Alberta’s new carbon policies are not revenue neutral

This week, the Alberta government unveiled its new strategy on climate change, aimed at reducing greenhouse gas emissions. The strategy calls for the implementation of a carbon tax that would reach $30/tonne by 2018, potentially increasing thereafter.

Premier Notley and others have gone on record stating that the proposed climate change plan is “revenue neutral.” A closer look at the plan contradicts this claim. In fact, the carbon tax plan is not revenue neutral, and would represent a significant net tax increase on the Alberta economy.

The common meaning of this term “revenue neutral” is simply that all revenues collected by a carbon tax are returned to the economy through offsetting tax cuts, with the result being no overall increase in government revenues and no overall increase in the economy-wide tax burden.

Carbon tax proponents often seek to defuse criticisms that carbon taxes are effectively a “cash grab” for governments by stating that they can be designed to be revenue neutral. In fact, many proponents argue that the negative economic effects of a carbon tax can be largely offset by reductions in other harmful forms of taxation, such as corporate and personal income taxes.

Rachel Notley, in announcing the climate change plan, argued that the new carbon tax will be revenue neutral. Specifically, the premier stated that:

“We will put every penny raised through the carbon price to work here in Alberta — building our economy, creating jobs, and doubling down on efforts to reduce pollution and promote greater efficiency. The Alberta carbon price will therefore be revenue-neutral, fully recycled back into the Alberta economy. To that end, revenue will be reinvested directly into measures to reduce pollution — including clean research and technology; green infrastructure like public transit; to help finance the transition to renewable energy; and efficiency programs to help people reduce their energy use.”

Premier Notley clearly says that the carbon tax will be revenue neutral. However, the subsequent sentences in her speech clearly contradict this claim and show that the carbon tax plan is not revenue-neutral at all, using the commonly used definition of the term.

If new revenue is used to reduce the deficit, increase a surplus, or fund new programs it is not revenue neutral. The government’s climate change plan, as Premier Notley herself states, involves using substantial portions of the revenue from the carbon tax to finance new government spending on initiatives like green infrastructure and public transit. Some money may be returned to taxpayers and businesses through tax credits – but certainly not all of it which, quite simply, means that the plan is not revenue neutral.

Under the premier’s understanding of the term “revenue neutral,” a simple income tax increase used to finance new spending on education, health, or literally any other government priority aside from deficit reduction would qualify as being “revenue neutral,” even though government revenues (and spending) would actually increase. Because much of the carbon tax revenue is going to be spent by government, not used to cut taxes, it is more accurate to describe the new policy package as a “tax and spend” approach instead of a revenue-neutral tax.

The purported advantage of a revenue-neutral carbon tax is that the money can be used to cut other economically damaging taxes. However, far from doing this, the Alberta government has actually been increasing both personal and corporate income taxes, widely regarded as among the most economically harmful taxes in the tax mix. A revenue neutral approach to carbon taxes would mean cutting personal and corporate income taxes – not raising both while layering a new carbon tax on top.

Despite the claims of Premier Notley, the new carbon tax is not revenue neutral. Instead, it is simply the latest in a series of tax increases being imposed on Alberta’s struggling economy.