Oil Rich Alberta’s New Carbon Tax

January 4, 2016

n-alberta-oil-pump-large570

You may be aware that the “Texas of Canada”, Alberta, recently had an election, and that the results were roughly equivalent to Bernie Sanders being elected Governor of the Lone Star State.

One of the first things the new administration did, was institute a tax on carbon. With the support of Oil companies.

Should be interesting.

Andy Skuce in Critical Angle:

On Sunday November 22nd, 2015, Alberta’s new centre-left Premier, Rachel Notley, announced that the province would be introducing an economy-wide carbon tax priced at $30 per tonne of CO2 equivalent, to be phased in in 2016 and 2017. Observers had been expecting new efforts to mitigate emissions since Notley’s election in May 2015, but the scope and ambition of this policy took many by surprise.

Alberta, of course, is the home of the Athabasca oil sands and is one of the largest per-capita GHG emitters of any jurisdiction in the world. The new plan was nevertheless endorsed by environmental groups, First Nations and by the biggest oil companies, an extraordinary consensus that many would not have thought possible.

How was this done? I will try and explain the new policy as far as I can (the details are not all available yet), but the short answer is that a huge amount of credit is due to the panel of experts led by University of Alberta energy economist Andrew Leach and his fellow panelists. Not only did they listen to what all Albertans had to say, but they were thoughtful in framing a policy that is acceptable to almost everyone.

The background

Alberta is the wealthiest province in Canada, with a population of 4.1 million.  In 2013,greenhouse gas emissions were 267 Mt CO2 equivalent, about 65 tonnes per capita, which compares with the average for the rest of Canada of about 15 tonnes. Among US states only North Dakota and Wyoming are worse. Alberta’s fugitive emissions of methane alone amount to 29 Mt CO2e, about 7 tonnes per person, which is a little more than the average for all GHGs per-capita emissions in the world.

Oil sands emissions and those from Alberta’s other oil and gas industries make up nearly half of the province’s emissions. But even if you remove those, Albertans emit an average of 35 tonnes each per year, much more than the average for countries like Canada, Australia or the United States. Alberta is a big place, with many wealthy people owning lots of large vehicles and living in large houses that have to be kept warm through long, cold winters. The province relies mostly on coal-fired electricity and on natural gas for home heating. Even apart from its petroleum industry, Alberta has a big emissions problem. Any mitigationpolicy obviously has to take aim at its petroleum industry, but the wider economy also needs to greatly reduce its use of fossil fuels.

Outline of the policy elements

The policies and the rationale behind them are laid out in the document Climate Leadership Report. Writing in Maclean’s Magazine, University of Calgary economist Trevor Tombe provided a useful guide to the details of the tax. I will just try to summarize Tombe’s main points here. Many details await the implementation of the policy.

1) Economy-wide, $30/tonne and “revenue neutral”

The carbon tax will be applied economy-wide to all emitters at the rate of CAD$30/tonne ofCO2e (USD$22) in 2017 with a phase-in year of CAD$20 per tonne in 2016. After 2017, the tax will rise at inflation plus 2%. CAD$30 is the amount levied in the neighbouring province of British Columbia.

This level of tax is within the lower part of the range of the social cost of carbon calculated by the US Environmental Protection Agency. Here’s how the proposed tax looks out to 2050.

Graph by Trevor Tombe in Maclean’s.

A tax at this level is large enough to influence behaviour, but it is too low, for example, to provide enough incentive to emitters to deploy carbon capture and storage (CCS). This would require a tax about three times as high.

Premier Notley described the tax as “revenue neutral”, but it’s not. All proceeds will not be paid back as reductions in other taxes (as BC does) but instead will be spent on rebates and targeted subsidies. David Roberts and Blair King claim that this is a positive aspect of the policy, rather than a defect. Nevertheless, others, for example The Citizens’ ClimateLobby, argue for true revenue neutrality.

2) Rebates to families

Estimates of the annual impact of the tax on families range from CAD$300-600, for increased costs of electricity, natural gas (for home heating) and gasoline. The intent is to fully compensate the lowest-income 50% of families for these extra costs by paying them some fixed amount per family. At CAD$30 per tonne of CO2e, a carbon tax will raise the cost of gasoline by about 7 cents per litre (roughly 20 US cents per US gallon).

3) Subsidies to high emitters

What will probably strike many readers as the oddest feature is that some oil sands produces will, as a direct consequence of the new policy, receive more in new subsidies than they will pay in new taxes. No wonder the oil companies like it, you are probably thinking.

The rationale here is that the policy is designed in such a way to encourage oil, gas and coal producers to reduce emissions as much as possible while not harming the export competitiveness of their products. The cleanest 25% of the producers within a certain type of production, let’s say in-situ bitumen extraction, will set the standard for the whole sector (this standard is expected to decrease by 1-2% per year). The subsidy would be paid per barrel produced, whereas the tax would be levied according to the amount of CO2e emitted. This will provide equal incentives to all producers to reduce emissions, while there will be the biggest net penalties for the most emissions-intensive operators. On average, the sector will pay out more than it receives in subsidies, but the cleanest producers will actually come out ahead.

