Is the BC Carbon Tax Working?

Emissions

A recent study from 2022 showed that the BC Carbon Tax is working to reduce transportation related emissions, but has not yet had a measurable impact on other sectors, due to the price being too low (Pretis, 2022). With the price increasing from $45 per tonne in 2021, to $80 per tonne in 2024, it is likely that the carbon tax has begun to have a stronger impact on emissions across a wider range of sectors.

Jobs and the Economy

Looking to jobs, research has found that the carbon tax has not had a negative impact overall in BC (Azevedo et al., 2023). While there have been some job losses in high emissions sectors, this has been offset through tax cuts that increased the purchasing power in lower-income households, resulting in increased jobs in other sectors such as the service sector. Looking at the economy more broadly, again the carbon tax has not resulted in significant GDP loss (Davidson-Chime, 2023).

What About Inflation?

A 2024 study found that Canadian carbon taxes are not having an inflationary effect on food prices. In fact, it found that carbon taxes may actually be having a deflationary effect on food prices, as it has led to lower consumption with no significant impact on farming costs.

So Why is the Carbon Tax so Unpopular?

Despite its policy successes, the BC Carbon Tax has faced recent growing public opposition. One major reason is visibility - the tax is applied directly at the gas pump and on heating bills, making the cost highly noticeable to households. Further, with the introduction of the federal carbon tax requirement across Canada, the policy was much more visible on a national stage. This makes it likely the most recognizable climate policy in the country, for better or worse.

Another factor is misinformation and perception. Critics of the policy often link the carbon tax to rising living costs, even in cases where the tax itself has little effect on inflation. This perception has been fueled by political campaigns that frame the tax as an economic burden.

Finally, equity concerns have amplified discontent. While rebates are provided to low-income households, many people feel the tax disproportionately impacts rural and suburban residents who rely on personal vehicles for transportation. These factors have combined to make the policy politically contentious despite its economic and environmental benefits.

Industrial Carbon Pricing

What is this policy approach?

Industrial carbon pricing, also referred to as Output-Based Pricing System (OBPS) or Large Emitter Trading System (LETS), is a flexible carbon pricing approach focused on reducing emissions within large industrial sectors like cement, steel, oil and gas, and mining. Under OBPS, each sector has a set performance standard for emissions. Companies that exceed this threshold must purchase credits from those who operate below it, effectively balancing emissions across the industry. Over time, these performance standards may be tightened, encouraging continual emissions reductions and fostering innovation in cleaner technologies, while allowing industries to remain competitive in global markets (Targray, 2024).

How does it work in BC?

British Columbia’s OBPS, introduced on April 1, 2024, aligns with federal standards and applies to companies emitting over 10,000 tonnes of carbon dioxide equivalent (tCO₂e) per year (Government of BC, 2024). Firms under the performance standard can bank or trade excess credits, while those over the limit must offset their emissions using credits or pay a carbon price in line with the current rate, set at $80 per tonne and rising by $15 annually to reach $170 per tonne by 2030.

Why might this be a good approach?

This approach supports the competitiveness of Canada’s industry (Sawyer et al., 2024).

This policy approach is also potentially more palatable to the public because it is targeted at large industrial emitters, meaning individual citizens are less likely to attribute direct financial impacts from it. This differs from a carbon tax, which consumers may notice for carbon-intensive products and services such as gasoline or heating oil. This approach may result in firms passing on increased costs to citizens, but because of its complexity, OBPS will also be less visible to the public. This may result in fewer opportunities for public opposition.

Further, the OBPS is projected to be Canada’s most effective carbon pricing tool for reducing emissions by 2030, with its impact expected to surpass that of other policies like the carbon tax (Beugin et al., 2024). By focusing on high-emission sectors and setting performance-based benchmarks, the OBPS drives meaningful reductions across industries, particularly in hard-to-decarbonize sectors like oil and gas, cement, and steel.

Image credit: Canadian Climate Institute. Click the above image to visit an in-depth guide on how Industrial Carbon Pricing Systems work.

How might Industrial Carbon Pricing Evolve?

Interview segment with Ross Linden-Fraser, Senior Research Associate with the Canadian Climate Institute. December 6, 2024

The Path Forward

What do I think is the path forward for climate policy in BC? There are some broader principles that I believe we need to remember.

