Alberta carbon tax—just bad economics

As the Kenney government begins its constitutional challenge to Ottawa’s carbon tax on consumers, both the provincial and federal governments agree on Alberta’s new carbon tax on large industrial emitters.

Yet legal issues aside, Alberta’s carbon tax reflects bad economics. Even though many Albertans worry about climate change, it’s important to take steps that will actually be effective. Passing symbolic legislation will simply raise energy prices without doing much to help the environment.

One major problem with the Alberta government’s so-called Technology Innovation and Emissions Reduction (TIER) program is that it’s not a simple carbon tax applying uniformly to all emissions. Instead, the TIER program is a hodgepodge of annual emission-target reductions enforced with an initial financial penalty of $30 per tonne of excess emissions, and with differing benchmarks based on the industry. When the plan was first rolled out in late-October, it only applied to some 55 per cent of Alberta emissions.

This approach undermines the whole justification of a carbon tax. In theory, a carbon tax—set to the level of environmental damages and then applied uniformly to all emitters—will provide the proper “price signal” to prompt emitters to account for the damage they cause. But these ostensible virtues of a carbon tax are muted if it’s implemented in an arbitrary fashion—as it is with Alberta’s TIER program.

A more fundamental problem is that Canada is a negligible player on the world scene when it comes to future emissions. For example, in 2017, Canada was responsible for only 1.7 per cent of global carbon dioxide emissions. And that percentage will only shrink over time as countries such as China and India experience faster economic growth with relatively high emissions-to-GDP ratios. A few years ago I asked climate scientist Paul Knappenberger to use a standard climate modelling package and emission scenario to project the contributions of various regions through the end of the century.

Knappenberger found that from 2017 to 2100, China alone accounted for a third (33 per cent) of global emissions while India accounted for another 13 per cent. The entire European Union was only 7 per cent. Needless to say, the impact of Canada—let alone Alberta!—on total global emissions over the next 80 years will be quite small.

When it comes to climate change economics, it doesn’t work to merely ask each small country to “do its part.” If only some countries enact aggressive policies, then “leakage” occurs, where emissions “migrate” to other jurisdictions. For example, if the EU and Canada make gasoline very expensive, then their people will drive less. But this will lower global oil prices, encouraging Americans and the Chinese to drive more. Such aggressive policies would greatly inconvenience Canadians and Europeans while doing little to slow global warming.

By its nature, climate change is a global problem. Trying to solve it through the political process is a dubious strategy, as voters in future elections can always demand a reversal (just look at Australia, the United States and of course Canada).

Albertans concerned about climate change should support solutions that don’t depend on permanent global government enforcement. This could include more research or even something as simple as a tree-planting initiative. But enacting a provincial tax on CO2 emissions is more symbolism than substance.