Australia has repealed its carbon tax, leaving climate advocates in the U.S. and abroad feeling disheartened. Although the repeal has long been anticipated — Prime Minister Tony Abbott campaigned to scrap the tax and has been gearing up to repeal it ever since he took office — it nonetheless strikes at the heart of supporters of a price on carbon.
In a bit of irony, the conservative prime minister’s opposition to the carbon tax has been so strident that he actually praised the Obama administration’s Environmental Protection Agency regulations — hotly opposed by conservatives in the United States — as “sensible direct action steps” Australia should follow.
However, this high-profile carbon tax defeat may not be what it appears. Although Australia’s carbon tax has become widely unpopular and controversial, British Columbia’s carbon tax, on the other hand, is considered a popular success.
What accounts for this difference?
The carbon tax rates for each region are similar, with British Columbia even edging out Australia at approximately $27.9 versus $22.6 (U.S. dollars per ton of carbon dioxide). British Columbia’s tax is more broadly applied than Australia’s, covering the purchase or use of all fuels within the province.
Australia’s carbon tax, in contrast, was applied only to the 348 highest carbon-emitting businesses, covering the electricity and mining sectors, but not gasoline use. By these measures, British Columbia has a seemingly more burdensome carbon tax.
Both regions have in recent years strongly supported climate policy, with 68 percent of the Australian public considering global warming a “serious and pressing problem” in 2006. That sentiment has all but disappeared in Australia. While there is plenty to say about the role of media and business interests in influencing Australian public opinion of the carbon tax, I think there are two crucial additional insights that explain the difference:
♦ Australia did not have a similar shale gas boom as in North America. Regardless of whether you consider fracking a good or bad thing, electricity prices in North America have been depressed in part due to abundant shale gas, and in part to economic recession. Dramatically rising electricity prices in Australia — due in large part to electricity infrastructure upgrades and other factors independent of the tax, along with the tax — turned the Australian public forcefully against the carbon tax, in a dynamic that does not exist in British Columbia.
♦ More importantly, British Columbia’s carbon tax is revenue-neutral, and Australia’s carbon tax was not. Although wonky, the concept of revenue neutrality is perhaps the single most important factor for explaining British Columbia’s success.
By law, British Columbia is required to return every dollar of carbon tax raised back to British Columbians by lowering other taxes. In essence, taxes are shifted away from what you might call “prosperity taxes” — such as taxes on income and payroll — to taxes on carbon pollution.
In practice, British Columbia’s carbon tax has actually been revenue negative — cutting more prosperity taxes than raising pollution taxes — with the result that it now has the lowest personal income tax rate in Canada and one of the lowest corporate rates in North America. (As an aside, carbon tax shift opponents argue that it could never remain revenue neutral in practice; highly progressive British Columbia is a notable example to the contrary.)
Shifting taxes from prosperity to pollution has enabled British Columbia to reduce carbon emissions handsomely compared to the rest of Canada, while maintaining a stable economy following recession. The “shift” in “carbon tax shift” has also cemented this once unpopular tax as a public policy pillar in the province, garnering a commanding 64 percent of public support, according to a 2012 poll.
Although Australia’s carbon tax included compensation schemes for electricity users to shield them from excessive costs — which many households benefited from — these schemes caused a lot of confusion. Compensation schemes are not as transparent as a tax shift, and do not naturally cultivate the low “prosperity tax” environment that has now taken hold in British Columbia.
For American climate advocates, this “Tale of Two Carbon Taxes” should be heeded when advocating for a price on carbon. Already many unlikely allies are aligned around a carbon tax shift, from activist James Hansen and Citizens Climate Lobby, to ExxonMobil and the free-market Heartland-spinoff R Street Institute.
In practical terms, the repeal of Australia’s carbon tax highlights the key role that revenue-neutrality will play in keeping together both the political coalition and public support for a carbon tax in the United States.
Brendon Steele is a senior stakeholder engagement manager at Future 500, a global nonprofit specializing in stakeholder engagement and building bridges between parties at odds to advance systemic solutions to urgent sustainability challenges.