Lessons from British Columbia’s Carbon Tax

In yesterday’s NYT, Yoram Bauman and Shi-Ling Hsu explained why the U.S. would be wise to follow British Columbia’s example and impose a carbon tax and use the revenues to reduce other tax rates.

On Sunday, the best climate policy in the world got even better: British Columbia’s carbon tax — a tax on the carbon content of all fossil fuels burned in the province — increased from $25 to $30 per metric ton of carbon dioxide, making it more expensive to pollute.

This was good news not only for the environment but for nearly everyone who pays taxes in British Columbia, because the carbon tax is used to reduce taxes for individuals and businesses. Thanks to this tax swap, British Columbia has lowered its corporate income tax rate to 10 percent from 12 percent, a rate that is among the lowest in the Group of 8 wealthy nations. Personal income taxes for people earning less than $119,000 per year are now the lowest in Canada, and there are targeted rebates for low-income and rural households.

According to Bauman and Hsu, adopting a similar tax in the U.S. could allow for substantial reductions in corporate and income tax rates.

What would a British Columbia-style carbon tax look like in the United States? According to our calculations, a British Columbia-style $30 carbon tax would generate about $145 billion a year in the United States. That could be used to reduce individual and corporate income taxes by 10 percent, and afterward there would still be $35 billion left over. If recent budget deals are any guide, Congress might choose to set aside half of that remainder to reduce estate taxes (to please Republicans) and the other half to offset the impacts of higher fuel and electricity prices resulting from the carbon tax on low-income households through refundable tax credits or a targeted reduction in payroll taxes (to please Democrats).

The threat of climate change is one reason to support a revenue-neutral carbon tax proposal like this. But even those skeptical that warming poses much of a threat could come on board simply because broad-based consumption taxes of this sort are more efficient than taxes on labor and wealth creation. Furthermore, as Bauman and Hsu note, a carbon tax, as a consumption tax, would “give Americans more control over how much they pay in taxes.” Households and businesses could alter what they pay the government by altering their behavior. This is but another reason to favor shifting the tax burden away from income and on to consumption of carbon.