Many economists will tell you that the simplest way to address climate change is just to put a levy on carbon emissions at the source (i.e., coal at the mine, gas at the wellhead, etc.) and use the money to cut taxes elsewhere. The price signal will nudge people away from dirtier energy and toward conservation and cleaner types of power. And now there's even a real-life model to examine. Back in 2008, the Canadian province of British Columbia passed a carbon tax that rises by $5/ton per year. And, according to three economists in the Ottawa Citizen, the early results look good:

In fact, B.C.'s economic growth in 2009—the first full year the tax was in effect—was higher than Canada's as a whole. Unemployment, although high because of wider economic events, is below the national average and does not appear to have jumped when the tax shift came in.

Perhaps even more significantly, for the average taxpayer, the carbon tax shift has been an economic boon. During 2008 and 2009, the tax raised $846 million. However, the province tied the carbon tax to reductions in personal and corporate income taxes, as well as tax credits to offset impacts on low-income individuals. The total value of these offsetting cuts was nearly $1.1 billion over those two years, meaning a net tax reduction for B.C. taxpayers of about $230 million.

While the economic effects of the tax have been negligible, the environmental impacts are expected to be positive. The province's economic modeling projects that the policy will lower greenhouse gas emissions by about 5 per cent. It is too early to say exactly how much reduction has happened so far—in part because Canada has not yet released carbon emissions data for 2009, and because the current level of the tax is still quite low (about four cents per litre of gas). But common sense tells us that people use less oil, gas and coal as their costs rise.

And there are lots of examples of this happening. At UBC, for example, the tax provides a $43-million incentive to reduce fossil fuel consumption; enough money to justify a major investment in ground source heat pumps, high efficiency windows, and other energy efficiency retrofits.

One potential problem, though, is that the carbon tax only applies to a single province, which means that Canadian businesses could still move elsewhere. It'll be interesting to see if this is in fact happening. If not, then it's possible you could see some states down here look closely at this experiment.

Getting a carbon tax enacted across the broader United States would be trickier, mainly because it would affect different regions differently—states that burn a lot of coal for power, like Indiana, would see higher jumps in electric bills than a hydropower state like Washington. As a response to this, carbon-tax proponents will argue that when you factor in all the different uses of carbon, from electricity to the embedded petroleum in products, the regional disparities more or less even out. (See the graph on p. 8 of this report.) But for whatever reason, politicians from coal states don't seem to buy this argument, which makes it much more difficult to pass a carbon tax than it is in a single, relatively homogenous Canadian province.

(Flickr photo credit: bfraz)