June 21, 2016 by Lindsey
How Not to Institute a Carbon Price in Alberta
The British economist John Maynard Keynes is frequently referenced by politicians who want to provide an intellectual justification for increasing public spending and running chronic deficits. Towards the end of his life, Keynes became so distraught over this one-sided abuse of his theoretical work that he told his friends he was not a “Keynesian.”
His objection was to political “cherry picking.”
When the economy was down, politicians would use his work to justify what their worst political instincts already predisposed them to do: constantly increase public spending and run huge deficits. But when the economy returned to health, they would completely ignore the part of Keynesian economics that then called for balancing budgets and paying down debt.
Now, flash forward to today and consider a repeat of this same phenomenon. In response to growing concerns about the environment, economists have developed the concept of “pollution pricing.” It combats the negative environmental effects of economic activities such as energy production by utilizing market mechanisms – pricing signals and financial incentives – rather than by ever-increasing micro regulation by governments.
Application of this concept to the production and consumption of hydrocarbon-based energy involves:
- Identifying any negative environmental impacts, such as the production of greenhouse gases (GHGs);
- Identifying, costing out and implementing avoidance or mitigative measures to reduce those impacts;
- Including the costs of those measures in the price of the energy through a pollution levy or tax;
- Adopting other necessary and complementary policies – such as revenue recycling and reduction of the regulatory burden – required to make the concept environmentally effective, economically sound and politically feasible.
But now, like Keynesian economics, the concept of pollution pricing, in particular carbon pricing, is in danger of being discredited by political misuse and bungled implementation, this time at the provincial level, particularly in Ontario and Alberta.
In Alberta, the provincial government – cherry-picking the taxation component of the pollution-pricing concept – has just passed Bill 20, the Climate Leadership Implementation Act. It institutes a carbon tax to reduce GHG emissions, but fails to include the other necessary and complementary measures required to make it environmentally effective, economically sound and politically feasible.
For example, if pollution pricing is to be introduced during a time of economic hardship and strong public resistance to price increases, it is absolutely imperative in my opinion that any carbon-pricing regime be “revenue neutral.” That is, other taxes and government levies should be reduced by the amount of revenue that the carbon tax will generate. The Alberta government claims its carbon tax is revenue neutral by contending that any tax raised in Alberta is “neutral” if it is spent in Alberta regardless of whom the tax is levied on, or how the revenue is spent. This is economic nonsense, and the plain fact is that only a portion of the revenue to be raised through Bill 20’s carbon pricing regime will be returned to taxpayers and consumers.
Furthermore, institution of a carbon price is supposed to replace micro regulation and should be accompanied by an absolute reduction in the regulatory burden on energy producers and consumers. But Bill 20 itself contains almost 90 pages of additional rules covering exemptions, rebates, credits, remittances, recoveries, registrations, assessments, liabilities, objections, extensions, applications to the Court of Queen’s Bench, investigations, enforcements and offences. It even contains a 13-clause section entitled “Special Rules,” and a schedule establishing yet another government agency.
Under this legislation, energy executives and managers in Alberta will spend more time trying to understand and adjust to government policy edicts and regulations, and coping with the investor uncertainty that these generate, than they will on running their energy businesses.
Finally, the government’s fixation on reducing GHG emissions has largely blinded it to the negative environmental effects of other energy sources, such as wind, solar and hydro. The costs of avoiding or mitigating these impacts are not subject to any pollution-pricing regime comparable to that imposed on hydrocarbons. Thus, the government runs the risk of under-pricing energy from these sources, sending misleading pricing signals to energy consumers and causing major misallocations of capital. Nothing in the government’s climate-leadership plan acknowledges this risk, and nowhere in the government’s current policy portfolio is it addressed.
When the consequences of this bungling of carbon-price implementation come home to roost, they will no doubt cause great political trouble for the government. But they are also likely to set public acceptance of the concept of pollution pricing back another 10 years and make it exceedingly difficult for a future government to return to it. It is genuine and responsible environmentalists in Alberta, not just consumers, taxpayers and investors, who should be most alarmed by this prospect and in the forefront of demanding corrective action.