With the election of Jason Kenney’s United Conservative Party in Alberta in April, the days of former premier Notley’s Climate Leadership Plan were numbered. I knew the plan well — I chaired the panel that designed much of it before it was introduced to great praise in November 2015, shortly before global leaders convened in Paris to plot a response to climate change.
With the coming into force of Bill 1, An Act to Repeal the Carbon Tax, on June 4, 2019, Alberta’s carbon levy was removed from consumption of gasoline, diesel, natural gas and other fossil fuels for everyone but large industrial facilities. While this by no means puts an end to action on climate change in Alberta — Kenney’s proposed policies on industrial facilities will still be among the more stringent carbon pricing policies in the world — it’s a significant step back and one that might eventually backfire on Alberta.
Kenney’s recent speech to introduce the third reading of Bill 1 provides an opportunity to reflect on how the facts supporting carbon pricing have been distorted, and how citizens have been swept up in the negative rhetoric. Kenney claimed there are four principles economists use to determine when a carbon tax is more efficient than emissions regulations:
- when a carbon tax is revenue neutral: that is, other taxes are reduced in proportion to the increased revenues from the carbon tax;
- when a carbon tax displaces other regulations;
- when carbon taxes are made to be progressive, with very generous rebates;
- when carbon taxes are of general application globally or at least applied equally across competing economies.
Kenney is correct, to a point. Economists do generally prefer carbon prices to regulations, but most would not cite the reasons Kenney does. Economists prefer carbon pricing because a carbon price transforms emissions into a commodity like any other: the price signals the value of emissions and lets individuals decide whether to engage in activities that create emissions. By doing so, carbon prices automatically select for the lowest-cost emissions reduction opportunities — people won’t undertake those activities if the costs of emissions aren’t worth it to them. By contrast, government regulations are ham-fisted: they’ll work well for those for whom the solutions they stipulate are low-cost, while being very costly for others by forcing solutions that are far from optimal.
Economists also prefer carbon pricing to regulations because of the incentives provided for innovation. By not stipulating specific means to reduce emissions, carbon pricing allows entrepreneurs to compete to provide solutions. Regulations don’t create the same space for entrepreneurs: rather than convincing their customers to take up their product, entrepreneurs need to convince governments to pick their solutions. Technology is not, as it’s often portrayed, a substitute for carbon pricing. The value of emissions reduction technology is increased through carbon pricing, thereby providing incentives to innovate without the need for governments to pick winners. These incentives for innovation and adoption of new technology were absent from Kenney’s speech.
Now, back to what Kenney did include. In his first principle of carbon pricing, Kenney is talking about a potential “double dividend,” where an additional gain can be derived from a carbon tax if the revenues are used to reduce (or avoid the need for new) taxes on things like income. This need not be the case for a carbon price to be more efficient than regulations, but the fact that revenue can be used in these ways can further enhance the advantage of a carbon tax over regulation.
Next, Kenney claims that carbon prices are efficient only if they displace existing emissions regulations. Existing regulations might constrain how people can react to carbon prices — by restricting the types of cars they can buy, for example — but it’s hard to imagine that regulations would prevent consumers or firms from choosing low-cost emissions-reducing alternatives. More likely, the emissions reductions achieved through the carbon price will reduce the cost of meeting existing regulations. With a carbon price in place, for example, people are more likely to buy fuel-efficient vehicles, making it easier for vehicle manufacturers to comply with existing regulations on fleet-average efficiencies. Of course, we can and should always look to make existing regulations more efficient, but their continued existence doesn’t imply that emissions pricing is inefficient.
Kenney’s third point about carbon pricing needing to be progressive and provide rebates to be effective is also at odds with what almost every economist would tell you. Rebates are not required to make carbon taxes less costly than comparably stringent emissions regulations. A progressive or lump-sum rebate simply serves to make carbon taxes more progressive. If a carbon price by itself is regressive (that is, it imposes higher relative costs on those with lower incomes), regulations will likely be as well, but with no new revenues available to compensate lower-income people for these impacts.
