Bill 20 – Alberta's Climate Leadership Implementation Act – recently passed first reading. Given the NDP majority, it will soon become law. Undeterred, the Official Opposition is declaring that it will "stop the carbon tax." What it hasn't said is what, if anything, would replace it.
So what are we to think about Alberta's climate plan? It's certainly not without controversy, but is it good policy? Let's break down the areas of debate one by one.
Starting at the top: the need for action on emissions. Actually, this isn't up for debate any more. Climate change is real. It's human-induced. And it's already happening. So, setting aside the "do nothing" non-option, is Alberta's plan the best way to tackle the problem? To answer that, it's best to split the policy in two: the carbon tax and the use of its revenue. Let's start with the tax.
Economists of all stripes view a carbon tax as the most cost-effective way to reduce emissions. A single price on carbon treats all emissions the same way. Targeted subsidies, regulations and outright bans, on the other hand, risk the sin of high implicit costs. Take Ontario's original feed-in-tariff for solar power, paying up to 10 times the market price. Don Dewees, a professor of economics and law at the University of Toronto, calculated that the implicit cost of carbon reached well over $1,000 a tonne. Thankfully, Alberta's proposed renewables auction takes heed of Ontario's mistakes and makes a concerted effort to avoid them.
But, to be fair, targeted policies have their place – and to an extent Alberta's plan includes them. Energy-efficiency programs, renewable targets and research and development funding offer low abatement costs when they act as complements to the tax or overcome market failures. The key is being mindful and transparent with their costs.
Over all, the tax side is on solid ground, but what about the revenue choices? It is here where the real debates should be had. Let's start with the household rebates, a lightning rod for criticism on two fronts.
First, there's confusion. The rebates will not, as some are saying, destroy the incentive to reduce emissions. The tax drives the incentive to reduce emissions, while the rebate is received regardless of your tax paid. Reduce your emissions; keep the same rebate. To those most able to reduce, this plan will result in a gain. Incentive? Check.
The second criticism is that only households below the 60th income percentile receive rebates. To those that complain they aren't getting the rebate, I say, congratulations, you're making more than $106,000 a year. This is an issue of affordability. Same as goods and services tax credits and the Canada Child Benefit – they phase out for high incomes because their burden proportional to income is smaller. Is this fair? For those working hard to earn six figures, it may not seem so. But this is a societal choice. This can, and should, be a focus of political discourse around the policy.
And what about the missed opportunity: income tax reductions? Ken McKenzie, an economics professor at the University of Calgary, recently argued (here and here) that the carbon tax revenue should be used to lower corporate and personal income taxes. In 14 words or less: tax more of the "bad" (emissions) and less of the "good" (labour and capital). This has potential for efficiency gains in our economy, at a time when it sorely needs a lift.
However, given the mandate upon which the NDP got elected (raise corporate and personal income taxes), it doesn't come as a surprise these weren't at the top of the list for revenue-recycling choices. But again, this, rather than "stop the tax," should be the area of debate in the legislature.
Nobody likes taxes. But as a cost-effective way to incentivize emissions reductions, a carbon tax is the best policy choice. And regardless of different preferences for the use of revenue, Alberta's carbon plan is much needed and economically sound policy. Rather than "stop the tax" nonsense, the opposition parties would be well served debating how good policy can be made better.
Better that than debating whether climate science is real.
Blake Shaffer is a PhD student in the department of economics at the University of Calgary. He is currently serving as an adviser for Alberta Energy on electricity policy.