It's not hard to see why so many tax wonks find the idea of a carbon tax alluring. Slap a fee on oil, gas and coal use. Use the revenue to cut taxes elsewhere, such as income or corporate taxes. In theory, economists have argued, this sort of "tax swap" could help reduce carbon pollution without much harming the economy.
But how do carbon taxes actually work in practice? One place to look is the Canadian province of British Columbia, which has had a modest carbon levy in place since 2008. (The tax started at $10 per ton of carbon in its first year and rose by $5 per ton each year thereafter. That translates into a roughly 9-cent tax on a gallon of gasoline, rising 5 cents per gallon each year.)
A recent report (pdf) from the University of Ottawa's Sustainable Prosperity group checks in with British Columbia's carbon tax experiment and finds that it appears to be accomplishing at least some of its goals. The province has reduced its carbon emissions at a modestly faster rate than the rest of Canada, even after the country's 2008-09 recession ended. Here's that chart:
Emissions dropped all across Canada at about the same rate during the recession. But in 2010, when growth returned, British Columbia kept cutting — while emissions in the rest of Canada started rebounding. The report authors expect that difference to widen even further in 2011 (data are not available yet), in part because British Columbia's use of refined petroleum products has dropped sharply compared to the rest of Canada:
(One counterargument here is that these "rest of Canada" stats are being skewed by Alberta, which has invested heavily in oil production from its tar sands. To some extent, that's true. But the authors show that British Columbia's petroleum use has been dropping more sharply than even Quebec or Ontario — although the difference is less stark.)
A notable point here is that British Columbia's economy has also been growing slightly faster than the rest of Canada since the recession. In 2010 and 2011, the province grew at an average rate of 1.78 percent a year. The rest of Canada has been growing at a 1.64 percent. "While it would be a stretch to claim that the tax shift has had a positive impact on the economy," the authors write, "the data appear to indicate it has not had a negative effect."
One possible reason that the carbon tax has had a negligible effect on economic growth, however, is that British Columbia gets the majority of its electricity (pdf) from low-carbon hydropower, so electricity prices have been less affected by the tax than, say, they would be in a natural-gas-heavy province like Alberta or a coal-reliant state like Indiana.*
British Columbia has also used the carbon tax proceeds to lower both its local corporate income tax and the tax rates on the bottom two brackets, in order to alleviate the fact that the carbon tax hits the poor a bit harder. "As a result of the carbon tax shift," the authors write, "BC now has one of the lowest general corporate income tax rates in Canada (tied with Alberta and New Brunswick), and also the lowest personal income tax rate in Canada, for those earning up to $119,000."
Now, B.C.'s carbon tax experiment is still in its early phases, and there are two big caveats here. First, the province's new Liberal government has moved to cap the tax at $30 per year, claiming that the tax needs review. "We think now is the time to say no further increases," the province's finance minister Kevin Falcon said in February, "and let's have an opportunity to have a look at the carbon tax, both the good and some of the criticism we've received." If the carbon tax stops rising, that will blunt its impact.
The other point worth noting is that some environmental groups, including the local Sierra Club, have argued that British Columbia is understating its progress on carbon pollution by not counting emissions from deforestation or exports of natural gas and coal. Neither of these sectors fall under the carbon tax, but in a way, that's the point — getting greenhouse gas emissions down will almost certainly require more than just one basic tax, even if a carbon fee can make an initial dent.
*Update: added in point on hydropower