Alberta’s carbon tax flawed, says economist

Prof. Trevor Tombe University of Calgary
Prof. Trevor Tombe
University of Calgary

By Tim Kalinowski, Staff Writer


There’s a good reason why Alberta’s high emissions producers are supportive of the NDP government’s carbon tax approach, says Dr. Trevor Tombe, assistant professor of Economics at the University of Calgary.

“As any economist will tell you, this is a very efficient way of going about emissions’ concerns,” says Tombe. “It’s certainly cheaper to do this than to subsidize technology or mandate certain engines be installed in this or that machinery… What the tax does is provide an incentive for businesses and households to make their own choices, and abate emissions only when it’s less costly than the tax.”

But, and there is a big “but” here, says Tombe.

“It depends on what aspect of the carbon tax we’re referring to… Where I would disagree is with what the government has chosen to do with the revenue. Instead of making it a revenue neutral approach to pricing carbon, where they take the revenue and lower other taxes, they are choosing to spend most of it.

“Pricing carbon, in principle, does not need to increase the size of government. It doesn’t need to increase government revenue… People view this as a tax grab, and this makes it also less politically viable as a (policy) tool.”

Tombe gives the example of a truly revenue neutral carbon tax, as it is applied in neighbouring British Columbia.

“In B.C. it was revenue neutral. They took that money from the carbon tax and used it to lower corporate and personal income tax so there is no evidence of adverse effects from the carbon tax… Anybody who cancels the carbon tax in B.C. will have to simultaneously increase income taxes. It changes the dynamic of the discussion there. Whereas in Alberta they are going to take the revenue and spend most of it, while substantially increasing the size of government.”

Tombe says another aspect to the carbon tax is the indirect costs industries such as agriculture will have to bear as a result of its application. He predicts those indirect factors could double the cost burden of the carbon tax for Albertans.

“The carbon tax is going to have direct costs, and that’s just literally at the gas pump or at the natural gas bill or electricity bill; that is the direct cost on households and businesses. The indirect costs are when the prices of things that we buy change because the producers of those other things have their own direct costs…

“Quantitatively, how big are those indirect costs relative to the direct costs?” asks Tombe. “It is tough to directly measure because there is complicated web of spillover effects. But, roughly speaking, it’s about the same size. So direct plus indirect is in aggregate maybe double the just direct costs,” says Tombe.

Tombe says the NDP government does seem to be aware of these potential indirect effects, and is trying to mitigate them, appropriately from an economics standpoint, using rebates.

“The whole point of this carbon tax policy is to change prices,” states Tombe. “So the fact that we’re going to see prices change is the purpose of the policy. So we wouldn’t want to change those price effects of the policy. Where we might have to be concerned is now peoples’ income is going to be stretched over what are now more expensive goods and services. A rebate can buffer that side of things. A carbon tax does not need to make, on average, households and businesses poorer. So if we are concerned about the costs increasing on a certain sector then direct support to that sector would be something that could be done. So, for example, a direct subsidy to agriculture where the output on each farm gets a level of subsidy to offset the effect of the carbon pricing.”

In the end, says Tombe, if you want to do something to reduce emissions as a province and society someone is going to have to pay more somewhere. The role of government is to buffer its citizens and businesses from the worst effects of this.

“Businesses, whether large or small, will have to pay the carbon tax,” says Tombe. “There is no way around it… In the same way we will have a low and middle class rebate, large emitters will be provided with output based rebates as well. It works out to the equivalent of a few dollars a barrel for large oil producers, for example. It works out to about $10 a megawatt hour for large power plants. It is that which kind of buffers the effect of carbon pricing on large firm costs.”