The carbon tax is not designed to kill the oil-sands industry. On the contrary, it is designed to preserve it, while trying to clean it up. Premier Notley expressly referred to President Obama’s decision on the Keystone XL pipeline as an unfair “kick in the teeth”. Nevertheless, there is acknowledgement that the bad reputation of the oil sands industry is in large part the fault of Alberta’s past governments for not having addressed real problems sufficiently. Shutting down or even slowing down the industry is not part of the agenda: it would be unrealistic to expect the Alberta government to saw through the branch it is sitting on.

Currently, the province is going through a recession due to very low oil and gas prices.Thousands are being put out of work, suicides are reportedly on the rise and the province’scredit rating is on the decline. For a new government to move to close down the oil sands would surely lead to its demise at the next election. There are political limits to what any government of the province could be expected to do.

4) Phasing out coal and boosting renewables

Coal-burning power plants will be phased out by 2030. This will make a big dent in the province’s emissions. However, the phase-out was already planned, the new policy will just speed it up. The plan is to provide power with “up to” 30% coming form solar and wind power and the balance from natural gas and small amounts of existing hydroelectricity.

Alberta is well endowed with both wind and solar resources. The southern Alberta Rocky Mountain Foothills are windy in all seasons. Southern Alberta is also quite sunny year-round despite being north of 49°N. Calgary gets 50% more sun than Berlin, a little more than Rome and nearly as much as Sydney. Calgary’s sprawling suburbs, replete with McMansions, have great potential for rooftop solar.

There’s plenty of scope for rooftop solar in Calgary’s suburbs. (Part of McKenzie Towne, Google Earth)

5) A cap on oil-sands emissions

An overall cap of 100 Mt CO2e per year has been set for the oil-sands sector. The first diagram in this post shows that current oil-sands emissions are around 72 Mt and that projected (pre-policy) emissions are 112Mt. The remaining allowance under the new policy means leaving enough room for a rise in production of, very roughly, 1 million barrels per day of bitumen at current average levels of upstream emissions. The proposed Energy East Pipeline will carry this volume, approximately. If the bitumen industry intends to grow production by more than 40%, it will have to find ways to reduce its emissions per barrel.

6) Fugitive methane

Alberta’s oil and gas sector emits 29 Mt of CO2e as methane, annually. (That’s 1.2 Mt ofCH4 or 1.8 million cubic metres or 65 billion cubic feet.) Through regulation and offset credits aimed at mandating and encouraging implementation of new technology, the intent is to decrease methane emissions to 60% of 2013 levels by 2030. Methane emissions come mainly from the province’s conventional oil and gas as well as the unconventional gasindustries.

A recent joint report by the Environmental Defense Fund and the Pembina Institute found that Alberta could reduce its methane emissions by 16 million tonnes CO2e (45% of the total, their numbers are a little different) at an average cost of CAD$2.57 per tonne.

The y-axis shows the cost of mitigation (green makes money, blue costs money) and the x-axis shows how much methane, measured as kt of CO2e of annual emissions, is mitigated. If oil and gas companies paid CAD$30/tonne CO2e on their methane emissions, this histogram would all be deep in the green. The Pembina Institute, co-author of this study, had input into the new Alberta policy.

7. What’s missing

Although the Climate Leadership Report is very comprehensive there are a few things that are either missing or downplayed:

  • Carbon capture and storage. CCS is mentioned only three times in the report, twice in the body of the text in the past tense and once in the Glossary. Under previous governments, CCS had been touted as a key solution to mitigation. There is one active CCS project, Shell’s Quest, which has just started and that will sequester 1 million tonnes of CO2 per year at a cost of CAD$72 per tonne. It is subsidized heavily by government. Even at proposed carbon tax levels of CAD$60 per tonne in 2050, hefty direct subsidies for CCS would still be needed.
  • Increased electricity trade with neighbouring British Columbia. In Europe, Norway is being touted as the “battery of Europe“, using its hydroelectricity to compensate for intermittency in other countries’ wind and solar generation. There seems to be no reason why hydro-rich BC could not provide the same service to Alberta.
  • Nuclear power.

These items were likely ruled out-of-scope by the Alberta Government and/or were not pushed significantly by stakeholders during the consultation process.

Another gratuitous Alberta Rockies picture. This is of the McConnell Thrust on Mount Yamnuska, where Lower Cambrian carbonates have been thrust over Upper Cretaceous shales and sandstones. The horizontal displacement on the fault is at least 30 km. This fault was first identified in the late nineteenth century. The evident large horizontal displacements on this and other faults in Alberta, consistent with continental drift, were ignored for many decades by most N American geologists who favoured vertically-dominated tectonics. Sheepdog for scale.

Why this policy is a big deal…

As every country in the world searches to find policies that will allow them to meet theirmitigation pledges made at the COP21 meeting in Paris, Alberta has set a thoughtful example. Economists almost universally favour carbon pricing as a mitigation mechanism and many, if not most, of them prefer a carbon tax over other pricing methods. Mitigationpessimists are quick to allege that it is politically impossible to institute carbon pricing inregions where emissions are high and where the primary industry produces high levels of emissions. It’s not.

