NDP leader Rachel Notley speaks during a pre-election rally in Edmonton, Alberta on Sunday, May 3, 2015. AMBER BRACKENAMBER BRACKEN/The Globe and Mail
In the coming months, Ontario and Alberta – which produce nearly two-thirds of Canada's greenhouse gas emissions – will introduce new rules to lower their carbon output. Will these provinces put in place policies that deliver the greatest environmental benefits at the lowest cost, or the opposite? The desire to please well-connected constituencies may push them to choose what's behind Door Number 2.
Ontario has promised to put a price on carbon and bring in what's known as a cap-and-trade system, linking up with programs in Quebec and California. Alberta already has a price on carbon, but it is low and only applies to some emitters under limited circumstances. Alberta's rules also expire at the end of this month.
The principles for efficiently reducing carbon emissions are clear. Put a price on carbon, using a carbon tax or a harder-to-understand cap-and-trade system. Make the tax as broad as possible. Use price signals and the free market, and leave it to individuals to figure out how to change their behaviour to avoid these costs. And as for the money raised by the new levy? Use it wisely.
The best model is British Columbia's carbon tax, which has significantly lowered carbon emissions in that province. The $1.2-billion a year raised has mostly funded lower income and corporate taxes. B.C. is taxing something everyone wants less of – pollution – and using the money to cut taxes on things we all want more of: income, investment and employment. It's an excellent model.
Ontario isn't going to copy B.C., but Premier Kathleen Wynne's government, which is expected to roll out a plan in the fall, can still create something that works.
If a reasonably high price is put on carbon, and on most companies and goods to the degree that they emit it, then costs will be broadly and fairly spread across the economy, and consumers and companies will get accurate price signals. Low-carbon users will benefit, and high-carbon emitters will have an incentive to lower their emissions.
But Ontario's Liberal government faces two almost irresistible temptations. The first has to do with the desire of some big, strategic industries to be exempted from cap-and-trade's costs. They will lobby hard, and so will local voters and employees. The second involves the new money – as yet undetermined, but likely well over $1-billion a year – that cap-and-trade is going to put into Queen's Park's coffers. B.C. mostly gives its carbon cash back to taxpayers, but the Ontario government has signalled that's not what it has in mind.
The impulse to misspend – to subsidize well-connected companies, to support favourite industries, or to pay for politically popular projects – will be very hard to resist. The danger that funds will be misdirected into misguided industrial strategies is palpable. Ontario has done it before, not long ago, with the Green Energy Act.
The B.C. promise to taxpayers was that, if they changed their carbon-burning behaviour, they could end up as net winners: They'd spend less if they figured out how to burn less gasoline, diesel and other fuels, and they'd also benefit from lower income taxes. Ontario appears not to want to do that. Its cap-and-trade proposal risks being less environmentally effective, less economically sound and even less popular.
In Alberta, Premier Rachel Notley's new NDP government has to take the time to get this right. It should extend the limited, weak greenhouse-gas regulation that runs out on June 30 to the end of the year. Take the next few months to design something better, which raises the price on carbon, thereby offering industry and consumers an incentive to get more efficient in their use of gasoline and other fuels, and which uses the income to reward all Albertans, not just politically connected friends.
In other words, Alberta should look west, and imitate or even link up with B.C.'s carbon tax. That would mean bringing in a new tax at the pump (the B.C. tax is worth 6.67 cents on regular gasoline) and elsewhere. Some of the revenue could go into Alberta's technology fund to develop carbon-reducing technologies. The rest could lower income tax on the average Albertan.
Ms. Notley got elected in part by promising to roll back a Progressive Conservative income tax increase on the middle class; she could promise to use a carbon tax to fund another middle-class tax cut. It might please both right and left, industry and voters.
As in Ontario, the government may have other agendas. During the election, the NDP pledged to review the way it taxes the oil industry, as part of a plan to somehow compel or subsidize the industry into building more refineries and processing facilities in the province. It's not a particularly plausible idea, but the NDP has harped on it and, given enough money, government can subsidize anyone into doing just about anything.
Ms. Wynne and Ms. Notley must resist political temptation, even as they fight against environmental sin.