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Business Commentary Alberta’s new carbon direction is just, and just in time

Todd Hirsch is the Calgary-based chief economist of ATB Financial and author of The Boiling Frog Dilemma: Saving Canada from Economic Decline.

Albertans got their first look this week at the provincial government's new carbon reduction plan. It included bold plans to phase out coal, cap oil sands emissions and reduce methane. Environmentalists and the Big Oil elite practically joined hands on stage and sang We Are the World.

But one word jumped off the pages of Premier Rachel Notley's speaking notes that confirmed what some Albertans suspected from the New Democrats the whole time: tax. A $20-a-tonne carbon tax (or fee, as I prefer to use) comes into effect in 2017, increasing to $30 a tonne in 2018.

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Predictably, the anti-tax lobby groups and opposition parties lost their minds. But the problem with their endless rant is that it goes like this: Be it resolved that all tax is bad. And therefore, a tax on carbon is bad, too. Be it also resolved that all taxes should be referred to as a "tax grab on hard-working families." And because a tax on carbon is a tax, it too is a "tax grab on hard-working families." And that's very bad.

This is as sophisticated as their debate on carbon taxes ever gets. That's unfortunate, because there could be reasonable alternatives to a straight carbon tax. But it's unintelligently called a tax grab and no other solutions to reduce carbon are ever offered.

The "tax grab" language resonates with their political base: rabid fiscal conservatives and climate change skeptics. They'll never change their minds, but it might be worth trying anyway to outline the reasons why a carbon levy is the right thing for Alberta to do.

First, unlike a carbon cap-and-trade system that induces companies to buy and sell carbon permits, a carbon fee on the end user really does keep the money in the province. It isn't quite revenue neutral (as some of the Premier's comments have suggested), at least not in the sense that individual taxpayers will see an equally offsetting reduction in other taxes. But it is revenue neutral within Alberta. Money collected by users in the province will stay in the province.

Second, charging a higher price to emit carbon works to nudge behaviour in certain directions. British Columbia is held up internationally as the example. Given a price incentive to burn less carbon, consumers will burn less carbon. It's classic economics. Remember Econ 201? The downward-sloping "demand curve"? That's what this is all about. Price goes up and quantity demanded goes down.

Third, and maybe most important, the carbon tax on emissions helps address a major risk to Alberta's and Canada's energy sector: reputation. Three major risks are presently bearing down on petroleum producers. One is price risk – and at $45 (U.S.) a barrel, the industry doesn't work. There's nothing we can do about price. Another risk is market access. Without adequate pipelines, the industry is doomed. And as U.S. President Barack Obama demonstrated, some of the market access risk is out of our control, too.

But reputational risk has quickly become a third, serious threat. Rightly or wrongly (and people can argue this forever), bitumen has been depicted as "dirty oil." Our environmental reputation was pummelled under former prime minister Stephen Harper, who didn't care. It did little better under former Alberta premier Jim Prentice, who did care but led a party that had lost credibility around environmental protection.

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With fresh leadership in Ottawa and Edmonton, we have a chance to repair our international reputation. It goes beyond selling oil. What global consumer wants to vacation in Canada, or buy our lumber, or technology, or engineering services, if we're perceived as not caring about our environment?

Alberta's carbon fee, along with the plans to phase out coal and limit oil sands emissions, are controversial. It certainly won't please everyone – after all, no one actually enjoys paying more. But it's a necessary first step in repairing Alberta's and Canada's reputation.

And as the Paris meetings get under way, it comes just in time.

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