Furthermore, pessimists object that small jurisdictions, dependent on trade, could not introduce carbon pricing because it would make their export products uncompetitive. Alberta has shown that these objections are false. It is possible to institute an economy-wide carbon tax that, properly structured, can be stringent without sacrificing competitiveness.

Many economists and policy experts argue that the only effective way to achieve necessary reductions in global emissions requires cooperation on a uniform global price on carbon. For example, read the paper We Will If You Will (see also Mackay et al. (2015)).

If Alberta, with its high emissions and dependence on high-emission industries, can bring in economy-wide carbon pricing, any government can. There are no excuses any more.

…and why it’s not enough

Ambitious and innovative though they are, Alberta’s new policies are not enough. The emissions future is flat, not rapidly declining, as it must be.

From the Climate Leadership Report.

Canada, under the Harper government, pledged to reduce national emissions to a level 30% below its 2005 emissions by 2030.

 From Canada’s INDC pledge. Note that the y-axis origin is not zero.

Considering that Alberta is planning, at best, to hold its emissions steady, the reduction in national emissions of 200 million tonnes per year will need to be borne by the rest of Canada in order to meet the Harper pledge. In 2030, Alberta, with just 12% of the country’s population, would be producing 50% of the nation’s emissions under the Harper and Notley plans.

The Harper pledge was anyway insufficient to meet the decarbonization required to meet the 2°Celsius target. This would need, roughly speaking, for emissions to fall to zero by 2050. The implication being that the Intended Nationally Determined Contribution (INDC) ought to be more like 50% below 2005’s emissions by 2030, around 350 Mt.

Source.

The report Pathways to deep decarbonization in Canada lays out an ambitious plan that would see Canada’s annual emissions drop from 700 Mt CO2e today to a 2-degree-consistent level of 78 Mt by 2050. Of this 78 mT, 17 would come from the upstream bitumen sector and 14 from other oil and gas production (which includes emissions from other provinces). For the extraction and upgrading of bitumen, this would entail:

Solvent extraction, direct contact steam generation (with process associated, automatic carbon dioxide sequestration) and CCS decrease the emissions intensity of oil sands production by about 90 percent relative to today’s levels. However, if production levels remain the same as in the Reference Case, this sector accounts for nearly a quarter (17 Mt) of remaining emissions in 2050.

Alberta’s carbon reduction plan would fall short of providing incentives to achieve reductions of this magnitude or of allowing deployment of technologies like CCS. The Pathways report envisages a carbon price of CDN $150 by 2030 (triple the Alberta price), rising in $10 per tonne per year increments to 2050. Quite clearly, much more stringent policies would required from national and provincial governments in order for Canada to meet its fair share of emissions reductions. (Note that all production and emissions projections are sensitive to future world oil prices.)

In Paris, the new Trudeau government was among the first of the big emitters to commit to an aspirational 1.5°Celsius target. Getting there will be at least twice as hard as meeting the 2°Celsius target. The Trudeau government has not yet reset the national INDC, nor is there yet a national policy to effect any serious reduction in emissions.

Because the world has procrastinated on mitigation for so long, the best policies everywhere fall far short of the minimum targets that we need to set to avoid dangerousclimate change. Canada’s goals under Stephen Harper were unachievable with existing national policies. Now, Justin Trudeau has now committed the country to even more stringent reductions without yet announcing new policies to get there.

Alberta is committing to do far more than anyone just a year ago would have thought the province to be capable of. But it’s still not enough. The physics and arithmetic of mitigationare brutal.

Reference

MacKay, D., Cramton, P., Ockenfels, A., & Stoft, S. (2015). Price carbon—I will if you will. Nature 526, 315–316 (15 October 2015) doi:10.1038/526315a

 

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4 Responses to “Oil Rich Alberta’s New Carbon Tax”

  1. Gingerbaker Says:

    Why would an oil company support a carbon price?

    Perhaps it is because they realize that a higher carbon price does nothing to lower renewable energy costs, which will tend to stay as high as possible – just under fossil fuel prices.

    The fossil fuel industry, meanwhile, will do all it can do subvert subsidies for renewables. Why? Because these do actually make renewables less costly for consumers.

    There is a cost to conversion to renewables, and the higher the price of renewables, the less likely are consumers to want to switch.

    Subsidies are a simpler, more effective idea than a carbon tax, and they will lower costs for consumers directly. Watch what your enemies do – the oil companies tepidly support a carbon tax – but they will fight renewable subsidies tooth and nail.

  2. Sir Charles Says:

    Great. Let’s also hope that Jessica Ernst will have success with her longsome lawsuit this year.

    => Multi-Million Dollar Landmark North American Lawsuit on Hydraulic Fracturing and Its Impact on Groundwater

    Fingers crossed, Jess!


  3. […] of CO2e. This looks like a bold move in the right direction. Alas that is not the case, as this article demonstrates.   Beware of anyone trying to sell you this as good news. Many thanks to Peter […]


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