Alberta’s Carbon Tax: The Right Tax at the Right Time?

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Alberta's Carbon TaxIt used to be very clear that Alberta had a spending problem and not a revenue problem.  However, since the 2014 oil crash, the world and Alberta have forever changed.  Historically, oil ‘busts’ were the result of a downturn in some key economy that reduced the demand for oil & gas products.  Today we have the worlds first notable price downturn caused by over production of oil, with no end in site.

Saudi Crown Prince Mohammed bin SalmanThis over production was started intentionally by Saudi Crown Prince Mohammed bin Salman in an effort to kill shale oil fracker’s and other non-state owned small players.  The idea was to have OPEC lead an over production that would drop the price of oil for a few years and force the marginal upstart players (i.e. US based frackers) out of the industry.  Then Saudi lead OPEC would reduce supply and drive the price back up.  Well, the Crown Prince was wrong and it didn’t work.

More importantly it won’t work in the future.  Saudi Arabia and friends can reduce the global price of oil by increasing production but they can no longer raise the price because they no longer control the global output, here’s why:

  1. American fracking companies scale up their oil production in a matter of weeks
  2. Canadian oil sands in Alberta and Saskatchewan have vast reserves backed by billion dollar upgrader investments that just keep coming online
  3. Iran, which has had its oil embargoed for decades, now is pushing 3 billions of barrels onto the open market as of the 2017 lifting of sanctions
  4. OPEC nations like Venezuela and Nigeria are desperate states the need cash and they will continue to cheat their OPEC agreements and produce produce produce
  5. Putin and Russia so desperately want to be a world powerhouse but only has an economy the size of Spain’s, with 20% of its citizens without even running water.  The Russian federal government gets nearly HALF of its revenue from oil so when the price drops, they just produce more which keeps pushing the price down.

Alberta-budget-deficit-2018

In the simplest terms, the supply of oil may have an end date 100 years from now, but for the next decade there will be no shortage and that means the price of oil will stay low.  That means the Province of Alberta is in trouble.  In addition to the obvious need for serious cuts to the public sector to get costs under control, Alberta ALSO needs to bring in more cash.  Massive oil royalties are a thing of the past that future generations will correctly judge us harshly for squandering.

Now the question is, how can the Province bring more money into its coffers.  There are three ready ways state and federal governments bring in notable amounts of revenue:

  1. Income tax (both corporate and personal)
  2. User fees (In Alberta’s case this includes oil & gas royalties)
    • User fees beyond oil & gas royalties are tiny and as explained oil & gas royalties will stay low for a decade or more
  3. Consumption tax (read: Sales Tax or PST)
    • Alberta is the only Province in Canada that does not have a sales tax.  Simply saying the words in your head will be the end of your political career.  No sales tax is part of Alberta’s DNA and no one is going to change that anytime soon

So what do we do?  It would seem that the three sources of revenue do not provide us with a solution.  Two words: Carbon Tax.

A Carbon Tax is a semi-voluntary sales tax.  It does an end run around Alberta’s sales tax paranoia.  While it is true that you can not avoid the Carbon Tax completely, it is true that you can reduce your payment of the tax quite dramatically, by simply using less carbon based products like gasoline, diesel and  natural gas.   We all know how to do that so we will not here explain that getting a vehicle with a smaller engine of turning down the thermostat 1 degree is the answer.

Alberta and all Canadian Provinces are required by the Federal Government to have a carbon tax with a minimum $30/tonne.  On the one hand this an annoying to have the Federal Government tell us how to live but on the other hand it is a gift that gives cover to all political parties in the Province.  They can rail against it, but in the end, Alberta needs the revenue.

This leaves two obvious questions:

  1. How much should the Carbon Tax be?
  2. What should Carbon Tax revenues be spent on?

Alberta-Carbon-Tax-Wasted-Money-CartoonLet’s answer those in reverse order.  In my opinion nearly all of the Carbon Tax should be spent paying down the debt.  The Government has no place picking winners and losers.  Governments job is to provide a level playing field for all operate safely within.  The current NDP government has chosen to pour billions of dollars into “winners” like LED lightbulbs.  Few will argue that LED light bulbs are a good idea, but many will argue that LED light bulbs will be chosen by businesses and consumers without rebates.  Let the free market do its job.  If Governments are going to provide moral guidance, let it be purely through punishment of unwanted behaviors and not through some recently elected Minister deciding that their pet project is right for all of us.  Governments have such a bad track record of accidentally selecting ‘losers’.

Alberta-Carbon-Tax-Rebates-Winners-Losers…Over the next 3 years, revenue from the Climate Leadership Plan, including the carbon levy, is expected to raise $5.4 billion, all of which will be reinvested in the economy and rebated to Albertans:

• $1.5 billion for carbon rebates to help low- and middle-income families
• $1.3 billion for green infrastructure like public transit
• $998 million for large scale renewable energy, bioenergy and technology, coal community transition and other Climate Leadership Plan implementation initiatives
• $566 million for energy efficiency, which includes Energy Efficiency Alberta, a new provincial agency that will support programs and services for homes and businesses
• $565 million to pay for a cut in the small business tax rate from 3% to 2%
• $291 million in transition payments as part of the coal phase out agreements
• $151 million to assist Indigenous communities transition to a cleaner economy
From: alberta.ca/climate-carbon-pricing.aspx

Ontario-Sales-Tax-Revenue-By-Source-2018On the question of how much should the Carbon Tax be, I look to Provinces that do not have substantial natural resource revenues.  In Ontario, the Provincial Government brings in 17.5% of its revenue from Provincial Sales Tax.  In case you are wondering, in 2014 that was $21B out of $119B total.

Alberta Carbon Levy Budget 2018Alberta is planning to bring in just $4.75% of its revenue in Carbon Tax.  In case you are wondering, that is expected to be less than $2B/year out of $41B.

Cuts alone will not balance the budget.  If Alberta gets rid of its carbon tax, it dooms future generations to paying hundreds of billions of dollars in debt.

It seems pretty clear to me that, even though the Carbon Tax is unpopular:

  1. the Alberta Carbon Tax is desperately needed today
  2. the Alberta Carbon Tax is the moral thing to do to unburden our children from a life of debt payments
  3. the Alberta Carbon Tax needs to be HIGHER than currently planned
  4. the Alberta Carbon Tax needs to be spent on the real business of government and not hand outs to ‘the winners’

We may not like it, but the Alberta Carbon Tax is here to stay and that is probably a good thing.

Comments

  1. Robert Liner January 6, 2018 at 1:25 am

    I am of the opinion that there is no such thing as FAIR. Having said that, the ONLY fair tax is a consumption tax. My only concern with an Alberta sales tax is you can’t trust the government (any government) not to spend every freekin’ dime that comes in to the coffers.

    Most people don’t know the difference between debt & deficit. Most people will vote for whichever party promises to tax “the other guy”.

    • Ian Matthews January 6, 2018 at 1:27 am

      Hi Robert;

      If it were practical I would say we should have ONLY consumption taxes, however, we have learned from bitter experience that this simply creates a giant black market and no-one wants to be Greece so we need other forms of taxation to pay for the roads, police and hospitals.

      I am (grudgingly) all for the Carbon Tax, but the NDP need a XXXXX in the XXXXXX for wasting the revenue on the ‘winners’. That proves your point that governments can’t be trusted to do the right thing. Government should set the rules and get out of the way. Let the free market clear itself!

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