The good politics and bad policy implications of a revenue neutral carbon tax

Premier Notley and The Alberta Climate Change Advisory Panel released their Climate Leadership Plan this week to widespread approval in both the political and climate communities. One of the features of the recommendations from the Panel is a price on carbon, better known as a carbon tax. I have written a lot at this blog about the need for a carbon tax as a means to reduce our reliance on fossil fuels. As a British Columbian I would like to relate our experience with the tax as a demonstration that making a carbon tax revenue-neutral is a bad idea from a policy perspective, even though it might look good in a political (and possibly economics) sense.

The impetus for this blog post was a Maclean’s online article by Trevor Tombe Here’s what we know—and don’t know—about Alberta’s carbon tax. Dr. Tombe is an economist from the University of Calgary and while Dr. Tombe praises the carbon tax he argues, persuasively, that from an economist’s point of view making the carbon tax revenue neutral is a good thing. He argues that there is an opportunity for a “double-dividend” consisting of an improved environment and an improved tax system. While he is likely right (I’m not an economist so I will trust him on this) from an economist’s point of view, I would like to argue that from a policy/climate change perspective a revenue neutral carbon tax is actually a very bad thing.

To understand where I am coming from you first need to understand what is meant by “revenue neutral”. In her presentation on the Alberta Carbon Tax Premiere Notley was very circumspect. In her speech she said:

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. Revenue from Alberta’s new carbon price will also be invested into an adjustment fund. This fund will help individuals and families make ends meet as this new policy is implemented. This adjustment fund will also provide transition help to small business, to First Nations, and to people working in the coal industry. As our emissions go down, so will the funds collected. We do not want the government to become dependent on these revenues.

Strictly speaking this description of revenue neutral doesn’t meet the actual definition of the term. The Province of British Columbia (my home province) has a true revenue neutral carbon tax. Being “revenue neutral” means:

every dollar generated by the tax is returned to British Columbians through reductions in other taxes.

In order to remain revenue neutral the BC government has to spend a reasonable amount of time (and money) keeping track of the effects of the tax on the economy and adjusting accordingly. In BC this means that:

The Minister of Finance is required by law to annually prepare a three-year plan for recycling carbon tax revenues through tax reductions. This plan is presented to the Legislative Assembly at the same time as the provincial Budget (ref).

In BC, in order to make the implementation of the carbon tax more palatable the government issued each of us a one-time “$100 Climate Action Dividend” and quarterly issues a Low Income Climate Action Tax Credit payment. This is where the whole revenue neutral nature of the carbon tax starts to go awry.

From an environmental/climate change perspective, the point of a carbon tax is to put a price on carbon in order to encourage the market to move away from carbon-intensive energy sources. In implementing a carbon tax to address climate change, governments will want to implement corresponding policies to help cushion the blow and help industries adapt. As described above, in BC that includes the tax credit. In Alberta the Panel has recommended:

  • A consumer rebate to mitigate the impacts of carbon pricing on low and middle-income Albertans,
  • fund complementary emissions-abatement programs and, where applicable,
  • support a sound and just transition for labour and communities and strategies to protect small-and medium-sized businesses.

The common feature of that list is that each item is going to cost the government money. Under a revenue neutral carbon tax regime that money still has to come out of the government’s pocket. If the overall budget is held steady, increasing payments in one section of the budget means cutting somewhere else. This is exactly what occurred in BC. The government vacated a tax space which it then replaced with a revenue neutral carbon tax. In doing so the BC government ended up short-changing the taxpayer. In order to fund the one-time $100 cheque and the quarterly tax credit payment the government has had to forego other opportunities.

Whenever policy experts get together to talk about reducing our carbon emissions the same topics come up. We talk about the need to increase funding for mass transit and bike lanes; for funding alternative energy technologies; and support for renewable energy. Notice something about that list? Once again each item requires an outlay of government cash. The problem is that the government is perpetually short on cash. Unfortunately, our governments also live in a world where raising taxes is an anathema to a goodly percentage of the voting public.

More problematically, the companies who have been delegated with the primary job of collecting the carbon tax, the retail fuel outlets and the natural gas companies, have made advertising the effects of the carbon tax a part of their business plan. They, rightly, do not want to be held solely responsible for higher gasoline and natural gas prices and so at our gas stations, right on the pumps, you will see a chart showing how much of our gas purchases are made up of tax. This serves as a reminder to drivers, every time they fill their tanks, that they are paying the bulk of this tax. This leaves the driving public with a (possibly misguided) belief that they deserve something for it. For drivers this comes in the form of a desire for increased infrastructure spending on roads, bridges etc… Unfortunately, since our carbon tax is revenue neutral the revenues from the gas tax are not spent improving infrastructure, those revenues are dumped directly into general revenues where they disappear from sight.

