Alberta has options to cushion the impact of its carbon tax

Share

When Alberta unveiled its carbon tax plan this week, some proponents hailed it as a major and much-needed step to address the emissions dilemma hanging over the province and its huge energy industry. Some critics decried it as a revenue grab by a tax-and-spend NDP government.

Which is it? Well, both, really.

Let's face it: Alberta is a massive fossil-fuel producer whose flagship source, the oil sands, is particularly carbon-intensive. It also burns more coal for electricity generation than the rest of the country combined. And it has a reputation in its only meaningful export market, the United States, as a poor environmental steward peddling a dirty product. If any province needs to make serious changes to tackle its carbon problems, it is Alberta.

Premier Rachel Notley even said that the U.S. administration's recent rejection of the proposed Keystone XL pipeline for Alberta oil, largely on environmental grounds, was "a major wake-up call" for the province to clean up its act. So, now it has a sweeping carbon-reduction plan, the centrepiece of which is a province-wide carbon tax starting at $20 a tonne in 2017, and ramping up to $30 a tonne in 2018.

"The government of Alberta is going to stop being the problem, and is going to be part of the solution," she said in announcing the plan.

Fair enough. But if Ms. Notley really believes, as she said in her announcement, that the new carbon tax is revenue neutral, then she has an unusual understanding of the term.

The proceeds of a truly revenue-neutral tax are offset by equal-sized reductions in taxes collected elsewhere, so that no additional revenue goes to the government coffers. British Columbia's $30-a-tonne carbon tax is required by law to be offset by equivalent cuts in corporate and personal taxes. That is revenue neutral.

Alberta's plan is to collect about $3-billion a year in carbon-tax revenue, which Ms. Notley has vowed "will be recycled back into the economy immediately" for green technologies and infrastructure, and compensation for people and small businesses most hurt by the carbon-reduction plans. While that may be sound policy, collecting more revenue and then spending it is decidedly not revenue neutral. It is a tax increase.

The commitment to inject the funds back into the economy on new investments – rather than, say, simply using it to reduce the province's budget deficit (forecast at nearly $5-billion in the first year of the carbon tax) – at least addresses part of the economic risk of imposing the new tax; namely, that it would suck $3-billion out of an economy that for the next several years can ill afford it.

The province is committing to spending the whole amount inside Alberta's borders. While that might prove tricky to achieve fully (what happens when the first big green-infrastructure project needs parts and equipment not available from Alberta suppliers?), at least it suggests the headwinds from the tax will be offset by an equivalent-sized spending stimulus. And to the extent that the green investments enhance productivity, there is a longer-term economic payoff.

Still, the tax puts a new cost on the already hard-hit energy sector that Alberta depends on for its economic well-being. It amounts to an additional disincentive to invest for an industry that has already become acutely spending-averse since oil prices slumped and, by all forecasts, will have recovered only modestly by the time the carbon tax arrives at the start of 2017.

But it is important to remember that the Alberta government is also looking at 2017 for revamping the structure under which it collects royalties on oil and gas production. Therein lies an opportunity to offset, at least partly, the impact of the carbon tax on oil and gas producers.

A recent research paper from the C.D. Howe Institute recommends that Alberta (and other resource-rich provinces) tax resource production on the basis of cash flow, rather than revenue. This would mean that royalty payments would be applied only after expenses were deducted. (Alberta already does this on oil sands, but not on other oil and natural gas production.)

The report argues that taxing cash flows rather than revenues would give energy companies a greater incentive to invest because they would not be taxed on their costs. The report did not consider the role of carbon taxes, but one of the paper's authors, C.D. Howe senior policy analyst Benjamin Dachis, said a switch to a cash-flow royalty regime would also cushion the impact of the carbon tax.

"As long as carbon levies are a cost the province allows the companies to deduct, then companies subject to the cash flow tax only pay a portion of the carbon tax out of total profits," Mr. Dachis said. "The cash flow tax model reduces the extent of double taxation due to a carbon tax."