Does putting a cost on carbon emissions displace the emissions to places without a carbon price?
This is the dilemma of carbon policy, and one that appears to be taking place in British Columbia.
Before the carbon tax was enacted BC only imported four percent of its cement. Those were generally specialized products with limited supply from the province. By 2011, after three years of the tax, imports had climbed to 23 percent of market share.
“Why? Because imported cement is not subject to the BC carbon tax. Foreign cement powder comes into BC tax free,” said Cement Association of Canada President Michael McSweeney.
“Not surprisingly, since the BC government allows foreign made products into the BC market tax free, there is now less demand for our local fully-taxed cement,” McSweeney continued in testimony to the BC Select Standing Committee on Finance and Government.
“As a result, in 2011, BC’s cement kilns are running at about 50 to 70 percent capacity, which has meant rotating layoffs for hundreds of employees and termination or layoff notices for contractors. Local mines, trucking lines and railways serving the kilns are also hurt. The negative provincial economic impact runs in the tens of millions of dollars. But most of all the impact of this is on BC families - as they are the ones that have to bear the brunt of unemployment, while others are employed making cement elsewhere in the world.”
Okay. That’s the cement industry guy. But so far I have been unable to get a response from carbon tax advocates on why it isn’t the tax doing this. I would appreciate a counterargument. At this point it appears to be the same displacement effect I wrote about here, reporting on a UK study that found that Britain’s domestic carbon emissions reductions are cancelled out by increasing imports.
That has an unintended consequence, as McSweeney reported, increased net carbon emissions from hauling cement from out of province.
It also spells net revenue loss, McSweeney noted, “because 23 percent of the cement used in BC now doesn’t pay the carbon tax, this system is actually costing the government direct revenue. The trend lines show that as the carbon tax increases, the tax base it applies to will continue to decrease. It’s a money-losing proposition for all involved.”
Again, carbon pricing proponents, I want to hear why this is not true, because I would like to see an effective price put on carbon to discourage emissions.
Interestingly, McSweeney does not call for repeal of the carbon tax, but for changing it to capture consumption-based emissions.
“We have been recommending for a few years now that the BC government should apply the carbon tax at the point of sale, where cement is transferred to the concrete industry. This way all the cement used in BC will pay the carbon tax. It will be fair, because every cement producer in BC, Alberta, Washington and China will pay the same BC carbon taxes.”
Could this fix work in the US? Could a tax on carbon intensity of products be applied by a state and get around Constitutional bars on state trade barriers? This would provide an incentive to achieve lower carbon ratings up the supply chain. It would be impractical to do this at a retail level, a different sales tax on everything. So assess the tax at the wholesale level, much as you would in a value-added tax system. Then rebate wholesale carbon tax revenues to offset the retail sales tax – the part you are going to rebate. A large share of carbon revenues must be invested in clean energy and land-based carbon storage.
BC’s carbon tax is apparently moving a major emissions source to other jurisdictions. This displacement effect must be taken into account by people designing state climate policies. We need to figure out ways to tax carbon emissions based on consumption rather than production, or we will only be moving deck chairs around on the Titanic.
p.s. My "Stormy Weather" co-author Guy Dauncey posted this to the BC Solar Energy Association list and generated a lively discussion. It follows:
Blaise Salmon - I think this problem can be addressed with a "border adjustment", as outlined in the detailed report below (page17). This US study shows a well-designed carbon tax would both reduce emissions and create jobs.
A "border adjustment" is in the carbon "fee and dividend" bill being promoted by Citizens Climate Lobby in the US. I will be among the 600 citizen advocates converging on Washington DC next week to push for this with Senators and Members of Congress.
Patrick Mazza - This looks like a good system for national carbon pricing frameworks. What about subnational systems like BC carbon tax or California Cap and Trade? In the US California could not charge a border adjustment because it would violate the Interstate Commerce Clause of the Constitution, and probably NAFTA as well. So until we have national systems is there any way to avoid displacement effects such as are apparently taking place with cement in BC?
Blaise - I'll make enquiries. And I plan to attend the session at the conference in DC next week "State carbon taxes".
Eric Doherty - The border leakage problem is real, but multiple mechanisms for reducing the problem are available. One example is cross-border shopping for gas, it would be better to have similar carbon taxes on both sides of the border. But Singapore just has a requirement that gas tanks be 3/4 full when leaving, with fines for violations (and bigger ones for fixing gas gauges to evade the system). I proposed a toll on (gas and diesel powered) vehicles leaving the lower mainland to Washington State http://www.surreyleader.com/opinion/239127581.html This may not be the best way to deal with the issue, but it is one option.
Carbon taxes are more effective with mechanisms to deal with cross-border avoidance. But one problem is that some trade and investment agreements could be interpreted to prohibit such mechanisms; however the superpowers (US, China) or any significant block of countries have the de-facto power to sweep these agreements aside if needed.
Andy Skuce - I wrote a long blog post on the cross-border shopping for gas problem. There is a small but real effect from this on BC fuel sales stats, but cross-border shopping trips have many motivations and the 7 cents per litre carbon tax on gasoline is just part of that. The idea that all of BC's fuel sales reductions are attributable to people filling up in the USA is a myth.
Yoram Bauman has written on this as well
I think that the problems faced by the cement industry provide much more serious limits on what any jurisdiction can do with a carbon tax in a free trade zone. I have heard different accounts of how far countries or provinces can go with things like border tariffs under agreements like the WTO and NAFTA. Whatever the reality, it won't be easy to impose them and any attempt won't go uncontested.
Honestly, I don't think the BC carbon tax can be increased above $30/tonne before our trading partners impose one. Even at current levels, it may be necessary to provide ad hoc exemptions for affected industries, as has already been done for greenhouse growers (sic).