Impact | Under the microscope

Volume 21, Number 1
January 2015

Brandon Schaufele studied the impact of the province’s groundbreaking carbon tax and uncovered surprising results.

Gorilla or elephant.

Call it what you will, businesses will eventually come face to face with the proverbial beast in the room and the major issue driving global energy policy for the foreseeable future is climate change. 

Politicians have been reluctant to develop broad-based policy reforms to address the challenge for a number of reasons. Some governments lack support from constituents for any such policy (“It will devastate our industry!”). Others have sought broader coalitions before acting. (“If China and India aren’t going to take action, then why should we?”) 

Ivey Assistant Professor Brandon Schaufele has brought the elephant to its knees. 

His research examined the effects of British Columbia’s carbon tax policy introduced in July 2008. It was one of the most aggressive climate change policy initiatives in the world, the kind that every economist dreams of developing.

The initiative works like this: Greenhouse gas emissions (GHGs) generated from burning fossil fuels are taxed according to their carbon dioxide content. Individuals and businesses lower their fuel consumption, increase fuel efficiency, or adopt new technology in response. And in British Columbia’s case, all of the carbon tax revenue is returned to taxpayers through income tax reductions. 

“It turns out that, prior to B.C. (British Columbia) developing this policy, we had next to no evidence on how citizens would respond to carbon taxes because internationally we had very little empirical, real-world experience with carbon taxes or cap and trade policies,” said Schaufele, who recently joined Ivey from the University of Ottawa, where he was an Assistant Professor in the Department of Economics and Research Director for the Institute of the Environment and Sustainable Prosperity.

While most of the province’s service-based economy was not adversely affected by the carbon tax, other industries like cement and agriculture saw disaster, said Schaufele. 

“They were very concerned they were going to lose markets to international competitors from Washington State, Mexico, China. There was this huge fear that the tax would cause their doom.” 

Schaufele’s research uncovered a number of interesting results related to the tax:

• People overreacted in their fossil fuel decisions, reducing their gas consumption seven-fold more than was expected. 
• Agricultural producers – who were so adamant the tax was going to destroy their business that they were granted an exemption – were essentially unaffected. 
  “We could find next to no effects of any sort, for any type of commodity coming out of BC,” said Schaufele.
• In fact, producers were in some cases able to adopt more fuel efficient technologies.

Surprisingly, no other constituency has developed such a policy, even though Schaufele’s work has shown there can be real benefits to a broadly implemented carbon tax.

“Washington and Oregon are debating a similar tax, which means B.C. producers have a strategic advantage because their government acted first,” Schaufele said. “B.C. producers have already adapted to the change that this policy induced whereas their southern trading partners still have to leap that hurdle. There is a huge strategic advantage to being first, just as there is a strategic advantage to being first in business.” 

Schaufele’s work revealed some important lessons: 

First, if you’re in the retail sector, you need to be aware of how your customers’ behaviour may be affected. Fewer customers at the pump may mean fewer people buying convenience items in store, such as was the case in B.C. You’ll need to adjust your margins and business model accordingly. 

Secondly, policymakers now have a model upon which to build their own version of the B.C. carbon tax – with fewer surprises. 

“The big takeaway is that policies can often have unexpected implications for consumers and businesses, and we need to be cognizant of how consumers respond to government initiatives when making business decisions,” he said,

Thirdly, you may not be as adversely affected by a carbon tax as you anticipate. In fact, there may be some strategic advantages over your competitors, such as B.C.’s agricultural producers experienced. 

“There was a lot of fear mongering because this policy was new and uncertain,” said Schaufele. “It turns out the damage just wasn’t that bad, if there was any damage at all.”

Because the tax was revenue-neutral, the province cut income and corporate taxes to offset the revenue it obtained from taxing carbon. B.C. now has the lowest personal income tax rate in Canada and one of the lowest corporate rates in North America, too.

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