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Carbon taxes are not only an efficient tool to mitigate greenhouse gas emissions, but they are also an increasingly important source of government revenue. The uneven distribution of emissions, however, creates significant differences across provinces in terms of their revenue potential. Equalization payments can mitigate these differences, but little is known about how this program interacts with carbon taxes. In this article, we quantitatively analyze this interaction and explore alternative considerations for equalization design—such as which revenues to include or tax bases to use—that may motivate changes to improve the functioning and effectiveness of both equalization and climate policy. [ABSTRACT FROM AUTHOR]

The work of Boadway and Hayashi (2001) and Smart (2007) tends to confirm the hypothesis that provinces who are the beneficiaries of equalization payments adopt strategic behaviours that reduce their tax capacity and thus increase these payments. In this study, we analyze the impact that a new hydroelectricity royalty paid by Hydro-Quebec to the Quebec Treasury has on total equalization payments received by the province; to do this, we consider the equalization formulas used before 2004 and after 2007. This royalty, which generates approximately $600 million each year, reduces Quebec's equalization payments by just over $100 million, using either formula. Under the terms of the current equalization formula, Quebec loses 38 cents in equalization rights for each additional dollar of income received from natural resources. The new hydroelectricity royalty and the increase in the dividend rates applied to this government-owned corporation have made it possible for the Quebec government to benefit from a transfer of $1.15 billion; on the other hand it loses $437 million in equalization payments. In this study, we provide and describe an important counter example to the hypothesis concerning the strategic behaviour of provinces that benefit from an equalization scheme. [ABSTRACT FROM AUTHOR]

A reasonable and fair interpretation of the mandate for equalization payments in Section 36(2) of the Canadian Constitution would differ from the present equalization formula in these respects: (a) transfers to the poorer provinces would be financed by transfers from the richer provinces rather than from the federal government; (b) entitlement to equalization payments would depend on provincial income rather than on a tax-by-tax comparison of the provinces' many tax bases; (c) for this comparison, provincial income would include revenue accruing directly to the provincial governments as well as the private income of residents of the province; and (d) compensation would be made for the exemption of provincial resource revenue from federal income tax. The most pronounced effect of these proposals would be to transfer the greater burden of equalization payments from Ontario to Alberta which is now, by far, the richest province. [ABSTRACT FROM AUTHOR]