A Preliminary View on Alberta’s New Carbon Tax

A Preliminary View on Alberta’s New Carbon Tax

This is the sixth post in the Environmental Law Centre’s new blog series exploring climate change law in Canada. This blog series will provide updates on climate change law developments and will include insights from our related law reform research. This blog series is generously funded by the Alberta Law Foundation.

 

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In April 2016, the Alberta Government announced its fiscal plan for 2016 to 2019 (Budget 2016). Information on the much-anticipated and feared carbon tax (or levy as it’s called in Budget 2016) is provided by Budget 2016 (pages 5-6, 93-98). However, there is only a general outline of the tax with details still to come. The impact and effectiveness of Alberta’s carbon tax can only be completely assessed once those details are provided.

 

The carbon tax was first recommended by the Alberta Government’s Climate Leadership Plan as one of several tools to reduce greenhouse gases (GHG) by putting a price on carbon emissions (see our previous post on the Climate Leadership Plan here). Budget 2016 sets out the carbon price at $20/tonne as of January 1, 2017 and $30/tonne as of January 1, 2018. Currently, there are no plans to increase the level of the carbon tax beyond $30/tonne but this may change with improvements to the economy.

 

The Alberta Government expects to raise revenues from the carbon tax in the range of $274 million in 2016/2017, $1.2 billion in 2017/2018 and $1.7 billion by 2018/2019. The intention is to invest revenues from the carbon tax back into the Alberta economy. In particular, carbon tax revenues will be invested into green projects such as green infrastructure (public transport), energy efficiency, renewable energy, bioenergy, and innovation and technology.

The government intends to mitigate the financial impact of the carbon tax using rebates and a reduction of small business taxes. Eligible low and middle income Albertans will receive an annual non-taxable and refundable rebate ranging from $100 to $400. It is expected that the total rebates will range from $95 million in 2016/2017 to $590 million by 2018/2019. Small businesses will receive a reduced income tax rate commencing January 1, 2017 (from 3% to 2%).

 

Application of the Carbon Tax

The tax will be imposed on purchases of all fossil fuels that produce GHG emissions when combusted, such as transportation and heating fuels. Each fuel type will be taxed according to the amount of GHG emissions released when combusted.

Exemptions to the Carbon Tax

The tax does not apply directly to consumer purchases of electricity. There are further exemptions from the carbon tax for natural gas produced and consumed on site, marked gasoline and diesel for farming purposes, biofuels, inter-jurisdictional flights, indigenous use and fuel sold for export.

Because large final emitters are already subject to the carbon pricing mechanism imposed by the Specified Gas Emitters Regulation (SGER), they will be exempt from the carbon tax in order to avoid double taxation. The precise details of the interaction between the carbon tax and the SGER will be announced later.

 

The Carbon Tax is not the only Carbon Price in Alberta

While the carbon tax is new to Alberta, it is just an addition to the province’s existing carbon pricing scheme. In 2007, Alberta was the first jurisdiction in North America to put a price on carbon. Alberta’s SGER regulates large final emitters with an output of 100,000 tonnes carbon per year. Under SGER, emitters have to pay compliance costs when they exceed their individual ‘net emissions intensity’.

The regulatory scheme established by the SGER is currently under review but the details of proposed changes are not public yet. However, according to Budget 2016, the SGER will adopt new product and sector-based performance standards. As well, as of January 1, 2016, large final emitters must pay $20 per tonne of GHG emissions, increasing to. $30 per tonne as of January 1, 2017.

In combination, the new carbon tax and carbon pricing under the SGER will cover 78% to 90% of Alberta’s GHG emissions. Budget 2016 also makes very clear that both tools work together and that fuel users will not be charged twice on the same emissions.

The government expects $9.6 billion in gross revenue from compliance payments from large final emitters and the carbon tax in combination. The table below illustrates high-level revenue expectations.

 

Millions CAD 2016-17 2017-18 2018-19 2019-20 2020-21 5 year total
SGER/ Compliance Payments 101 146 917 899 758 2,821
Carbon Tax 274 1,247 1,709 1,751 1,796 6,777
Gross Revenue 375 1,393 2,626 2,650 2,554 9,598

Table source: Budget 2016, page 6

 

Will the Carbon Tax Work?

It remains to be seen how effective Alberta’s carbon tax will be at reducing GHG emissions. Based upon the limited information provided in Budget 2016, several questions relating to the efficacy of the carbon tax arise.

Firstly, the Alberta Government aims to change the behaviour of Albertans by introducing the carbon tax. Albertans will be encouraged to use less fossil fuels and to implement energy-saving measures in their households and daily routine. However, given that the Pembina Institute predicts that 60% of Albertans will not have to pay additional costs in light of the rebate program, that matter raises the question of the viability of the carbon tax incenting behavioural change for most people.

Secondly, another question arises in respect of the projected revenues as set out in the table above. Majority of revenues from the carbon pricing tools will come from the carbon tax. In fact, the revenue from the carbon tax is almost triple the amount of revenue generated from payment by large final emitters under the SGER. That raises the questions of which emitters and to what extent they are contributing to GHG emissions in Alberta? Will the polluter-pays principle be effectively implemented with Alberta’s carbon pricing regime?

Finally, there are questions around what the Alberta Government expects in terms of emission reductions resulting from the carbon tax. The only available official information on the carbon tax come from Budget 2016. Unsurprisingly, this means that the focus is on the fiscal aspects of the tax. The questions remain as to which sectors and what amount of GHG emissions will be subject to the carbon tax?

Currently, the oil and gas sector is responsible for 46% of Alberta’s emissions, followed by electricity generation accounting for 17%, transportation for 11%, agriculture, forestry and waste for 9%, other industry, manufacturing and construction for 9% and buildings and homes for 8%.

 

Chart source: Alberta Government

 

At first sight, it appears that the SGER scheme will generate significantly less revenue when compared to the carbon tax. On the other hand, large final emitters under the SGER may be responsible for the largest contribution to GHG emissions in the province. This means that the sectors that contribute less to GHG emissions are making more significant financial contributions through the carbon tax.

While this is of some concern, it may be that this is not actually the case. There are still too many uncertain factors. For example, as discussed above, the exact relationship between the carbon tax and the SGER still has to be worked out. After amendments of the SGER and the release of the carbon tax law, conclusions can be hopefully reached with more certainty.

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