The Carbon Tax for Dummies – Part 2 -How is Industry Treated and Will the Plan Work?

Introduction

This article is a continuation of an outline of the basics of Alberta and Canada’s carbon pricing plans that began in “The Carbon Tax for Dummies – Part 1”

The Alberta carbon plan is based on its policy report, “The Climate Leadership Plan”, or the “CLP”. The federal government based its policies on the “Pan Canadian Framework on Clean Growth and Climate Change”.

Industry

In Canada, the emissions by sector are broken down in our federal database. Industrial emissions constitute a significant portion of Canadian greenhouse gases and so are treated separately in both the Alberta and federal plan.

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https://www.canada.ca/en/environment-climate-change/services/environmental-indicators/greenhouse-gas-emissions.html

Output Based Allocations

In Alberta, large industrial emitters have been subject to a carbon price since 2007.  The previous legislation, Specific Gas Emitters Regulation (“SGER”), taxed carbon at $15/tonne. Facilities were benchmarked against their own historical performance – the previous 5 years of emissions. They were then expected to reduce emissions 12% below that benchmark or pay the carbon levy.

A “large” industrial emitter is considered to be one that emits 100,000 tonnes/year or more. Smaller industrial facilities can combine batteries to be treated as a large emitter if they see advantage in that.

As of January 1, 2018, Alberta’s industrial carbon emissions are covered under the  Carbon Competitiveness Incentive Regulation, or “CCIR”. Both the benchmark and the carbon price were changed.

The new carbon levy under the CCIR is $30/tonne. The benchmark has been changed to a  “best in class” model.  Critics of the previous regulation pointed out that facilities who were operating with little regard to carbon intensity were “rewarded” with a higher benchmark against which to reduce future emissions, and historically more carbon-efficient facilities were left with a tighter target.

Under the CCIR, facilities will be compared to best in class. For oil sands, this generally means that an emitter has to meet the top quartile performance against other facilities who produce a similar product.  Emitters receive credits, or “Output Based Allocations” and pay a carbon price for emissions over and above the benchmark.

For electrical generators, a “good as best gas” standard applies – this means emissions should be below an equivalent facility powered by natural gas for unit of electricity produced.

The federal Pan Canadian Framework will follow a similar model for industry.

Why treat industry differently?

The reason behind using benchmarks in industry, according to the CLP, is to prevent “jurisdictional leakage” if too heavy a tax burden is applied.  The system was derived for Alberta because most of the gas and oil industry is considered to be “trade exposed”.

In other words, the fear is that if too high a levy is applied, investment will simply move to jurisdictions without a carbon price.  Today, that could simply mean the United States.

What percentage of emissions will be covered?

Under Alberta’s new industrial regulations, and when consumers are included, about 70% of provincial emissions are covered by a carbon price. Under the previous legislation in 2007, only about 55% were covered.

Will industry divest from Alberta based on the carbon price?

It is highly unlikely at $30/tonne, under the CCIR regulation, there would be financial incentive for an oil and gas company to re-locate part of its operations.

The Alberta CLP report estimates the carbon price, combined with the OBAs, will cost industry about $0.50-$1.00/bbl (barrel) of oil produced, if a company exceeds the benchmark.  This type of cost falls well within the volatile changes in world oil price typically experienced by the industry. Prices routinely fluctuate $5-$10/bbl over the course of just a few months, and for Alberta, have fallen over $50/bbl in the past several years.

How is the plan supposed to work to reduce emissions?

Alberta’s policy group was clear in the CLP: emissions reductions are unlikely to come directly from a change in consumer behaviour at $30/tonne. Instead, the emissions reductions are expected to come from green initiatives paid for by the carbon tax plus the “other measures”. For example, in Alberta, a $500 rebate is available to homeowners for upgrades to high efficiency boilers and furnaces.

Indeed, Albertans have experienced the carbon tax  in their household economies since 2017. Did the7 cent/litre uptick in gasoline price drive more people towards transit in urban areas or ride-sharing in others? Canadians regularly absorb  swings in the price at the pump of 10 cents/litre based on seasonal or demand factors and it rarely leads to drastic changes in driving behaviour.

Will Canadians use the funded green initiatives derived from carbon taxes? Possibly.  Energy Efficiency Alberta reports that 50,000 households took advantage of green programs in 2018 for an emissions reduction of 3 Mt.

What are the other measures? In both the Alberta and federal plan, “other measures” with significant impact on our emissions include measures to track and fix methane leaks, coal fired plant standard changes, and HFC (hydrofluorocarbons) regulations.

