 to 2019: https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014D0746&from=EN.

[3] A sector or sub-sector is deemed to be exposed to a significant risk of carbon leakage if: direct and indirect costs induced by the implementation of the directive would increase production cost, calculated as a proportion of the gross value added, by at least 5%; and the sector's trade intensity with non-EU countries (imports and exports) is above 10%. A sector or sub-sector is also deemed to be exposed if: the sum of direct and indirect additional costs is at least 30%; or the non-EU trade intensity is above 30%.

[4] Cement and greenhouses.

[5] Exchange rate of $1.33 US for every Canadian dollar.

[6] US States participating in RGGI: Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New York, Rhode Island, and Vermont.