Revisiting Albertan Scepticism - Canada's Ecofiscal Commission

Revisiting Albertan Scepticism

Climate and Energy Technology and Innovation

A lot has happened in Alberta since January 1. The economy is on the mend, provincial politics will never be the same and, yes, there’s a $20 carbon tax in place. Last Christmas, I went home to Calgary and wrote a blog about my conversations with carbon pricing skeptics. Over the summer, I flew back for round two. 

I was recently in Calgary for a friend’s wedding. True to form, I spent my vacation talking carbon pricing (on a completely unrelated note: turns out I’m really fun at weddings). As a policy wonk and Ecofiscaler, I sit at odds with many of my fellow Albertans on carbon pricing, and I’m fascinated by the divergence of opinion.

Still a simmering issue

The carbon tax is unpopular in many corners of Alberta. It inspires a magnificent array of emotions, from enthusiasm to indifference to contempt. After eight months of exposure therapy, the shifts in attitude are subtle.

Last time, I set out to listen. This time, I pushed back a little. Whether I was defending the underlying economics or clearing up misconceptions, it felt like progress. I found the dialogue more productive and came away with some conclusions. Here are four discussions I had that are worth exploring further.

#1: Tax? What tax?

When I asked if the carbon tax has adversely affected anyone’s budget, job, or employer, I didn’t hear an answer in the affirmative. But whether people have noticed the tax or not, it’s there, and serious questions remain regarding its effectiveness, necessity, and the use of revenue.

But to me, the fact that the carbon tax has largely gone unnoticed suggests two things.

First, the rebate cheques are effectively offsetting costs for eligible Albertans. I’ll dive into this later.

Second, the carbon tax may not —yet— be spurring widespread change at the household level. This isn’t that surprising; evidence suggests we’re playing the long game here, and it’s been eight months. People become more responsive to carbon taxes over time (econ speak: carbon demand is more elastic in the long-run) because there is more time to invest in and replace equipment, cars and appliances. This is why stability and predictability are so important, so people and businesses make the right investments.

Furthermore, the costs aren’t always visible. $20/tonne is quite modest, and prices are well within range of typical market fluctuations. Take gas prices. A $20 carbon tax adds 4¢ per litre, but Calgary’s gas prices have spiked by 10¢ overnight multiple times this year (for long weekends and after Hurricane Harvey).

Early observations indicate that the effects of the carbon tax have been small so far. Going (mostly) unnoticed at first means that everyone has time to adjust. And if the tax is making a noticeable dent in your disposable income, policy design can take care of that.

#2: Is there a point if you’re just giving the money back?

Of course, the fact that $20/tonne is not a strong enough incentive invites several questions. A friend posed an interesting one: Is Alberta’s rebate system another barrier to widespread behavioural change? Doesn’t returning the money defeat the purpose?

As my friend imagined it, the consumer pays the tax, which changes hands in the public service, and travels back to lower-income households in the form of rebate cheques. Isn’t the result an unnecessary back-and-forth redistribution of revenue that doesn’t really change incentives?

Well, no. As usual, the reality is more complicated. The carbon tax makes carbon-intensive goods and services relatively more expensive. But rebates don’t undermine this objective because they are tied to your income level, not your carbon consumption.

Eligible families receive rebates irrespective of their choices around reducing emissions. For example, say a family invests in a high-efficiency furnace. They’ll avoid some carbon taxes on their heating bill, and since their income doesn’t change, they get the same rebate. In short, the rebate doesn’t neutralize the incentive to reduce emissions. In some cases, they offer an incentive to reduce more emissions and avoid more tax, which is the whole point.

But the rebate also ensures that lower-income earners, who tend to spend more of their income on carbon-intensive goods, aren’t disproportionately affected by the tax. In other words, rebates ensure carbon taxes aren’t regressive—a common criticism— but keep the price signal in place for everyone.