In Alberta, the combined effect of green initiatives and other measures is expected to be a 12% reduction over “base case” for a total reduction of  50 Mt  annually. In other words, it stabilizes Alberta’s growth in emissions but does not reduce them below the 2005 benchmark used for the Paris agreement.

The authors of the CLP fully admit this will not put Canada on a path to meeting its Paris agreements, but felt the measures were as stringent as they could when compared to competing jurisdictions.

Will it work?

The carbon price alone, at $30/tonne, will not produce the emissions reductions needed by 2030 in order for Canada to meets its Paris obligation.

Both the Alberta climate plan and the federal plan rely on re-investment of the carbon tax and a suite of “complementary measures”, most of which are regulatory in nature, to meet the Paris obligation. The Pan Canadian breakdown of how different initiatives reduce emissions is shown below: (note that Ontario has dropped its Cap-and-Trade program since this federal chart was produced).

feds
https://www.canada.ca/en/services/environment/weather/climatechange/pan-canadian-framework/pathway-canada-target.html

International agencies who track carbon policy carry the same message; carbon pricing currently in place across the world falls significantly below the estimated “social cost of carbon”. The Intergovernmental Panel on Climate Change (IPCC), recommends carbon price start at $135/tonne. And a recent OECD report shows that the average worldwide carbon pricing gap and that required to meet the Paris goals is about 76.5%.

Is this just another tax or is there an upside?

 The carbon levies in place across Canada and coming into play on April 1, 2019, and the carbon plans that go with them, do provide benefits over and above a reduction in emissions.

In most cases, reducing carbon emissions is synonymous with improved energy efficiency. If a household or business implements an energy efficiency measure the cost savings go beyond just the carbon tax and apply to the full fuel savings on the initiative. This can lead to a lower cost burden for families and increased competitiveness for business.

Finally, after we left Sweden last summer, we travelled to Manchester for a second soccer tournament. We tried a few different ways to travel between downtown Manchester and the soccer fields – hands down, nothing beat the cost and speed of their light rail train. Sometimes the green alternatives are just too damn convenient to ignore.

Summary

The intent of both installments of this article is to increase the reader’s energy literacy on the carbon tax and complementary policies, particularly by emphasizing more of the numbers. The key take-aways from this article are:

  • Industry treatment under both the federal and Alberta climate plans includes carbon credits designed to minimize jurisdictional leakage of carbon emissions
  • The initial carbon price of $30/tonne will not be enough, by itself, to reduce Canada’s emissions to meet its Paris commitment
  • Re-investment of the carbon tax and complementary (or regulatory) measures are required to produce most of Canada’s emissions reductions
  • Alberta’s oil and gas industry should be able to easily absorb costs (in the order of $0.50-$1.00/bbl) of the carbon policies as set out in the current plans
  • Further , significant, increases in the carbon price are projected to be required worldwide to meet the Paris targets

Alisa Caswell has a degree in chemical engineering. She spent twenty years working in the oil and gas industry, including roles in operations and energy conservation. She previously held the position of Chair – Oil Sands, Canadian Industry Program for Energy Conservation (CIPEC). She lives in Fort McMurray, Alberta. Read other articles at “Confessions of a Dandelion Anarchist” or follow her on facebook.

[1] Photo by Rodolfo Clix from Pexels

[2] Emissions by Sector: https://www.canada.ca/en/environment-climate-change/service

[3] CCIR Fact Sheet: https://www.alberta.ca/assets/documents/cci-fact-sheet.pd

[4] https://www.efficiencyalberta.ca/homeenergyplan/fes/environmental-indicators/greenhouse-gas-emissions.html

[5] https://open.alberta.ca/dataset/da6433da-69b7-4d15-9123-01f76004f574/resource/b42b1f43-7b9d-483d-aa2a-6f9b4290d81e/download/clp_implementation_plan-jun07.pdf

[6] https://www.canada.ca/en/services/environment/weather/climatechange/pan-canadian-framework/pathway-canada-target.html

[7] http://www.oecd.org/ctp/tax-policy/few-countries-are-pricing-carbon-high-enough-to-meet-climate-targets.htm

[8] https://www.carbontax.org/blog/2018/10/15/ipcc-not-just-a-carbon-price-but-a-really-high-one/

[9] https://www.pembina.org/media-release/33m-grant-fort-chipewyan-will-lead-canadas-biggest-remote-solar-project

 

 

 

 

 

 

 

 

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