Effects of B.C.’s Carbon Tax on GDP

The province of British Columbia, Canada, introduced a broad-based revenue-neutral carbon tax in July 2008; the rate was set to $10/tonne of CO2 initially, increased annually by $5/tonne until 2012 to reach $30/tonne, and remained at that level until 2017. We use the experience related to this unique initiative to shed some light on the controversy regarding the nature of the relationship between environmental taxes and overall economic activity. In particular, we test whether gasoline and diesel carbon taxes had any impact on GDP changes of the province, either positive or negative. Having found no evidence of asymmetry in the price impact, our analysis is conducted in the context of a standard VAR framework. We conclude that there is no statistically significant effect of carbon taxes on GDP change. The result is supported by tests on slope coefficient estimates as well as via dynamic simulations with and without carbon tax. We also find evidence of complete pass-through of carbon tax into price over time.