National Post (National Edition)
Carbon tax will raise revenue, but may not help reduce emissions.
‘Atax on everything.” That’s how the Conservatives attacked the carbon-tax proposal of Stéphane Dion when he proposed it in 2008. Yet for economists, that is a feature, not a bug. A tax on everything does not distort the choices producers and consumers make; it’s akin to a consumption tax, which is supposed to be a tax on everything. If the revenues were returned to the taxpayers as a whole — for example by a cut in income taxes — then a tax on everything might well encourage earnings, savings and investment.
Carbon taxes are much in fashion. Senior American Republicans (albeit retired) have called for a national one south of the border. The Trudeau government has mandated one here. And as of Jan. 1, a carbon tax of $20/tonne of emissions is in place in Alberta. That means 4½ cents/ litre at the pump. Next year, it will increase to $30/tonne, or 6¾ cents/litre. Alberta’s carbon tax will apply to all carbon-emitting combustion, so the cost of home heating will go up, and all goods and services that might use carbon-emission energy in production. Alberta joins British Columbia, which adopted a broad-based carbon tax in 2008.
Will the carbon tax reduce the amount of Alberta’s emissions? Perhaps. In principle yes — put a tax on something and people will buy less of it, all else being equal. Part of the reason that energy demand in Ontario has gone down is because the price of energy has risen rapidly, though not due to a tax, but rather massive mismanagement of energy policy.
In practice though, the carbon tax will change carbon consumption decisions only if set at the right level. If the cost of reducing carbon emissions is, say, $45/tonne for a particular producer, then Alberta’s carbon tax will have no effect on its energy consumption. It will pay the $20 or $30/tonne tax, but continue to burn carbon at the same level because the cost of reduction — the “marginal abatement cost” as economists call it — is too high.
Trying to figure out what the marginal abatement cost might be across an entire economy is immensely difficult. But if those costs are very high, say $50 or $60/ tonne, it becomes politically very difficult to set carbon taxes at a sufficient level. So it is possible to have a carbon tax with little, if any, appreciable reduction in emissions.
What the tax will do is raise revenue, and taxes on everything can raise a lot of revenue. Alberta promises, like B.C., that the tax will be revenue-neutral. Unlike B.C., Alberta is not even trying to tell the truth. In B.C., all carbon-tax revenues must be offset by corresponding tax cuts, credits or rebates. A recent Fraser Institute study found that it did just that until recent years, in which it has failed to be revenue-neutral.
In Alberta, the government expects $9.6 billion in revenue over five years. Of that only a third, $3.2 billion, will be returned to taxpayers in rebates and tax cuts. Twothirds of the revenues will be for new spending: $3.4 billion for “large scale renewable energy, bioenergy and technology,” $2.2 billion for “green infrastructure like public transit,” $645 million for a new government energy bureaucracy, and a $195-million slush fund to mollify the leaders of coal towns and aboriginal communities.
The Alberta government will use its carbon tax for more than $6 billion of new spending. Alberta counts spending of carbon-tax revenues as equivalent to tax cuts. By that logic, the entire government of Alberta is better than revenue-neutral, as it is running enormous deficits. Aside from the rank dishonesty, Albertans ought to be wary about what the new spending on green energy will bring.
It’s not only Ontario’s dog’s breakfast of an energy policy that should frighten Albertans, but its own history. The Alberta NDP after two years is not as deeply corrupt as the Progressive Conservatives were after decades in power, but the list of corporate boondoggles Alberta taxpayers have paid for is long indeed. There is little reason for confidence that the NDP will get better results from shovelling more than $5 billion to large corporate interests than the PCs did. Calling it green doesn’t make it any less wasteful.
Taxes on everything do well at what taxes principally do — fill the provincial exchequer. What they do about carbon is very much in doubt.