HOW AN ECO-TAX WOULD BENEFIT LIVES IN B.C.

Researchers say their model shows how a tax on carbon dioxide emissions would increase employment, cut pollution and have negligible effects on the costs of production.

by:  Amy Taylor and Mark Jaccard, School of Resource and Environmental Management, Simon Fraser University

(from:  The Vancouver Sun, June 30, 1999)

If there is one thing everyone knows about economics it is that people use less of something if it costs more.

The government charges people when they hire someone yet it charges almost nothing when they pollute, even though British Columbians repeatedly say they want more employment and less pollution.  Recently we conducted a study in which we assumed that the B.C. government gradually shifted its taxation policies to reflect these values.

While many different wastes are dumped into our environment, our research project done over the past three years focused on carbon dioxide emissions from fossil fuel consumption, water use and solid waste disposal.  It was one of the first studies of its kind in North America (only New York and Minnesota have been researched at this detail), we simulated the effect of gradually applying a tax to these three.  This is known as ecological tax reform.

Just like other "sin taxes" on cigarettes and alcohol, eco-taxes generate revenues that government can use for various purposes.   Those on the political right might argue for debt reduction or reduced income, capital and profits taxes.  Those on the left might argue for increased funding for schools, hospitals and social services.  In our study, we used the eco-tax revenue to reduce the various payroll charges that make it costly to employ someone - worker's compensation premiums as well as unemployment insurance and pension premiums.

Our simulation model estimates how firms and households respond to the rising tax costs of polluting and the falling costs of hiring.  It keeps track of myriad technologies - everything from fridges to pulp dryers - and uses information on consumer and firm behaviour to simulate their ability to adjust to changing costs.

The study tested two scenarios of gradually rising eco-taxes over the period 2000 to 2020 - an ambitious and a tentative tax scenario.  However, even the ambitious tax scenario is moderate compared to what has been tested elsewhere see chart

For example, the ambitious CO2 tax increases the price of gasoline by only eight cents a litre by 2010, less than the recent price fluctuations.

Depending on the scenario, annual eco-tax revenue ranged from $1 billion to $2.5 billion by 2020.  Water consumption fell 15% to 35%, solid waste generation dropped 25% to 50% and carbon dioxide emissions were cut 8% to 15%.

Employment increased by 3% to 6% - that's 100,000 to 200,000 more jobs over a business-as-usual total of about 3 million in the year 2020.

Finally, costs of production for key sectors showed negligible or no change.  While there is considerable uncertainty associated with these numbers, the general direction is consistent with research and experience elsewhere - several European countries are beginning to see job creation associated with their eco-tax initiatives.

What is the downside?  Naysayers argue that eco-tax reform would cause both short-term adjustment costs and long-term production cost increases that would hurt resource-dependent sectors and regions of the economy, affecting especially low-income households.

If the eco-tax is designed poorly, this outcome is possible.   However, intelligent policy design could reduce or even eliminate such impacts.

First, the eco-tax shift should not be too great.  The idea is to begin to bring our taxation system into line with public values.  The idea is not to end all pollution overnight and cause an economic crisis in the process.

Second, the eco-tax shift should be implemented gradually.   Research shows that the costs to firms and households of adjusting to eco-taxes are dramatically lower if the adjustment occurs gradually and with knowledge of future tax levels.

People don't buy a new furnace, car or appliance every year.   With enough warning, we can take the projected tax into account when such purchases occur.

Third, while the eco-tax revenue is collected from all firms and households (in accordance with their CO2 emissions, water use and solid waste generation), using our model it would only be returned to firms.  Thus, many firms (especially labour-intensive ones) will see their total cost of production fall.

Those companies with rising costs, and those that face competitive pressure from jurisdictions without comparable eco-taxes, would be given a partial tax rebate and/or assistance with their adjustment costs.  This is currently done in Denmark and other countries to reduce CO2 tax effects on energy-intensive exporting industries.

Fourth, negative effects on low-income households could be offset by various programs to assist them with adjustments (income-targeted tax rebates and energy/water efficiency support).

While this study provides a starting point, leadership by government and key interests is needed to further design and explore eco-tax reforms that can benefit the province without negatively affecting particular regions, industrial sectors or income groups.

(Amy Taylor is a research associate and Mark Jaccard, the former head of the B.C. Utilities Commission, is a professor in the School of Resource and Environmental Management at Simon Fraser University.)