ENVIRONMENTAL INITIATIVES
PART 1
Tax Shift — Update and Status Report

Background:

In the 1999 provincial Budget government announced it would initiate discussions with British Columbians about how to make the provincial tax system better reflect provincial environmental values. One component of that discussion was to examine the concept of tax shift, a market-based tool to encourage environmentally desirable behaviour and discourage behaviour which is harmful to the environment.

At its simplest, tax shift means shifting taxes away from productive activities, such as employment and investment, and towards those that waste natural resources or cause pollution. Fundamental to the concept of tax shift is that it should be:

• revenue neutral to government (i.e., all revenue raised as part of a tax shift should be fully offset by an equivalent reduction in other provincial taxes or fees, or by providing new incentives to encourage environmentally friendly behaviour); and
• the offsetting revenue reduction must be clear and transparent to the public.

Consultation:

In keeping with the commitment to initiate a discussion of the concept, government commissioned and released an independent discussion paper by three leading academics in the field of environmental economics. The paper, Environmental Tax Shift: A Discussion Paper for British Columbians, explains the principles of environmental tax-shifting, describes the opportunities and challenges of applying the concept, reviews examples from other jurisdictions, provides examples of possible tax shift scenarios for British Columbia, and outlines how other government policies could be made to complement tax shifting.

The Discussion Paper is available on the Ministry of Finance and Corporate Relations website at  www.fin.gov.bc.ca or can be obtained by calling Enquiry BC at 1-800-663-7867 (660-2421 in Vancouver). Interested British Columbians are invited to offer feedback through the website or by writing to the Minister of Finance and Corporate Relations, the Honourable Paul Ramsey, or the Minister of Environment, Lands and Parks, the Honourable Joan Sawicki.

In addition to releasing the discussion paper, government has encouraged discussion on the topic by helping to offset the cost of guest speakers and meeting room rentals for various groups to hold tax shift forums for business, youth, labour, environmental, academic and community groups. To date, five forums have been held and twelve more are scheduled throughout the province over the coming months.

Reaction to the concept of tax shift has generally been supportive in principle, but cautious regarding its potential application in specific situations. British Columbians want more details before supporting specific initiatives. Issues raised regarding the concept generally relate to the following themes:

• uncertainty regarding the revenue neutrality of tax shifts;
• questions regarding who will pay and who will benefit;
• the need for consultation;
• possible adjustment and ongoing costs for business and consumers;
• potential impacts on low-income families and individuals;
• potential impacts on business competitiveness; and,
• technical issues related to the measurement of environmental costs, benefits and the success of tax shift initiatives.

Government is cognizant of these issues and is committed to moving prudently and in consultation with stakeholders. To that end, government has identified one pilot project in consultation with stakeholders to be introduced this year. The pilot will be carefully designed and monitored to allow a thorough evaluation of its efficacy. Government will also consult with stakeholders about two other tax shift scenarios over the next few months.

Tax Shift Pilot Project — Beehive Burners

The tax shift pilot project is designed to address environmental problems associated with beehive burners and unmodified silo burners by promoting investment in technologies to use wood residue in other ways.

Burning wood residue in beehive burners or unmodified silo burners contributes to serious air quality and human health problems, and is wasteful of a potentially valuable resource. Current commercial applications of wood residue include electricity generation and the manufacture of medium density fibreboard and wood pellets. Other uses such as bio-oils, barkboard, ethanol and adhesives from lignin are in various stages of development.

In order to help resolve this serious environmental and health problem, and to promote more environmentally friendly value-added uses of wood residue, government will:

• provide an incentive to mills currently disposing of wood residue in beehive or unmodified silo burners to invest in value-added uses of wood residue that are less harmful to the environment. The incentive will be provided through a refund of a portion of emission fees paid by firms that invest in the development, demonstration or commercialization of emerging technologies or new uses of wood residue.
• raise the revenue to fund the incentive by increasing particulate emission fees paid by firms burning wood residue in such burners.

Stakeholder Consultations:

Fish Farms

In October 1999, government announced a new salmon aquaculture policy to ensure a viable and environmentally sustainable salmon aquaculture industry in BC. As part of a new regulatory and management framework, government committed (among other things) to:

• introduce a new waste management regime based on strictly enforced environmental standards; and
• encourage investment in closed-containment systems and other environmental technology and practices.

The policy established a two-year period during which government will work with industry, communities and First Nations to resolve outstanding resource-use conflicts and bring industry into compliance with more environmentally sustainable management practices.

In order to minimize the aquaculture industry's impact on the marine environment and wild fish stocks, and to encourage investment in new closed-containment farming systems and other green technology and practices, government will work with stakeholders to determine the most effective approaches to incorporating the concept of tax shift into the new regulatory and management framework.

One possible initiative is to raise environmental research and development funds through levies based on production levels. A research and development fund would respond to the Environmental Assessment Office's 1997 Salmon Aquaculture Review that identified a lack of incentives to develop and adopt new environmental technologies as a significant concern. Over the next 12 months government will discuss this initiative and tax shift options with industry.