The result of all this is a general upset with the operation of government. This was best observed in a virtual tax revolt in the form of a landslide vote against further funding of transit in Vancouver. Moreover, since the carbon tax is being used to run hospitals and pay for wildlife officers it is not available to built new bridges or help support our fledgling renewable energy industry in BC. It is my personal opinion that the revenue neutral feature of the carbon tax is also why it has been frozen for the last several years. Any further increase would require the government to protect industries/individuals from shocks associated with the increase and in the absence of tax room they do not see a way to pay for those supports.

Based on the BC experience, I beg Premier Notley to stand fast on her plan not to make her carbon tax strictly revenue neutral. Leave yourself the tax space to make intelligent policy decisions and don’t allow yourself to be handcuffed to a white elephant like we have been in BC. Our class-leading carbon tax has been sabotaged by the promise to keep it revenue neutral; yours doesn’t need to be.

Author’s Note: Somewhat ironically, I started composing this post on the Vancouver rapid transit system. Using a combination of an express bus and the Skytrain, I was able to get from my home in Langley to a meeting in Vancouver faster than I could have done had I actually had a car to make the trip. The downside of the commute was that I did not see David Robert’s similar post on the topic on Vox until I had written much of the text. Mr. Roberts presents a very similar premise and his article is an excellent companion piece to this one. If I had the energy, I would have re-written the post to better reflect his excellent analysis, but instead I will simply recommend that after reading this you head over to Vox and read his take as well.

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10 Responses to The good politics and bad policy implications of a revenue neutral carbon tax

  1. Dan says:

    So the primary premise of your argument is that the terminology around ‘revenue neutral’ is misapplied and if it were to be applied properly, is bad policy? Your largest concern is that the introduction and administration of the program will actually cost the government money because of the tax reductions in other areas do not cover the program. Do you have any indication of where the funding will come from for administration fees in Alberta? I have seen no source that identifies who will cover the administration costs but it is a valid point. Would you feel better if the program first covered their internal fees prior to disseminating collected funds? That seems like a very valid concern! It is just good business to cover costs prior to collecting profits. I would be surprised if any program doesn’t first cover is own costs and am surprised to hear that BC has led the way by not using collected funds to first cover administrative fees and donation programs.

    As an environmental scientist and as one who’s livelihood is dependant on both BC and Alberta, I will let the semantics of ‘revenue neutral’ be argued amongst the economists, and be proud of the benefits this program will bring to Alberta. The BC model may not be perfect but it was built better than the first Alberta model. Now Alberta is bettering the BC model. Hopefully, if what you are claiming is true as I have not yet fact checked your claims, then Alberta will learn from this error as well! Thanks for the insightful post!

    Dan

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  2. Roland Seguin says:

    Re: BC Carbon Tax
    The big lie about BC’s Carbon Tax being “Revenue Neutral”.
    That is how it was sold to us back in 2008, absolutely 100% guaranteed by law to be Revenue Neutral by the Gordon Campbell Liberals
    Here is how I take the gov’ts own budget numbers and prove that the BC Carbon tax is not ‘Revenue Neutral’ to the people as it cost each household $416 annually.
    The BC Carbon Tax has a track record since 2008 and is touted by eco-saviors world wide as the best model.

    It is only R-N to the gov’t with their creative shell game bookkeeping. We are supposed to believe that we consumers will benefit from the tax credits they give to business as the businesses will volunteer those credits back in the form of lower prices of their products. Yeah and I have a bridge to sell you!
    I attended BC Environment Minister’s Mary Polak’s (MLA Langley) Open house at her constituency office Dec 19, 2014… had a brief discussion about the “revenue neutral carbon tax” and the CO2 we were breathing, as I was leaving.
    I then followed it up with this letter below.
    …………………………………….
    December 21, 2014

    Attn: Mary Polack, MLA

    Thank you Mary for your Open House hospitality, I really enjoyed meeting you, your staff and other constituents.
    I would like to follow up a bit on a rushed conversation we partly had as I was leaving, my contention that the Carbon Tax is not ‘Revenue Neutral’.

    1. Revenue Neutral Carbon Tax?

    How much does the BC Carbon Tax cost us annually per household?… $416 http://bcbudget.gov.bc.ca/2014/bfp/2014_Budget_Fiscal_Plan.pdf

    In the Budget, the Carbon Tax (2014 p.64) brings in to general revenue $1.228 billion p.15. (That’s twelve hundred and twenty eight million dollars).