#3: Carbon pricing, or technology?

More than once, I fielded the idea that carbon pricing is unnecessary since, eventually, we will achieve the technological advances we need to solve climate change. This thinking aligns perfectly with Alberta’s entrepreneurial spirit.

So why not just invest in promising technologies?

Yes, innovation and clean tech are vital to decarbonization. But they’re not panaceas, and the timely arrival of their fruits isn’t guaranteed. Relying on future breakthroughs is acknowledging that we’re content with waiting on tomorrow’s solutions to fix today’s problems.

We must also consider whether the market is creating the right incentives for developing those breakthroughs, and on a suitable timeline. The costs of mitigation technologies will come down faster with a carbon tax because private firms will invest in decarbonization to save themselves money.

Moreover, if you’re game for this vision of the future, carbon taxes spare us the trouble of picking winners, since they’re agnostic about where emissions reductions come from. If we’re investing, we’re picking what to invest in. With carbon taxes, whatever technologies become cheapest, fastest, win. The market does the heavy lifting. Carbon capture and artificial photosynthesis are pretty cool, but they reduce emission at a cost of hundreds of dollars a tonne. Alberta’s carbon tax reduces emissions for less than $20/tonne.

But tax vs tech is a false dichotomy, anyway. They can work well together. Carbon taxes offer better bang for our buck than heavy investment in moonshots, but they are not mutually exclusive. Quite the opposite.

#4: Revenue transparency is good; revenue-neutrality is better

Some pointed to BC’s revenue neutral carbon tax, and wondered why Alberta wouldn’t pursue a similar approach. One of my better-read peers described a revenue-neutral carbon tax as “a sales tax with environmental leverage,” which he would be fine with paying. I think the key here is being explicit about objectives. A sales tax is about generating revenue. A carbon tax is about changing incentives, though it happens to generate revenue as well.

We should treat the question of revenue recycling separately and sequentially. Right now, Alberta splits revenues between rebates, tax cuts, and emission reduction projects. There’s healthy debate in this arena. It’s worth noting that not every carbon tax supporter agrees with the revenue recycling approach, just as there are those who approve of the revenue recycling approach but oppose the carbon tax.

Right now, Alberta must legally spend revenues from the carbon tax on further emissions reductions (i.e. renewable energy auctions, public transit) or direct refunds to Albertans (i.e. small business tax cuts, household rebates). So as prices rise to $50/tonne, the door is open for income tax cuts.

At a time where it’s easy to become submerged in misrepresentation and myth, I wonder if revenue-neutrality can help keep us afloat. It’s simple enough to explain in one sentence, and strikes me as a compromise Albertans could get behind.

An open question for carbon tax opponents

I didn’t leave a conversation without asking “If not the carbon tax, then what?” I challenge every carbon tax opponent to consider what alternative they want to see. And before you answer, no, repealing the carbon tax isn’t climate policy, the same way tearing up NAFTA isn’t trade policy.

Doing nothing is no longer a viable option. The developed world is moving on this, if they haven’t already. China is opening the world’s largest carbon market this year. U.S. states are reaffirming and doubling down on their commitments to cut emissions. Mexico is considering linking with California. Japan has had pollution pricing since 2012, the EU since 2005. Alberta and Canada are, inarguably, part of this community.

Strong environmental policy, including credible, visible climate policy, is not something Alberta – which considers itself a world leader in energy development – can afford to reject. There are plenty of alternatives to a carbon tax, but it’s the least invasive, most efficient, most effective climate policy we know of. Debate where the revenues go, absolutely; but saying no isn’t enough.

In this blog’s predecessor, I focused on improving the quality of conversation around Albertan climate policy. Now it’s time to have those conversations, even if those conversations are debates, and even if those debates are awkward.

To my friends in Alberta, and to other carbon price skeptics: by all means, let’s debate policy. But it’s time to move beyond throwing rocks. It’s time to be for something.

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