Premier Notley and The Alberta Climate Change Advisory Panel released their Climate Leadership Plan this week to widespread approval in both the political and climate communities. One of the features of the recommendations from the Panel is a price on carbon, better known as a carbon tax. I have written a lot at this blog about the need for a carbon tax as a means to reduce our reliance on fossil fuels. As a British Columbian I would like to relate our experience with the tax as a demonstration that making a carbon tax revenue-neutral is a bad idea from a policy perspective, even though it might look good in a political (and possibly economics) sense.

The impetus for this blog post was a Maclean’s online article by Trevor Tombe Here’s what we know—and don’t know—about Alberta’s carbon tax. Dr. Tombe is an economist from the University of Calgary and while Dr. Tombe praises the carbon tax he argues, persuasively, that from an economist’s point of view making the carbon tax revenue neutral is a good thing. He argues that there is an opportunity for a “double-dividend” consisting of an improved environment and an improved tax system. While he is likely right (I’m not an economist so I will trust him on this) from an economist’s point of view, I would like to argue that from a policy/climate change perspective a revenue neutral carbon tax is actually a very bad thing.

To understand where I am coming from you first need to understand what is meant by “revenue neutral”. In her presentation on the Alberta Carbon Tax Premiere Notley was very circumspect. In her speech she said:

The Alberta carbon price will therefore be revenue-neutral, fully recycled back into the Alberta economy. To that end, revenue will be reinvested directly into measures to reduce pollution — including clean research and technology; green infrastructure like public transit; to help finance the transition to renewable energy; and efficiency programs to help people reduce their energy use. Revenue from Alberta’s new carbon price will also be invested into an adjustment fund. This fund will help individuals and families make ends meet as this new policy is implemented. This adjustment fund will also provide transition help to small business, to First Nations, and to people working in the coal industry. As our emissions go down, so will the funds collected. We do not want the government to become dependent on these revenues.

Strictly speaking this description of revenue neutral doesn’t meet the actual definition of the term. The Province of British Columbia (my home province) has a true revenue neutral carbon tax. Being “revenue neutral” means:

every dollar generated by the tax is returned to British Columbians through reductions in other taxes.

In order to remain revenue neutral the BC government has to spend a reasonable amount of time (and money) keeping track of the effects of the tax on the economy and adjusting accordingly. In BC this means that:

The Minister of Finance is required by law to annually prepare a three-year plan for recycling carbon tax revenues through tax reductions. This plan is presented to the Legislative Assembly at the same time as the provincial Budget (ref).

In BC, in order to make the implementation of the carbon tax more palatable the government issued each of us a one-time “$100 Climate Action Dividend” and quarterly issues a Low Income Climate Action Tax Credit payment. This is where the whole revenue neutral nature of the carbon tax starts to go awry.

From an environmental/climate change perspective, the point of a carbon tax is to put a price on carbon in order to encourage the market to move away from carbon-intensive energy sources. In implementing a carbon tax to address climate change, governments will want to implement corresponding policies to help cushion the blow and help industries adapt. As described above, in BC that includes the tax credit. In Alberta the Panel has recommended:

A consumer rebate to mitigate the impacts of carbon pricing on low and middle-income Albertans,

fund complementary emissions-abatement programs and, where applicable,

support a sound and just transition for labour and communities and strategies to protect small-and medium-sized businesses.

The common feature of that list is that each item is going to cost the government money. Under a revenue neutral carbon tax regime that money still has to come out of the government’s pocket. If the overall budget is held steady, increasing payments in one section of the budget means cutting somewhere else. This is exactly what occurred in BC. The government vacated a tax space which it then replaced with a revenue neutral carbon tax. In doing so the BC government ended up short-changing the taxpayer. In order to fund the one-time $100 cheque and the quarterly tax credit payment the government has had to forego other opportunities.

Whenever policy experts get together to talk about reducing our carbon emissions the same topics come up. We talk about the need to increase funding for mass transit and bike lanes; for funding alternative energy technologies; and support for renewable energy. Notice something about that list? Once again each item requires an outlay of government cash. The problem is that the government is perpetually short on cash. Unfortunately, our governments also live in a world where raising taxes is an anathema to a goodly percentage of the voting public.

More problematically, the companies who have been delegated with the primary job of collecting the carbon tax, the retail fuel outlets and the natural gas companies, have made advertising the effects of the carbon tax a part of their business plan. They, rightly, do not want to be held solely responsible for higher gasoline and natural gas prices and so at our gas stations, right on the pumps, you will see a chart showing how much of our gas purchases are made up of tax. This serves as a reminder to drivers, every time they fill their tanks, that they are paying the bulk of this tax. This leaves the driving public with a (possibly misguided) belief that they deserve something for it. For drivers this comes in the form of a desire for increased infrastructure spending on roads, bridges etc… Unfortunately, since our carbon tax is revenue neutral the revenues from the gas tax are not spent improving infrastructure, those revenues are dumped directly into general revenues where they disappear from sight.

The result of all this is a general upset with the operation of government. This was best observed in a virtual tax revolt in the form of a landslide vote against further funding of transit in Vancouver. Moreover, since the carbon tax is being used to run hospitals and pay for wildlife officers it is not available to built new bridges or help support our fledgling renewable energy industry in BC. It is my personal opinion that the revenue neutral feature of the carbon tax is also why it has been frozen for the last several years. Any further increase would require the government to protect industries/individuals from shocks associated with the increase and in the absence of tax room they do not see a way to pay for those supports.

Based on the BC experience, I beg Premier Notley to stand fast on her plan not to make her carbon tax strictly revenue neutral. Leave yourself the tax space to make intelligent policy decisions and don’t allow yourself to be handcuffed to a white elephant like we have been in BC. Our class-leading carbon tax has been sabotaged by the promise to keep it revenue neutral; yours doesn’t need to be.

Author’s Note: Somewhat ironically, I started composing this post on the Vancouver rapid transit system. Using a combination of an express bus and the Skytrain, I was able to get from my home in Langley to a meeting in Vancouver faster than I could have done had I actually had a car to make the trip. The downside of the commute was that I did not see David Robert’s similar post on the topic on Vox until I had written much of the text. Mr. Roberts presents a very similar premise and his article is an excellent companion piece to this one. If I had the energy, I would have re-written the post to better reflect his excellent analysis, but instead I will simply recommend that after reading this you head over to Vox and read his take as well.