The corporate tax implications of each of the parties' greenhouse gas (GHG) policy proposals will run in the billions of dollars per year. GHG policies will induce significant expenditures, whether they follow the regulatory approach proposed by the Conservatives, the cap-and-trade approaches proposed by the Liberals and the NDP, or the broad carbon pricing approach of the Green Party.
These new expenditures will be deductible in calculating corporate taxes paid to Provincial and Federal governments, and in some cases from provincial resource royalties. None of the parties seems to have accounted for this, which likely leaves multi-billion dollar gaps in each of their budgets.
GHG reductions are not a free lunch; they occur as a result of either changes in the capital stock, changes in energy sources, or changes in output. In the context of a household, think of the purchase of a more fuel-efficient vehicle, a change to an electric- or pedal-powered vehicle, or a reduction in kilometers driven per year. The key difference between a household's decision to buy a more efficient car and a similar decision by an electric utility to build a new, more-efficient power plant is that the capital cost of the power plant is tax deductible.
There will be significant increases in capital expenditures by industrial emitters no matter which policy tool we use to reduce emissions. Mark Jaccard and Associates estimated that meeting Canada's GHG targets would imply an increase in capital expenditures in the electricity sector alone of $7.5 to $8.1-billion annually by 2020. Using the University of Calgary's Jack Mintz's average corporate tax rate of 25.6 per cent, this would increase corporate tax deductions by $2-billion a year in 2020. Only some of this would be compensated-for by increased revenues due to higher electricity prices.
GHG policy will also affect operating costs, through changes in the prices and quantities of energy used. The net effect of these changes on the corporate tax base is difficult to assess. Firms would likely face higher energy prices, at least in the near term, but would use less energy as a result of these higher prices and efforts to reduce GHGs. Technologies such as carbon capture (CCS), part of the GHG regulations for electricity generation proposed by the Conservatives, can significantly increase the operating cost for a power plant as up to one-third of the electricity generated may be used to operate the new equipment.
The largest impacts on corporate tax revenues would likely result from the payment of carbon taxes or purchases of permits at auction under cap-and-trade. The NDP estimates that the auction of emissions permits would generate $7.4-billion by 2014. This revenue would be partially negated by a corresponding $2-billion corporate tax writeoff, which does not seem to be included in the NDP platform. The same appears to be true for the Green Party budget, while the Liberals have yet to provide auction revenue details for their cap-and-trade proposal.
Emissions fees and changes in operating and capital costs induced by GHG policy will affect provincial resource revenues. For example, established oil sands facilities pay up to 40 per cent of net revenues in royalties, but under Alberta's Royalty Framework, higher operating costs and/or "environmental fees or levies (are) deductible in determining royalties." If oil sands facilities are required to purchase permits at auction or required to install expensive technology as a result of GHG regulation, a significant share of the costs would be "paid for" from what would otherwise be provincial royalty revenue.
Changes in capital and operating costs required to meet the GHG emissions targets of any of the major national parties will have multi-billion-dollar implications for annual corporate tax and resource royalty revenue. The emissions fees in the NDP, Liberal, and Green party platforms will likely draw the most attention on this front but that is not justified. Abatement costs will likely matter just as much, and economists will universally acknowledge that a regulatory approach will generally lead to higher (tax-deductible) abatement costs to meet a given emissions target. As such, the Conservative platform should not escape scrutiny on this issue either.
Andrew Leach is an Assistant Professor at the Alberta School of Business. He blogs on energy, environment, and oilsands issues at http://www.andrewleach.ca and is on Twitter @andrew_leach
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Andrew Leach