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Make the Alberta Carbon Levy Revenue Neutral

The new carbon levy of $30 per tonne, announced in November 2015 as part of the report
issued by the Alberta government’s Climate Leadership Panel, is a positive move in the direction
of pricing carbon emissions. The levy is expected to generate $3 billion in net revenue by 2018,
and possibly as much as $5 billion by 2030. While there is some discussion in the report of
what should be done with the revenues generated by the carbon levy, it is somewhat vague
on the details, leaving a number of options open to the government. The purpose of this
briefing paper is to argue that the revenues from the carbon levy should be used to lower
existing taxes – the carbon tax should be revenue neutral, generating no new net revenue for
the government.
The basic argument is that the carbon levy can be viewed through two lenses. The first lens
is the imposition of a price on carbon emissions which (at least partly) reflects the social
costs of emissions. Viewed through this price lens, the carbon levy plays an important role
in incenting firms and individuals to change their behaviour and move towards less carbon
intensive activities. The second lens is the role of a carbon tax as a part of the broad revenue
system. Viewed through this tax lens, a carbon tax is not a very good, or efficient, way of
generating revenue. The reason for this is somewhat nuanced, but the basic idea is that
the carbon tax is applied to a narrower base than broader-based taxes. Broad based taxes
generally impose lower costs on the economy than narrow based taxes. Moreover, carbon
taxes interact with other taxes in the economy, exacerbating the economic costs associated
with those taxes. And those costs are quite high – research shows that the total cost to the
economy of raising an additional $1 in revenue through the corporate income tax in Alberta is
$3.79; for the personal income tax the cost is $1.71. These taxes therefore impose higher costs
on the economy than they raise in revenue. Swapping revenue from the carbon levy for these
taxes in a revenue neutral manner would lower these costs, generating a substantial return to
the provincial economy relative to other uses

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