The Alberta carbon tax, explained (and no, it won't drive up cremation costs—that much)

The carbon tax that was implemented in Alberta on Jan. 1 is meant to reduce the greenhouse gas emissions that cause climate change, but it’s produced one unexpected side effect so far: confusion.

Provincial media reported on the uncertainty as the new tax approached, and now that the levy is in place The Edmonton Journal reported about potential confusion surrounding where the tax rebates are coming from. CBC News even reported about confusion over how much tax people should be charged for cremation.

On a national level, The Canadian Press reported how focus groups from last year showed some Canadians believed there is already carbon pricing in place nationwide.

To help clear up some the confusion, Yahoo Canada News spoke with two experts from the University of Calgary: Jennifer Winter, the scientific director of energy and environmental policy at the School of Public Policy; and Trevor Tombe, research fellow at the school and assistant professor of economics at the university.

Their answers have been edited for length and clarity.

What is carbon pricing?

Jennifer Winter: In some ways it’s really obvious, in that it is putting a price on carbon or carbon emissions. How do we do that? Well, we know with relative certainty the quantity of carbon emissions or quantity of carbon dioxide that results from the combustion of gasoline or diesel. Once we know that we can say, OK, for every tonne of emissions from those fossil fuels, we put a price on it. And in Alberta right now that is $20 a tonne. And so it is a price on the carbon dioxide equivalent emissions of combustion from fossil fuels.

Trevor Tombe: So for example, gasoline: the Alberta carbon tax of $20 per tonne of emissions, that’s about 4.5 cents a litre; for natural gas that we use in most of our homes to heat them, it’s about $1 per gigajoule. So the list of fuels is quite long, and they each have their own appropriate level of tax imposed on them that corresponds to what we think the cost of greenhouse gas emissions are.

It’s never politically easy for a government to bring in a tax. Why do they think it’s worth it?

JW: Well, we know that there are damages from emissions. That is one reason to bring in a tax, though there are policy alternatives, in that a government could implement a carbon tax like in B.C. and Alberta. Ontario and Quebec have gone the way of cap-and-trade, or we could just go with environmental regulations. The reason there’s the preference for something like a carbon tax is that it’s transparent. We know exactly what the price on emissions will be and that means we know exactly what the increase in the cost of, say, gasoline or natural gas are. It’s also simpler to implement than a cap-and-trade system, and also definitely less costly than regulations.

TT: Economists are almost universally in agreement that market-based approaches are the most efficient way to lower emissions. It will cost the economy less than alternative approaches like regulations or technology mandates, or subsidies, things of that nature. And so recognizing that we want to take action and also recognizing that we also don’t want to unduly burden the economy, both lead to carbon pricing as a very sensible policy instrument to take.

How does the system in Alberta work?

JW: The Alberta tax is a tax on emissions from combustion of fossil fuels in the province. There are some exceptions, but broadly speaking it is just a tax on emissions from combustion of fossil fuels by end users. So that would be the gasoline you use to drive a car, the natural gas you use to heat your home or your business, that sort of thing.

TT: So this where the Alberta government picks a price on carbon rising to $30 by 2018… So that is basically to say that every tonne of emissions will be taxed at that level.

How will it affect the average family?

JW: The effect on the average family really depends on your consumption habits. For the average family in Alberta, it’s probably going to cost about $500 a year in additional costs associated with the carbon tax. And that’s actually a fairly small amount of total household expenditure, so it’s actually not that big of an increase overall.

TT: It’s going to affect the average family in three main ways: First, it will affect the price of gasoline that we use for our vehicles…The average household, given how much gasoline a typical household buys, that will add up to about $100 a year this year, and $150 a year next next year.

The second way that it matters for households is natural gas for home heating will become more expensive due to the carbon tax, and based on how much natural gas is typically used, that will also add up to about $100 a year this year and $150 a year next year for a typical household.

The third way that it matters is that there will be indirect costs throughout the economy. More expensive fuel means that trucking fees are going to be higher. So business costs will rise due to the carbon price and that will be passed on to the consumer through higher product prices. That’s trickier to calculate, but an economist at the University of Ottawa, Nic Rivers, and I have tried to crunch the numbers on that for Ontario and Alberta and we find that these indirect costs are probably on the order of $100, $150 for your typical household.

Who gets rebates?

JW: The rebate is structured to give it to lower-income Albertans, in that there is an income cut-off for 2017, for a couple, it’s at $95,000. And so that means if your household earns income above $95,000 you do not receive a rebate. If you are below $95,000, then you receive a rebate. And the amount of the total rebate depends on the number of people in the household as well.

TT: Here in Alberta, we’re providing rebate cheques to roughly two-thirds of households. Roughly speaking, the bottom one-third will receive rebates that are in excess of the carbon costs that are expected on them.

Where will the carbon levy money go?

JW: In Alberta, the carbon revenue is going towards the rebate, it is going towards a decrease in small business tax rate and it’s also going towards investment in Alberta. There is a new energy efficiency agency. And the revenue’s also going towards other types of infrastructure in the province, as well as helping with eliminating coal-based electricity.

TT: The government here in Alberta will plan to spend it on projects meant to lower emissions: energy efficiency grants, public transportation, technology subsidies, things of that nature.

Why do you think there’s been confusion about a carbon tax?

JW: I think there’s confusion about how much a carbon tax will increase prices, and how and when a carbon tax actually affects households and businesses. Businesses are potentially overestimating the impact on their costs, and that translates to misunderstandings about how much they should increase their prices.

TT: First off, taxes are generally complicated. It takes some time to sit down and crunch some numbers that most people just don’t have the time or the inclination to do. So there’s going to be confusion there.

But then politics creeps in: I’d say proponents and opponents of the carbon tax are both guilty of misrepresenting either the benefits or the costs of the tax. In Alberta, the opposition has been much more vocal and has I believe quite significantly exaggerated the costs associated with the carbon tax and that has been, I think, a view that has been widely adopted.