Why 40-40 is Foolish-Foolish

Carbon taxes are once again dominating the discussion over energy policy in Alberta, where Environment Minister Diana McQueen has proposed a sharp hike to Alberta’s carbon levy. Presently, large emitters in Alberta are required to reduce greenhouse gas emission intensity (that is, emissions per unit of production) by 12 per cent, or face a levy of $15 for every tonne they come up short. The new proposal would hike the emission intensity target to 40 per cent, and raise the levy to $40. Nice round numbers, to be sure, but extremely ambitious ones. Still, not ambitious enough for the Pembina Institute, which would like to see a $100/tonne tax for failures to achieve the emission reduction targets.

Premier Redford has not climbed on board with the plan. She recently told Macleans that “40/40 isn’t a number that we’ve in any way landed on or proposed.” She then told American reporters that “I wouldn’t characterize anything as a plan.” So while the government of Alberta is floating around without any sort of plan that’s been landed on, this might be a good time to review the serious drawbacks of carbon levies.

Likely most important: there’s little to no benefit to the imposition of carbon levies. Canada is responsible for two per cent of global greenhouse gas emissions, with the oil sands responsible for about seven per cent of that, or about 0.15 per cent of global emissions. Eliminating that entirely would have virtually no measurable effect on the global climate.

But the government argues: “We buy social licence to develop our oil sands with a carbon levy.” One has to observe, however, that Alberta has had a carbon levy since 2007 while attacks on Alberta’s oil sands have only grown more and more venomous. So how’s that social licence thing working out for you so far Ms. Redford?

Bill McKibben of 350.org and James Hansen, arguably the world’s leading climate activists, have both said that the oil sands are “game over” for the climate. So a question for those addicted to giving in to what amount to green shakedowns: Does it seem likely that a carbon levy, however high, would buy social licence from Mssrs. McKibben and Hansen? Or David Suzuki?

Others suggest that we’re really trying to buy social license for Keystone XL from the states, but such a view is naïve. The Keystone decision in the states will come down to pure domestic politics. It’s a fight between the Democrats and Republicans that is now essentially a fact-free zone. It is most certainly not going to be influenced by a levy most Americans wouldn’t understand in a location they probably couldn’t point out on a map.

So there’s no social or political benefit from carbon levies, but what are the liabilities? Of those, there are plenty.

First, unless instituted in an economically optimal way (with full revenue neutrality based on lowering other, more economically distorting taxes), they do what any other tax does: they impose a drag on economic activity. That means lost wages, lost jobs, lost revenues to fund social services, and the usual downsides of high taxes.

Second, carbon levies are discriminatory. They penalize energy-producing regions, energy-intensive industries, and economies with greater levels of industrial activity.

Third, they discriminate against the poor. Levies cascade down to energy consumers and their energy costs go up. When compared with higher income people, those with lower incomes spend a greater proportion of their incomes on the basic necessities of life: shelter, food and on energy that heats their homes and fuels their vehicles. So the impacts of carbon levies will be economically regressive. And while such levies may start low and have a reasonable “growth rate” when they’re implemented, as we’re seeing in both Alberta and British Columbia, the pressure to raise them grows the longer they’re implemented.

Before Alberta’s premier lands upon some plan to hike Alberta’s carbon levy, she should consider two fundamental policy questions: Will Albertans receive more benefits than costs from this action? And of the many things Alberta’s government can do to facilitate the efficient functioning of markets and trade, is this the most efficient and equitable option?

If Ms. Redford gives those questions the diligence they deserve, she may avoid landing on a policy that she, and all of Alberta, later comes to regret.