    Regarding the ‘Revenue Neutral’ part, if we deduct the personal tax relief credits of $447 million which leaves $781 million. (The other Tax relief measures are for businesses.)
    Divide $781 million by BC’s population of 4.62 million and it cost each man, woman and child $169 annually, x 2.46 which equals $416 per household.
    (Statscan; BC pop. Oct. 1, 2014 = 4,631,300 divide by 1,884,831 households = 2.46 persons per BC household). http://www.bcstats.gov.bc.ca/StatisticsBySubject/KeyIndicators/QuickFactsAboutBC.aspx

    2. Regarding CO2, I was quoting some ppm’s we breath and exhale. Are we carbon based humans bad toxic polluters?

    The ambient atmospheric CO2 we breath in is about 400 ppm (parts per million) or 1 part in 2,500. So what are the other 2499 parts?
    With each breath and our amazing lungs, we exhale about 100 times more CO2, 40,000 ppm or 1 part in 25. So what is the other 24 parts made up of?
    http://www.physicalgeography.net/fundamentals/7a.html
    Parts per million may sound like a lot but CO2 is infinitesimal when you consider the lower atmosphere is made up of 78% Nitrogen, 21% oxygen, that’s 99% and the remaining 1% consists of some 9 other trace gases.
    In their order of volume, the remaining 1% is….. Water Vapour, Argon, ‘Carbon Dioxide CO2’, Neon, Helium, Methane, Hydrogen, Nitrous Oxide, Ozone.

    CO2 is an inert, colourless, invisible, odourless, tasteless gas that is absolutely necessary as photosynthesis requires a minimum of 280 ppm for life on earth and in the oceans to exist. It is the ‘ingreenient’ that greens the planet!

    Another good example is that our BC Greenhouse Growers (and all hydroponics need about 4 times more) 1600 ppm to grow healthy, strong root, profitable plants, with less water. Most greenhouses spend big bucks with generators to convert natural gas to CO2 and add in a 12 hour daylight growing cycle, 23 times more CO2 than ambient.

    My purpose is to show how silly it is for us to waste tax-dollars on demonizing CO2 and methane as harmful gases and believe the nonsense they could cause catastrophe on earth.
    I also maintain you could more easily balance the budget by dismantling the Carbon/Climate Cap/Trade Bureaucracy and stick to tangible realistic environmental principles.

    The UN IPCC, Climate Change program’s purpose (Kyoto etc.) is to redistribute tax-dollars from have to have not nations, most of which are non democracies run by corrupt dictators. When they produce 73 consecutive computer climate models and all 73 have been wrong, we should be able to figure out their motives by now.

    Best of the Season to you and family Mary.

    Roland Seguin
    Constituent
    Langley, BC

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  3. lewisjperelman says:

    In essence, you are observing that a revenue neutral carbon tax may be as harmful as beneficial, if not more so. Yet you also acknowledge that a net tax increase is politically unacceptable. You are basically right on both points.

    This detailed, three-part essay by Jesse Jenkins (MIT) shows why a carbon tax that could significantly alter consumer behavior is politically unfeasible; and the only practical carbon tax would be a very modest one used to fund technology innovation:
    http://www.theenergycollective.com/jessejenkins/434246/why-does-politics-keep-getting-way-carbon-pricing-policies-part-1

    Like

  4. Dot says:

    Why not HST and bump the rate up if the gov’t needs more revenue? Clearly, not in the works. Using CTax revenues in lieu of is not being transparent.

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  5. tanck23 says:

    Unfortunately, since our carbon tax is revenue neutral the revenues from the gas tax are not spent improving infrastructure, those revenues are dumped directly into general revenues where they disappear from sight . . .

    Like

  6. Fred from Canuckistan says:

    Tax $3billion out of people’s pocket by telling them they are required to suffer beciase the planet needs our tender loving care.

    Continue to produce more and more of the GHGs that you are telling us are the problem.

    The insanity of the deal is just so ripe for mockery.

    So many real environmental problems but the Global Green Industry has mobilized the Eco Doomslinging all over CO2.

    And now rumblings in BC by a panel of “experts” that we need to raise our carbon tax but this time not offset income taxes to make it $revenue neutral.

    Always about more taxation, bigger government, more experts living off the public teat.

    Like

  7. hunter says:

    Fred,
    The climate/environmental community has formalize their parasitism by way of NGO grants, public policy, and now in a growing list of economies, carbon taxes and credits. It is simply a way for them to monetize their CO2 obsession and go to the bank.

    Like

  8. Pingback: Alberta’s new carbon tax | Critical Angle

  9. Pingback: Oil Rich Alberta’s New Carbon Tax | Climate Denial Crock of the Week

  10. Pingback: On BC CAPE’s guide to the BC Election: Why doctors should stick to medicine | A Chemist in Langley

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