Alberta's new carbon tax isn't revenue neutral. That's the best thing about it.

In May, Canada shocked the world ... no, seriously ... when the left swept to a surprise, overwhelming victory in Alberta, ending more than 40 straight years of conservative leadership in the oil-producing province. The liberal New Democratic Party formed a majority government, Rachel Notley became the new premier, and Canadian political prognosticators set about recalibrating their instruments.

Those instruments were scrambled again five months later, when liberals won a similarly decisive victory nationally and Justin Trudeau became prime minister. Thus did Canada produce more interesting political news in the past half-year than it has in the past decade.

For energy nerds (and a nervous Canadian oil industry), this raised a fascinating question: What happens to a province that’s economically dependent on dirty oil when it’s taken over by liberals?

The answer came this week, in the form of Alberta’s Climate Leadership Plan. It turns out there will be no revolution, no seizing of the means of production, no immiserating of the capital class. Instead, the transition will be very ... Canadian: thoughtful, orderly, and low-key.

Last spring, Notley appointed a five-member Alberta Climate Leadership Panel, headed by University of Alberta energy economist Andrew Leach, who is well-known and respected in the world of energy wonks. The panel traveled around the province and heard from thousands of individuals, groups, and businesses about what they wanted from climate policy. They took all the feedback into account and hashed out a comprehensive, ambitious plan — all in six months.

It’s difficult to exaggerate how crazypants this is. It’s as though North Dakota were taken over by the Green Party and launched California-scale climate policies less than a year later.

Yet reaction has been largely favorable; the plan has been endorsed by both environmentalists and the tar sands industry. (Again: so Canada.)

The centerpiece of the plan is a carbon tax. Right now, Alberta has a small carbon tax on industrial users, which covers less than 50 percent of the province’s emissions. Under the plan, it would be expanded to cover end users as well (90 percent of the province’s emissions in total) and raised to $20 per tonne in 2017, $30 in 2018. Subsequently, it will rise at a rate of inflation plus 2 percent.

Naturally, economists love this: It’s substantial enough to be at least a close approximation of the true cost of carbon; it’s predictable; it rises automatically; it covers the whole economy. This is the kind of thing economists daydream about.

However, there is one econo-objection. University of Calgary economist Trevor Tombe, in a thoughtful and generally supportive review of the new plan, calls it a “missed opportunity.”

What’s missed? Tombe says that the tax is not, despite its claims, revenue neutral. To an economist, revenue neutral means one thing: All revenue raised by the tax goes to reduce other taxes.

Tombe:

The Alberta carbon tax plan is not revenue neutral—not at all. Nothing in the report today suggests any existing tax will be lowered. Of course, that’s a valid position to take, but the government shouldn’t try to mislead people by misusing the phrase “revenue neutral”—it should advocate clearly for the policies it prefers, and let people decide. To many economists, the opportunity to use carbon tax revenue to lower highly distortionary taxes like corporate income taxes or personal income taxes is an opportunity that shouldn’t be wasted. There’s an opportunity for a double-dividend (an improved environment, and an improved tax system). [my emphasis]

(Note: Income taxes are “distortionary” in that they penalize income, a good, thus discouraging something we’d rather encourage. Economists would rather “tax bads.”)

I think Tombe’s critique is wrongheaded in a couple of ways.

When Notley introduced the carbon price, she said it would be “revenue neutral, fully recycled back into the Alberta economy.” I don’t think she was misleading anyone, I think she was using a more colloquial (and probably better-understood) meaning for the term.

The revenue won’t go to lower taxes, but it will all be spent, within Alberta, for specific purposes tied to the carbon plan. It isn’t just disappearing into government coffers; it’s being cycled through the Alberta economy in visible, transparent ways. Voters can know what they’re getting for their money. (I’m exaggerating a bit here; the actual details of spending won’t be clear until the Alberta government releases an official budget.)

Here are the four uses the panel recommends for carbon tax revenue, which would reach $3 billion by 2018 and possibly more than $5 billion by 2030:

Here are the four bundles of complementary policies to be implemented alongside the tax:

All these policies are worth digging into in more detail, but ... probably not over Thanksgiving break. The key point is that this is a sprawling network of interdependent policies, meant to satisfy multiple environmental, economic, and political mandates, and it all depends on the carbon revenue.

If it were revenue neutral in Tombe’s sense, if all the revenue were rebated directly to taxpayers or used to reduce other taxes — or a combination, as in British Columbia — none of the investment programs would be possible. (And without the investments, many of the regulations become politically difficult or impossible.) There would be no output-based subsidies for oil and gas, no transition assistance for hard-hit workers, no direct boost for renewable energy, and no new research into cleaning up the oil and gas sector.

Those programs not only make the plan substantively better — economists aside, overall macroeconomic performance is not the only thing that matters — but they likely make it politically possible. They are the tangible benefits that have led such a broad range of constituencies to support the plan. They are what demonstrate to Albertans that the additional money they will pay for fossil fuels is worth it, that it will enhance the province’s environmental performance and its reputation as a climate leader.

From this perspective, the lack of revenue neutrality is not a “missed opportunity.” It’s the reason there’s an opportunity at all.