Revenue-Neutral Carbon Taxes in the Real World: Insights from British Columbia and Australia

While the scientific and economic implications of climate change remain highly contested, the idea of a net revenue-neutral tax on carbon dioxide emissions has been proposed by a number of economists from across the ideological spectrum as one possible way to help level the playing field among different sources of energy by accounting for the potential externalities of carbon emissions. At the same time other economists have criticized carbon pricing, both from the right and the left, as either a Utopian scheme inappropriate to address a global problem or as a band-aid that will not fundamentally limit carbon emissions. In a revenue-neutral carbon tax regime, all revenues generated from taxes on carbon emissions would be directly returned to the taxed economy through an equivalent reduction in other existing taxes or through direct payments to taxpayers. Depending on the particular structure utilized, these may be referred to as a “revenue-neutral carbon tax” or a “carbon tax shift/swap” or a “carbon fee and dividend”. What the arguments for such a policy structure, both pro and con, have often lacked is detailed analysis of the performance and design of revenue-neutral carbon taxes in the real world. This paper attempts to address that gap. It examines the revenue-recycling carbon pricing mechanisms already enacted in British Columbia and Australia in order to assess their approach and efficacy.