With the Australian government’s historic repeal of its carbon tax, bitterly decried for long by business leaders, it would seem extremely unlikely that other countries would be pushing similar “job-killing” policies.

On the other side of the Pacific, however, another carbon tax program is enjoying widespread popularity, both for lowering carbon emissions and for encouraging economic growth. British Columbia’s carbon tax – no less controversial than Australia’s when it was enacted in 2008 – now enjoys broad public support and is touted as fostering an innovation-positive, business-friendly climate.

What has led Australia and British Columbia to reach such divergent conclusions about their respective carbon taxes? Do British Columbians just enjoy getting taxed more?

The answer to the latter question is “no.” BC residents are now taxed less than they were before the carbon tax. In fact, the two carbon taxes are wildly different, with strikingly different impacts on business and the public.

What went wrong in Australia?

Australia’s now-defunct carbon tax was directly levied against the country’s top 348 carbon emitters – mostly electricity and mining companies. The tax did not register “at the pump” as gasoline and other fuels were not included. In essence, 348 businesses were singled out for the tax, passing along the added costs downstream.

For businesses not covered by the tax, this translated to more expensive electricity prices as well as higher prices for certain Australian commodities. Electricity and other energy prices have risen drastically in Australia the last few years, fueling opposition to the tax. There is much debate as to the extent that the carbon tax itself caused prices to rise, as opposed to other factors like capital upgrades, with one estimate putting the tax’s increase on electricity prices at a modest 9%.

To replace the carbon tax, conservative Prime Minister Tony Abbott has looked to an unlikely source: the Obama administration’s new power-plant regulations. Vociferously opposed by conservatives in the US, the prime minister called the EPA rules “sensible direct action steps” that he wished to emulate. At least for the moment, businesses can expect Australia to evolve along the lines of the US.

British Columbia’s carbon tax, in contrast, has been more broadly applied than Australia’s, covering the purchase or use of all fuels within the province. British Columbia’s tax rate is also higher to begin with than Australia’s. For business and the public, this translates to higher costs for transportation fuels and electricity derived from fossil fuels, with the downstream costs filtering to a wider segment of the province’s economy than in Australia.

Given this higher burden, why then is the carbon tax so popular? The short answer is that British Columbia’s carbon tax is revenue neutral, while Australia’s was not.

By law, British Columbia must return every dollar of carbon tax raised back to British Columbians, by lowering other taxes. This is called a “tax shift” or “tax swap,” where one tax is cut and then replaced by another. In this case, taxes are “shifted” away from what you might call “prosperity taxes” – like taxes on income and payroll – to taxes on pollution, like carbon. In economic terms, “bads” are taxed instead of “goods.” The revenue raised in carbon taxes, the more prosperity taxes are cut.

In fact, British Columbia’s carbon tax has turned out to be revenue negative, cutting more in prosperity taxes than it’s raising in pollution taxes. This has enabled the province to have the lowest personal income tax rate in Canada and one of the lowest corporate tax rates in North America.

In practical terms, this means British Columbians take home more money from their paycheck compared with before the tax, and businesses face lower taxes, too. Obviously a portion of this increased income goes to pay for higher energy prices and goods, but this arrangement gives consumers and businesses the choice about how to spend that money. By choosing relatively less carbon-intensive goods and energy, consumers and businesses net more money than before.

Most people end up ahead, with more disposable income to spend in the economy or to save for big purchases. The market chooses clean-economy winners, not the government. And the market sends a signal to innovate, to find ways to be more productive with energy inputs. In essence, British Columbia is pioneering a tax system that encourages innovation, not one that punishes it. Innovation creates value, and value – not economic stimulus – leads to lasting economic prosperity.

A new tax model

By cultivating a business-friendly, low “prosperity tax” environment while reducing the harms of carbon pollution, British Columbia’s carbon tax has gone from maligned to celebrated, commanding a 64% public approval rating, according to a 2012 poll.

Already in the US, these facts are aligning odd bedfellows in support of a carbon tax shift, from activist James Hansen and Citizens Climate Lobby, to ExxonMobil and the free-market R Street Institute.

As businesses grapple with the meaning of Australia’s carbon tax repeal, they – and their government affairs units – may want to consider which type of policy environment would do them best: the current paradigm that taxes their income and inflexibly regulates pollution, or one that encourages clean innovation and the power of markets. We already have a model for the answer.

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

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