By Nikola Milutinovic, Queen’s University

Carbon taxes aren’t necessarily the job killer some provincial party leaders are making them out to be. Research by Ph.D. Candidate Akio Yamazaki of the University of Calgary should give Canadian politicians and pundits pause over the employment effects of carbon taxes. Yamazaki’s research suggests that British Columbia’s revenue-neutral carbon tax caused a net-gain in employment of 4.5% between 2007 and 2013. Governments can affect the labour market impact of carbon pricing by properly allocating their carbon tax revenues, according to Yamazaki.

Why Price Carbon?

The scientific consensus is that humans’ carbon emissions are increasing global average temperatures beyond historical fluctuations. Some social costs of temperature increases include rising sea levels, declining crop yields, and ecological disruption. There are also costs to reducing emissions. Restricting carbon emissions could lead to inefficient production, economic dislocation, and lower wages. Banning all carbon emissions today would cause a large disruption in several economic sectors.

An efficient carbon price is the dollar value where the marginal damage of carbon emissions equals the marginal cost of reducing emissions. Above this price, society would be paying more to reduce emissions than it is benefiting from abating them. Below this price, society is incurring damages from climate change that are more costly than abating the emissions.

This theoretical framework is straightforward but says little about the distributional impact of emissions pricing. It also does not account for how governments allocate their carbon revenues, and how that can mitigate or exacerbate distributional concerns.

Carbon Pricing in Action: British Columbia

Premier Gordon Campbell’s government implemented its carbon pricing strategy in 2008. The tax is levied at the point of purchase for all fossil fuels. This includes gasoline, diesel, natural gas, propane, coal, and home heating fuels. It is a broad-based tax, with few exemptions. The British Columbian government distributes carbon tax revenues via three channels:

1. Personal Income Tax reductions,
2. Corporate Income Tax reductions, and
3. A lump-sum transfer to people with annual earning less than $30,000. The province projects its carbon tax revenues each fiscal year and adjusts the aforementioned channels accordingly.

The province’s carbon tax has been noted for its effectiveness. It was introduced in 2008 at $10/ton of Greenhouse Gas Emission (GHG) Equivalents, and increased $5 each year until 2012. It raises approximately $1 billion of revenue annually. By 2011, British Columbia’s per-capita GHG emissions fell 17%, while the rest of Canada’s rose 2%.

A Tale of Two Industries

The Canadian economy is diverse. Industries vary in their trade exposure, emissions intensity, and elasticity of demand. Yamazaki simplifies the economy into two types of industries. The first is clean, not trade-exposed, and faces relatively inelastic demand. The second emits substantial amounts of carbon, is trade exposed and has relatively elastic demand. The latter industry characterizes our fossil fuels and energy sectors, which are internationally competitive and sensitive to cost fluctuations.

Each industry interacts with two markets. They supply the perfectly competitive market for the goods they produce. Their marginal costs dictate the price of the good, which tells us the quantity of the good demanded and produced. The clean industry faces inelastic demand, so consumers won’t be sensitive to changes in costs and prices. The fossil fuel industry’s demand is elastic, so consumers will respond aggressively to changes in prices. These industries also participate in the labour market. They demand labour, and demand less as wages increase. Workers supply labour, supplying more as wages increase.

The carbon tax, and its revenue being recycled into tax cuts and transfers, will impact the two industries differently. The effect on aggregate employment will depend on the jurisdiction’s industrial composition. In the goods market, the carbon tax increases marginal costs for both industries. The emissions-intensive industry’s costs increase more, increasing the price by a larger factor than in the clean industry. Because the dirty industry’s demand is more elastic, its output will fall more sharply than in the clean industry. At the same time, the personal income tax cuts and lump-sum transfers financed by the carbon tax may dull or reverse the fall in output by increasing consumer demand.

The labour market story is more complex. If the personal income tax cuts and transfers reverse the fall in output and increase demand, the industries may begin demanding more labour. Decreased corporate tax rates might also induce hiring, by cutting marginal costs and increasing output. Furthermore, the reduced income tax rates might drive people into the labour force, increasing labour supply. In summary, goods demand and labour demand could move in either direction, and labour supply could increase. The directions and magnitude of these movements will depend on characteristics such as the level of the carbon price, elasticity of demand, and workers’ responsiveness to changes in taxes. Yamazaki’s article estimates the employment effects, attempting to quantify the above changes.

The Brass (Carbon) Tax

Yamazaki’s predictions of the industry-level effects are mostly consistent with the data. He used a panel of Canadian provinces’ employment, emissions, and industrial trade-intensity from 2007 to 2013. Trade-exposed emissions-intense industries saw decreases in employment and output in British Columbia. Meanwhile, cleaner service industries’ employment increased. In aggregate, British Columbian employment increased by 4.5% as a result of its revenue-neutral carbon tax.  Wages decreased approximately 2%. This supports the author’s supposition that labour supply increased. Labour demand may have varied across industries. However, the net employment increase may be a function of British Columbia’s industrial composition. The author notes that workers in other provinces are more trade exposed and work in more emissions-intensive industries. Thus, this result might not be easily replicated in the rest of the confederation.

A Tough Sell

Canada’s largest oil-producing provinces, Saskatchewan and Alberta, have expressed substantial opposition to the federally-imposed carbon pricing regime. Saskatchewan Premier Scott Moe has threatened to take the federal government to court over the tax, echoing his predecessor Brad Wall. Alberta’s Leader of the Opposition, Jason Kenney, has promised to put emissions pricing to a referendum if elected. In Ontario, one of the lowest per-capita emitting provinces, all four leadership candidates for the Progressive Conservative Party promised to oppose the federally mandated carbon price. The winner, Doug Ford, has remained steadfast in his commitment to sue the federal government, decrying the “job-killing carbon tax”. Ontario, with less emissions per capita than British Columbia, would likely see employment increases from their carbon price. But the Premier of Saskatchewan and the Opposition Leader in Alberta may have a point on the employment effects of taxing carbon in their provinces. Yamazaki’s results indicate employment reductions of approximately 30% in the petroleum, coal, and chemical processing industries in British Columbia. Alberta and Saskatchewan have high stakes in the success of those industries.

Implementing a carbon price isn’t as simple as setting marginal costs of abatement equal to the marginal damages of emissions. How provinces allocate revenues will affect the net employment impact of carbon pricing, but much of their success may depend on the provinces’ industrial makeup. British Columbia had the benefit of already being a relatively clean-industry province.  Other Canadian provinces may not fare as well in the face of carbon taxes.

References

1 Yamazaki, Akio. “Jobs and Climate Policy: Evidence from British Columbia’s revenue-neutral carbon tax.” Journal of Environmental Economics and Management 83 (2017): 197-216.