New Brunswick embraces carbon pricing; it should choose wisely

Climate and Energy

Last week, in response to the results of the federal election, New Brunswick Premier Blaine Higgs announced he would look at options for implementing a carbon price in his province. It’s a policy shift that embraces a core principle of the Pan-Canadian Framework: provinces creating their own, tailored approach to pricing carbon. A made-in-New-Brunswick approach would give the province control over key details of policy design. In particular, it creates an opportunity to customize how revenues are spent according to New Brunswick’s distinct priorities. So, what are Premier Higgs’s options? Let’s take a look.

The current setup

Canada’s federal carbon price is currently set at $20/tonne. It rises by $10 every year until it hits $50/tonne in 2022. By 2022-23, the federal backstop will generate an estimated $210 million in New Brunswick. The federal government currently returns all revenues collected in New Brunswick back to the province, as required by law. Households receive 89% of the revenues in the form of a rebate. Small businesses, municipalities, hospitals, and other large facilities receive the remaining 11%.

(New Brunswick is also developing a separate carbon pricing system for large emitters, which closely resembles its federal counterpart, with a few notable exceptions. And while this separate pricing system is critical to protecting the competitiveness of New Brunswick’s emissions-intensive, trade-exposed industries, this blog focuses exclusively on the economy-wide carbon price.)

How would a made-in-New-Brunswick plan differ from the federal backstop? Well, it depends. Let’s look at three options.

Status quo

If New Brunswickers don’t want things to change, not much has to. The provincial government could replicate the federal dividend and rebate all or most of the revenues directly to households. Under the federal backstop, the average New Brunswick household will pay an estimated $470 per year and receive a dividend of $583 by 2022.

Alternatively, the provincial government could maintain the dividend system but tweak the formula. For example, it could provide more generous and targeted rebates to low-income households, while high-income households could receive smaller dividends or none at all. The government could also allocate a smaller percentage of revenues for dividends and set aside the rest for other purposes. Alberta took this approach with its Climate Leadership Plan. It rebated 28% of carbon tax revenues back to low-income households to ensure the policy did not disadvantage the least well off.

Just a reminder: sending money back to households doesn’t undermine the incentive they have to reduce emissions.

Reducing income taxes

Alternatively, the New Brunswick government could return the revenues to the economy by cutting income taxes. Ecofiscal’s report Choose Wisely showed that while the economic effects of carbon pricing are small no matter how governments recycle revenues, the costs to the economy are smallest when the revenues are used to cut taxes as opposed to all other options.

Tax cuts could be particularly appetizing for a province with one of the highest tax burdens in Canada. New Brunswick could cut both personal and corporate income taxes with its new carbon revenues. The province will generate an estimated $1.77 billion in revenues from its provincial income taxes and $381 million in corporate income taxes in 2019-20. A $50/tonne carbon price in New Brunswick could generate upwards of $210 million—enough to take a sizable bite out of its tax rates. Doing so could protect low-income households from increased costs while making the province a more attractive destination for investment.

Investing in infrastructure and green technologies

A third option is to invest revenues in infrastructure or green technologies. Many communities in New Brunswick, for example, are being hit hard by extreme flooding. Carbon revenues could help pay for new infrastructure projects to make the highest-risk communities more climate resilient against future floods, which the provincial government has already flagged as a high priority.

Investing in green technologies could also provide a much-needed boost to the New Brunswick economy. Investing a portion of the carbon revenues in clean tech, public works and transit, and other low-carbon initiatives could help diversify the province’s economy while further reducing emissions. Funding household retrofits is another option, which could help modernize New Brunswick’s relatively old building stock and reduce how much households pay from the carbon levy (e.g., window retrofits or replacing oil furnaces with gas furnaces or electric heat pumps). In the long-term, such investments could better position New Brunswick to compete in a low-carbon economy.

Genuine trade-offs

New Brunswick has much to gain by embracing a provincial carbon pricing plan. Not only will it reduce emissions at the lowest economic cost, it will also gain control over the revenues that the carbon price generates. New Brunswick can tailor its approach to its unique context. It also can (and should) actively engage its citizens to weigh in on the options.

Regardless of how the province recycles its carbon revenues, there’s a clear opportunity to drive real benefits in New Brunswick. The choices are plentiful—improving household fairness, addressing business competitiveness, investments in public works and low-carbon innovation—but the province will ultimately have to make some important choices. They should choose wisely.

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