Federal plan may appeal to many in Alberta

Returning cash to households may well be popular, Trevor Tombe says.

“Starting next year, it will no longer be free to pollute in Canada,” declared Prime Minister Justin Trudeau on Tuesday morning. Conservative Opposition Leader Andrew Scheer, meanwhile, says the government is trying to “trick Canadians into paying higher taxes.”

They’re talking, of course, about the never-ending political battle that Albertans, and now Canadians, are all too familiar with. They’re talking about The Carbon Tax.

Though a little behind schedule, all the important details behind the federal plan were laid bare on Tuesday. Though Alberta is not directly affected (for now), the federal plan matters here too. A lot. At the very least, carbon taxes will dominate both the Alberta and the federal elections in 2019. And it’s unlike any carbon tax plan we’ve seen. So it’s worth reflecting on what just happened.

Carbon emissions will be taxed at $20 per tonne next year, rising to $50 by 2022. We knew this already, and we also knew why. An overwhelming majority of economists see market-based approaches, like a carbon tax, as the cheapest way to lower emissions. It leaves decisions over how to lower emissions to individuals and businesses. Alternative centrally planned approaches — where government chooses which light bulbs we can use or regulates how appliances are designed — tend to cost more.

We also knew the federal program will apply differently in different provinces. In provinces that do not fully price carbon themselves, the federal government will instead. Though controversial, this isn’t new territory. Federal programs regularly allow provinces to opt out. Quebec availed itself of this numerous times since the 1960s. If a province doesn’t have its own comparable program, the federal one prevails.

The big question, which was answered on Tuesday, was how to use the revenue.

For the four affected provinces (Sask., Man., Ont., and N.B.), each dollar raised from a given province will return there. And return in a simple way: 90 per cent as a lumpsum transfer to households, and 10 per cent as targeted support to small businesses, remote communities, municipalities and so on. Simply put, the federal plan is largely a “fee and dividend” approach to carbon pricing. To my knowledge, no other jurisdiction in the world has done this.

While the government could have lowered income taxes, which creates economic benefits through increased employment and investment, sending cash transfers directly to households has political points in its favour. Toronto Postmedia columnist Lorrie Goldstein (who, to be clear, is skeptical of the government’s plan) has called fee-and-dividends “the most honest, fair and effective form of a carbon tax.” There are a few reasons for this.

It’s easy to show the carbon tax isn’t a “tax grab.” Dollars in and dollars returned will be measured and reported annually. Any discrepancies will be corrected the following year.

It’s a large visible benefit to households, which might be difficult for future governments to cancel. Saskatchewan voters, for example, might think twice before supporting a proposal that, by 2022, would cancel a transfer worth $1,400 per year for the average household there. (Yes, you read that right.)

And it changes the political calculus in provinces outside the federal plan too, like Alberta.

It’s easy to see why. Currently, 40 per cent of Alberta’s carbon tax is used to fund household transfers. Under the federal plan, that would rise to 90 per cent. For perspective, the average household in Saskatchewan will receive $883 when the carbon tax there reaches $30 per tonne. In Alberta, rebates for those who qualify are $300 for a single individual or $540 for a couple with two kids. In addition, one in three Alberta households do not receive a rebate today. Under the federal plan, everyone would.

As we approach 2019, voters will ultimately decide. But now, unexpectedly, replacing Alberta’s carbon tax with the federal approach may appeal to many.

No other jurisdiction in the world has done this.