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Alberta Budget 2016 and Climate Change Leadership Plan

Author(s): Rishi Sarin, Kevin Lemke, Dana Saric

Apr 19, 2016

On April 14, 2016, Alberta’s NDP government released its new fiscal plan (the 2016 Budget), which implements the Climate Change Leadership Plan (the Plan) previously announced by the government this past November. The key elements of the Plan include the following:

  • implementing a carbon tax that places an economy-wide price on greenhouse gas emissions
  • phasing out emissions from coal-generated electricity by 2030 and replacing that capacity with electricity produced by renewable sources and natural gas
  • capping total emissions from the oil sands at 100 megatonnes (Mt) per year
  • implementing a new methane emission reduction strategy with the goal of reducing methane emissions by 45% from 2014 levels by 2025

Each of these elements is discussed in greater detail in the November 23, 2015 Osler Update titled “Alberta’s New Climate Change Leadership Plan.”

Of the four elements listed above, the cornerstone of the Plan is an economy-wide carbon tax. The carbon tax applies not only to large industrial emissions, which have been taxed in Alberta since 2007, but also to individuals’ and other small emitters’ greenhouse gas combustion or consumption. The new carbon tax is to be levied by the purchase of transportation and heating fuels, and will affect individual Albertans and businesses, not just at the pump and on their utility bills, but in all purchases to which the levy applies within the distribution chain. For instance, the price of imported items is anticipated to increase as transportation costs rise by the amount of the tax.

When the Plan was first announced, Premier Notley promised that the carbon tax would be “revenue-neutral,” a statement that garnered much criticism for its inaccuracy. Nonetheless, the government does intend to reinvest carbon tax revenues in the economy, through a combination of tax rebates, infrastructure spending and other government investments. The 2016 Budget provides the first detailed insight into the revenues and expenditures that the carbon tax is expected to generate.

The new carbon tax will come into effect on January 1, 2017, with an initial price of $20 per tonne of carbon dioxide or equivalent emissions and rising to $30 per tonne in 2018. This is expected to generate $274 million in 2016-2017 for government coffers, increasing to $1.7 billion by 2018-2019. Over five years, the carbon levy and compliance payments made from other parts of the Plan  are expected to raise a combined gross revenue of approximately $9.6 billion. This additional revenue comes at a critical time for the province, as infrastructure and other spending needs are high, whereas the Heritage Fund has been decimated by a string of deficit budgets and the deficit continues to grow due to the ongoing slump in the oil and gas industry and the associated reduction in provincial royalties.

For now, the government has pledged not to apply the Plan’s revenue stream to pay down the increasing provincial debt. So, where is the revenue going?

Approximately one-third of the forecast revenue, $3.4 billion, is expected to be spent on helping households, businesses and communities adjust to the carbon tax. These expenditures will include the following:

  • $2.3 billion on consumer rebates available to lower-income Albertans who are the least able to bear the cost of the carbon tax or avoid it through investments in energy-efficient homes and vehicles. The government expects that approximately 60% of households will be eligible for rebates with these thresholds. However, scant acknowledgement has been made that the rebate effectively discourages a majority of households from changing their carbon use practices, the very point of having an economy-wide price.
  • $865 million in foregone tax income due to a reduction in the small business income tax rate to 2% (from 3%), starting January 2017. This new announcement by the government will come as welcome respite from the new regime for small business owners, but it remains to be seen to what degree the income tax reductions will offset the direct and indirect additional business costs attributable to the carbon tax regime.
  • $195 million for other adjustments. These other adjustments are to include Indigenous community payments and “coal community transition,” which is suggested to involve retraining of coal workers to transition into other areas of the economy as well as assistance to communities that depend on coal production. As with the initial announcement of the Plan, little detail is offered as to how coal plant operators will be compensated for their stranded capital and incentivized to cooperate with the government’s coal phase-out schedule.

The remaining $6.2 billion in revenues is slated for a variety of investments, which the 2016 Budget describes as follows:

  • $3.4 billion is slated for large-scale renewable energy projects, innovation and technology investment and bioenergy initiatives, along with the administrative costs of implementing the Plan. The 2016 Budget did not address the allocation between administration costs and investment, and also did not clarify to what degree the government will invest directly in renewable energy project development. The Climate Change Advisory Panel, whose recommendations led to the Plan, proposed a competitive auction process for renewable energy credits (RECs), but did not recommend that the government procure fixed-price power purchase contracts. In the 2016 Budget, the province has confirmed that the Alberta Electric System Operator will conduct a competitive process in late 2016, but has not indicated whether some fixed-price power purchase agreements will be allocated as well as RECs. Many commentators believe that fixed-price power purchase contracts are necessary to encourage sufficient renewable generation capacity to come online at current electricity prices in order to phase out coal on the anticipated schedule.
  • $2.2 billion is to be spent on green infrastructure investments, which include spending on public transit and energy efficiency initiatives.
  • $645 million is allocated to open Energy Efficiency Alberta, a new provincial agency. The purpose of this agency will be to support energy efficiency and power micro-generation initiatives. Other provinces, notably Saskatchewan and Ontario, have implemented government programs and subsidies for micro-generation, with varying degrees of success. The Alberta government offered little detail as to what parts, if any, of those programs will be mirrored in Alberta.

The economy is contracting in Alberta at present, which generally brings with it lower consumption of fuel and a reduction in greenhouse gas emissions. This could result in lower realized revenue under the carbon tax and compliance payments, and correspondingly reduce the investments contemplated above. Even with the additional revenues from the Plan, the overall provincial revenue forecast in the 2016 Budget is lower than in previous years, and lower than expected for this year. All industries affected by the carbon price will be incentivized to streamline operations in such a way as to keep growing, despite the additional burden of the carbon levy.

Further, the government is also free to tweak the revenue allocation as it sees fit, which may benefit some industries and communities at the expense of others.

Finally, the 2016 Budget does not address how much the implementation of the Plan is expected to decrease greenhouse gas emissions. With a large portion of Alberta’s emissions attributable to the combustion-intensive oil and gas industry, the effect of taxing household consumption of fuel and electricity may be more to raise provincial revenue than to meet the province’s emissions reduction commitments.