Motor Vehicle Feebate

As elsewhere, motor vehicles in British Columbia contribute to air quality problems and greenhouse gas emissions. Air quality problems pose certain health risks, such as respiratory disease, in several areas of the province and greenhouse gases contribute to global warming and climate change.

One tax shift idea identified in the Discussion Paper as an option to help reduce the environmental impact of motor vehicles is the concept of a feebate — a fee on purchases of high fuel consumption cars and trucks offset by rebates on purchases of fuel efficient vehicles.

Over the coming months government will enter into discussions with stakeholders to identify and test the feasibility, potential effectiveness and economic and business impacts of various options, including the feebate, to reduce motor vehicle emissions and greenhouses gases in British Columbia. The discussions will be undertaken within the context of Canada's international commitment to reduce greenhouse gases and with a full appreciation of existing taxes and fees on motor vehicles, including the luxury tax, joint government-industry environmental programs related to automobiles (e.g., the Scrap-It program), existing environmental incentives for alternative fuel vehicles and regional transportation needs.

Next Steps:

Government will continue to look for opportunities to use the concept of tax shifting to help meet British Columbians' environmental objectives. All proposed and future pilot projects will be carefully monitored and reviewed to evaluate their success in achieving the intended objectives.

PART 2
Tax Policy for Alternative Motor Fuels (AMFs) in BC

Introduction:

A new alternative motor fuel tax policy will provide certainty for industry and consumers and help make the provincial tax system better reflect provincial environmental values by providing meaningful and ongoing tax preferences for environmentally friendly alternative fuels.

Background:

Propane and natural gas used in motor vehicles have been exempt from provincial motor fuel tax since 1982. In 1992 the exemption was extended to include 85 per cent blends of ethanol and methanol. The tax preference for AMFs is to help them become established in the marketplace as alternatives to gasoline and diesel fuel because of their potential environmental benefits.

A review in 1997 determined that propane, with 1,100 fueling stations supplying about 50,000 vehicles throughout the province, had become sufficiently established to no longer warrant a complete fuel tax exemption. As a result, a preferential tax rate (the 7 per cent provincial sales tax) was imposed on purchases of automotive propane in the 1998 Budget. On an energy equivalent basis, the tax on propane remains significantly lower than the tax on gasoline and diesel fuel. For example, the provincial tax on propane at current prices is about 3.7 cents/litre compared to the provincial tax of 11 cents/litre for gasoline and 11.5 cents/litre for diesel fuel.

Policy Rationale:

Consumers and stakeholders have expressed concern in recent years that the lack of a transparent provincial policy regarding the future taxation of AMFs has resulted in uncertainty for both consumers and stakeholders. This uncertainty, in turn, reduces the willingness of alternative fuel producers to invest in infrastructure and consumers to purchase factory manufactured alternative motor fuel vehicles, or convert existing vehicles to operate on alternative fuels.

In response to these concerns the Province is introducing a long-term, transparent policy for the application of tax to AMFs. The policy will reduce uncertainty for industry and consumers, provide a significant and ongoing tax preference for environmentally friendly alternative fuels, and encourage consumers to purchase vehicles that operate on these fuels.

Key Policy Considerations:

In designing a long-term approach to taxing AMFs, the key objectives are:

• to achieve government environmental objectives by providing incentives to promote the development of cleaner fuel supply infrastructure and encourage motorists to purchase vehicles which operate on these fuels;
• to apply tax rates to AMFs, on an energy equivalent basis, based on their environmental benefits;
• to provide long-term certainty regarding AMF taxation for industry and consumers;
• to allow market and technological forces to determine which AMFs are ultimately successful in the marketplace; and
• to maintain a viable and stable motor fuel tax base over the long term to help raise revenue for essential government programs.

Policy Design:

Fuels that qualify as AMFs will remain exempt from tax until they capture a predetermined market share. Thereafter, tax rates will be phased-in based on market share growth and the fuels' inherent environmental benefits. To ensure an ongoing incentive for cleaner AMFs, the maximum tax will be lower than the tax on gasoline on an energy equivalent basis.

AMFs will be grouped into two categories, with separate tax schedules based on their environmental benefits. Fuels that reduce vehicle emissions by less than 40 per cent, such as natural gas and propane, will bear a maximum tax that is lower than gasoline on an energy equivalent basis, but higher than other alternative fuels, such as electricity and fuel cells, that reduce emissions by more than 40 per cent. Thus, the most environmentally beneficial fuels will receive a larger permanent tax preference to encourage their use.

The ultimate environmental benefits of this policy, and the extent to which alternative fuels ultimately replace gasoline, will depend on a number of factors. These include the growth in the availability of AMF vehicles, consumer vehicle purchasing behaviour, the development of convenient alternative fuel supply infrastructure and possible environmental improvements in traditional gasoline.

Next Steps:

The government will complete ongoing stakeholder consultations over the next few months to finalize the criteria for evaluating the environmental benefits of alternative fuels and the tax rate phase-in schedules. Once these consultations are concluded the AMF policy will be implemented by regulation.