Finally, yes, climate change is a global common property problem and will best be solved with global action; but, in the case of the emissions affected by the carbon price Kenney is repealing, that’s not a primary concern. The Sundre seniors’ centre that Kenney repeatedly cites is unlikely to relocate to Saskatchewan; and as a dad who drives his kid to hockey practice, I’m not easily able to outsource those emissions to China. For large industrial facilities including oil sands operations, outsourcing current emissions or forgoing future production is a real alternative, and Alberta’s existing policy for large emitters (the one Kenney plans to keep) is already designed to mitigate the incentive to relocate emissions to other jurisdictions.
Kenney isn’t necessarily wrong in what he’s putting forward — he’s just choosing to ignore the key reasons why economists support carbon pricing, because they would cut against his decision. In doing so, he also provides a useful lesson for economists. When Kenney talks of seniors having to pay about $2,000 in carbon tax to heat the Sundre West Country Centre, or when he talks of the impact on hockey dads and school-board busing costs, he’s much more effective than economists would like to admit at undermining the rationale for carbon pricing. Perhaps we should spend some time asking why.
I’d posit there are three reasons why this approach is so effective. First, people and firms don’t have a great sense of their exposure to carbon pricing. With some effort, we can figure out how much gasoline, diesel and natural gas we use and project the impact of a carbon price on our direct expenditures. That task gets a lot harder once we’re dealing with indirect impacts like the embedded cost of transportation in the food products we buy. We’re also risk averse, so anecdotes of other individuals facing high costs will lead us to worry that we, too, could soon be in the same situation.
Second, Canadians are more willing to support climate change policies if the costs will be hidden or borne elsewhere — Doug Ford’s claim that the target of the federal tax should be polluters, not commuters, is a primary example. The notion that we can meet our GHG reduction goals by focusing on large industry alone and can do so with new, costless technological solutions is a convenient but unrealistic safety blanket. But it’s more appealing to many than a carbon price.
Finally, the purpose of carbon pricing and the role of rebates have been so obfuscated by opponents that people are almost guaranteed to decide that pricing is ineffective. Carbon pricing works because of the economic law of demand: people use less of something when it has a higher price. Does that mean all people will use less with a carbon price than without? No. Other factors, like income, location, employment and family dynamics, will affect emissions, too. Does it mean it’s not effective if some people don’t change their behaviour? No. The point of carbon pricing is to lower emissions over time through a series of small changes that individuals and firms will make in response to those prices. Will we start driving more efficient vehicles? Sure, some will. Will more of us bike to work? Yes, some will, but others won’t. Will we opt for more efficient home heating? Maybe. The changes are always going to be incremental at the individual level. Ultimately, goods associated with higher emissions will cost more and will be used less with a carbon pricing system in place. Are these changes altered by rebates? Yes, a bit. Rebates, whether as lump sums or as reductions in other taxes, put more money in some people’s pockets, and that income will affect consumption. It will remain the case, though, that emissions are more expensive, and so, all else being equal, people will emit less.
Jason Kenney has successfully weaponized people’s skepticism of climate change policies, their desire to let someone else pay for mitigation, and their willingness to accept arguments that confirm their biases. His success in this has given him a powerful mandate to repeal carbon prices on transportation and heating fuels in Alberta.
There’s a possibility, though, that his victory will be too clever by half. If the country decides it agrees with the emerging conservative consensus that emissions are best reduced with stringent regulations on industrial facilities — polluters, not commuters — Kenney could be in for a rude awakening. Large facilities in Alberta produce more emissions than large facilities in all other provinces combined; 20 percent of our national emissions come from Alberta’s large facilities. The rest of Canada might find that a policy focused on large emitters (polluters) in Alberta is preferable to carbon pricing on themselves (commuters), and that would be a lot worse for Alberta than any carbon tax we’ve seen proposed.
This article is part of the The evolution of carbon pricing in the provinces special feature.
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