We need to remain outcome focused
Climate policy must prioritize its core goal: reducing emissions. Tools like the carbon tax and industrial carbon pricing are means to an end, not ends in themselves. Policymakers need to stay flexible and adapt as circumstances evolve, ensuring the chosen policies remain effective and acceptable.
Trust is important
Citizens giving policy-makers the benefit of the doubt and believing that they have their best interests at heart will only happen if citizens trust government and institutions. This has eroded in recent decades, but the top way to improve trust in government is through giving people agency in how we move forward with the challenges of our time. Citizens need real opportunities to participate in decision-making processes that shape their lives. Giving people the space and power to contribute to collective decisions will build legitimacy and create a foundation for making difficult decisions.
There will be growing pains
Decarbonizing our deeply fossil-fuel dependent economy and society will have bumps along the way. To help us make good decisions it may mean that things like gasoline are a bit more expensive. We need to maintain a long-term perspective though and work towards building resilient energy systems and a sustainable economy that safeguards the future.

Final words from Ross Linden-Fraser on policy mixes and the path forward.

Interview segment with Ross Linden-Fraser, Senior Research Associate with the Canadian Climate Institute. December 6, 2024

Bibliography

Azevedo, D., Wolff, H., & Yamazaki, A. (2023). Do Carbon Taxes Kill Jobs? Firm-level Evidence from British Columbia. Climate Change Economics, 14(02), 2350010. https://doi.org/10.1142/S2010007823500100

Beugin, D., Kanduth, A., Sawyer, D., Smith, R., & 2024. (2024). Which Canadian climate policies will have the biggest impact by 2030? 440 Megatonnes (Canadian Climate Institute). https://440megatonnes.ca/insight/industrial-carbon-pricing-systems-driver-emissions-reductions/

Davidson-Chime, A. (2023). Evaluating the economic impact of carbon tax: A case study of British Columbia. https://unbscholar.lib.unb.ca/handle/1882/37548

Dion, J., & Linden-Fraser, R. (2024, April 19). Industrial carbon pricing explained. Canadian Climate Institute. https://climateinstitute.ca/large-emitter-trading-systems-explained/

Globe and Mail Editorial Board. (2023, February 15). Globe editorial: What will B.C. do with its surging carbon-tax revenues? The Globe and Mail. https://www.theglobeandmail.com/opinion/editorials/article-what-will-bc-do-with-its-surging-carbon-tax-revenues/

Government of BC. (2024). Getting Started with the B.C. Output-Based Pricing System.

Hawkins, E. (2023). Show Your Stripes. https://showyourstripes.info/c/globe

Mascher, S. (2018). Striving for equivalency across the Alberta, British Columbia, Ontario and Québec carbon pricing systems: The Pan-Canadian carbon pricing benchmark. Climate Policy, 18(8), 1012–1027. https://doi.org/10.1080/14693062.2018.1470489

Ministry of Environment and Climate Change Strategy. (2024, April 2). British Columbia’s Carbon Tax—Province of British Columbia. Province of British Columbia. https://www2.gov.bc.ca/gov/content/environment/climate-change/clean-economy/carbon-tax

Net Zero Advisory Body. (2024). Climate’s Bottom Line: Carbon Budgeting and Canada’s 2035 Target.

Pretis, F. (2022). Does a Carbon Tax Reduce CO2 Emissions? Evidence from British Columbia. Environmental and Resource Economics, 83(1), 115–144. https://doi.org/10.1007/s10640-022-00679-w

Sawyer, D., Linden-Fraser, R., & 2024. (2024, November 21). How Canada’s industrial carbon pricing protects competitiveness. 440 Megatonnes: Tracking Canada’s Path to Net Zero. https://440megatonnes.ca/insight/how-canadas-industrial-carbon-pricing-protects-competitiveness-profitability/

Shannon Waters. (2024, September 13). What on earth just happened with B.C.’s carbon tax? The Narwhal. https://thenarwhal.ca/bc-carbon-tax-drama/

Targray. (2024). OBPS Credits: Credit Solutions for Canada’s Output-Based Pricing System. Targray. https://www.targray.com/environmental-commodities/carbon-credits/obps-credits

Thomas F. Pedersen. (2024). The Carbon Tax Question: Clarifying Canada’s Most Consequential Policy Debate. Harbour Publishing.

Xu, J. (2024). The Role of Carbon Pricing in Food Inflation: Evidence from Canadian Provinces (arXiv:2404.09467). arXiv. https://doi.org/10.48550/arXiv.2404.09467