Alberta's new carbon tax plan

My friend Jon Koomey points me to a great summary of Alberta's new carbon tax plan, which Albertan Premier Rachel Notley has introduced in the home of the carbon-intensive Canadian oil sands. Andy Skuce at Skeptical Science lays out the details in a remarkably comprehensive piece. 

One of the things that caught my eye was the distinction between "revenue-neutral" tax design as promoted by many environmental economists and the concept as Alberta has embraced it. British Columbia, for example, uses carbon tax revenues to offset local taxes, producing what economists call a "double dividend" from the reduced tax burden on labor and capital. In the United States, this is the preferred approach with moderate Republicans (e.g., George Shultz) as well as grassroots environmentalists (e.g., Citizens Climate Lobby). 

But as Andy Skuce notes, Alberta's plan uses the term "revenue-neutral" to describe a different mechanism. Rather than re-spending carbon revenues to reduce taxes, Alberta's plan would provide incentives to support relatively lower-emitting oil and gas producers; rebates to low-income households; and expenditures on complementary policies that support renewable energy. This looks a lot like what Senators Boxer and Sanders proposed in the ill-fated Climate Protection Act of 2013, which would have returned 60% of carbon revenue to households in the form of direct rebates, using 25% of the revenue to offset lost tax income consistent with Senate PAYGO rules, and 15% to support additional mitigation policies and worker transition programs. 

In both approaches, carbon revenues are not treated as general tax revenues—instead, the new carbon revenue is spoken for by the programs and policies that create it in the first place. But words matter in politics, and there is sure to be debate over whose claim to the "revenue-neutral" throne is the better one. 

The ever-sharp David Roberts at Vox has weighed in on this point, arguing that the political coalitions that are made possible by an Alberta-style revenue use are far more important than the second-order savings in a classical tax-offsetting approach. He makes a powerful case for this approach in terms of the raw politics, something that has been increasingly echoed by economists (Gernot Wagner et al. in Nature) and political scientists (Jonas Meckling et al. in Science) over the last few months. 

Personally, I think the political merits of each approach to carbon revenue use depend on the context. Using carbon revenue to support the lowest-emitting oil sands producers makes a lot more sense than would a reduction in personal or business taxes—Alberta's oil and gas industry is an immensely powerful stakeholder that benefits more from direct reimbursement than corporate tax benefits that would be shared by all companies in the province. And by winning support from the oil and gas sector, Premier Notley is able to impose a high carbon price and strong complementary policies to phase out coal power plants and encourage renewable electricity. In other words, support from oil and gas means more pain for coal and more gain for renewables in Alberta. 

Perhaps this is the kind of model that will work in the United States, too. It certainly has traction in state level discussions. But in the federal policy debate, the clout of concentrated industries like coal is diminishing, the domestic oil and gas industry now faces persistent low prices, and the interests of big business remain as strong as ever. Point is, I wouldn't rule out the political benefits of a classical tax-swap approach to a revenue-neutral approach just yet. We may yet reach a point where the national politics favor a tax swap over a coalition-building approach at the national level—especially now that the wind and solar industries have secured five-year tax credit extensions. With luck under the right circumstances, unexpected climate allies from the business world might find such a deal appealing. 

Time will tell exactly how the carbon tax and related policies might be implemented in Alberta, but that we are even having this conversation is a big deal. Here's to another interesting data point in the climate policy world, with the promise of more to come in 2016.