Alberta's carbon price — if you don't have an opinion on it, you should -

Alberta’s carbon price — if you don’t have an opinion on it, you should

It might have a huge influence on federal regulation


Etienne de Malglaive/REA/Redux

So Alberta hasn’t really proposed to increase its carbon price to $40, as reported last week. Speaking with Luiza Savage in Washington, D.C. yesterday, Premier Alison Redford said the much debated 40-40 plan isn’t something “we’ve in any way landed on or proposed.” (Read the full interview here.)

You still need to know about Alberta and its system for pricing carbon. Why? Because it might be the blueprint for federal emission regulations for the oil and gas industry that are expected to — forgive the pun — come down the pipe later this year. Alberta and Ottawa are collaborating “intensely” on the upcoming federal rules for the oil and gas industry, Redford told Maclean’s.

But is Alberta’s setup the model the nation should follow? Here’s what you need to know to start making up your mind:

1. Provincial vs. federal regulations, a bit of history.

In 2006 Ottawa let it be known via the Canada Gazette that it intended to regulate greenhouse gas emissions. The approach the government had in mind was the following: target the largest polluters, those with emissions over 100,000 tonnes per year, and use “intensity targets.” That would limit the amount of GHGs per unit of output rather than putting a cap on aggregate emissions. However, the government added, such targets should be “ambitious enough to lead to absolute reductions in emissions and thus support the establishment of a fixed cap on emissions.” (A big hat-tip to University of Alberta professor Andrew Leach here, who wrote this paper.)

Deeds, however, did not follow those words speedily, and a few provinces have since pressed ahead with their own rules. Alberta was the first to put a price on carbon in 2007; a few months later, Quebec imposed a carbon levy on energy producers and a cap-and-trade system in 2011. B.C. followed suit in 2008 with a carbon tax on gasoline and other fuels.

Among Alberta’s reasons to anticipate the federal hand were concerns over public revenue. Even if the federal system  didn’t impose new taxes, Alberta companies would be able to deduct their compliance costs from both income taxes and royalties, which, as Leach notes, would hit provincial coffers. On the other hand, if provinces implemented rules at least as strict as whatever Ottawa might come up with they might be able to avoid federal policy superseding their policy, which would allow them to keep all the money within their boundaries.

When it decided to attach a price tag to carbon emissions, Alberta turned to the Gazette announcement, crafting a system targeting emissions above 100,000 tonnes per year through intensity targets.

Fast-forward to 2010, now, when Canada pledged to the United Nations it would reduce GHGs by 17 per cent below its 2005 level by 2020, on par with what the U.S. promised. In order to do that, Ottawa has opted to come up with different regulations for different sectors of the economy. So far, it has approved rules to cut emissions from cars and light trucks (model years 2017 and beyond) and in the electricity sector. According to Environment Minister Peter Kent, oil and gas regulations will be out shortly — and on that one, according to the Pembina Institute, the feds are “taking a close look” at Alberta’s model.

2. How Alberta’s carbon price works.

The benchmark: As we mentioned, the system covers only major polluters, i.e. facilities that produce 100,000 tonnes or more of GHGs per year. (The baseline applies to all facilities in Alberta, not just the oil and gas industry, as would be the case with federal regulation.) Unlike a carbon tax or cap-and-trade system, the rules do not bound smaller emitters.

The target: Right now, the target is a 12 per cent reduction from a plant’s average intensity. Alberta’s 40-40-plan-that-never-was would have increased that to 40 per cent.

Ways to achieve the target: If they don’t reach the target by cutting their own emissions, producers can either put money into a government-run fund that invests in green technology — the price tag is $15 per tonne of above-target GHGs — or buy offset credits, which represent reductions in Alberta emissions achieved by facilities not bound by the rules.

3. A few takeaways on Alberta’s setup.

Emissions reductions: The intensity target doesn’t guarantee a reduction in the absolute level of emissions, the Pembina Institute notes. It is possible for oil producers to comply with the target and increase their overall levels of emissions. However, this doesn’t mean the system itself can’t lead to absolute reductions — whether it does or not depends on the specific target and how industry reacts. Also, the model offers companies the possibility of buying others’ emissions reductions — now, making sure that such GHG cuts are additional, i.e. would not have happened even without regulation, is tricky, argues the Pembina Institute. (That’s difficult in any system that involves buying and selling carbon credits, including cap-and-trade.)

Price: Though the policy doesn’t impose a hard cap on emissions, it imposes a hard cap on the price of carbon. Right now, that’s $15 per tonne of GHGs in Alberta. That’s because companies have no incentive to reduce emissions if it costs them more than paying into the technology fund for above-limit GHGs. The oft-quoted figure for how much it costs oil producers to comply with Alberta’s current regime is $1.8 per tonne. According to the Pembina Institute, federal oil and gas emissions regulations crafted after Alberta’s system would have to set the fee for contributing to the fund at least $100 per tonne in order for Canada to be able to meet its 2020 target.

Impact on oil and gas production: compared to a carbon tax, Alberta’s policy offers emitters less of an incentive to reduce production in order to cut GHGs, notes Leach: “assuming that the facility reduced production by 10 percent, and that emissions decreased proportionately (a simplifying assumption), the facility’s emissions intensity would not change, so its carbon liability per barrel of oil produced would also remain constant.” On the other hand, Alberta’s framework offers a stronger incentive than a carbon tax for companies to become more efficient, i.e. to be able to increase production per unit of emissions. This suits the oil sands sector well, argues Leach, because technological innovation there is supposed to spur precise this type of efficiencies. Alberta’s regime offers oil sands producers stronger incentives to adopt technology such as wedge wells and solvent-aided extraction in existing facilities than a carbon tax would.

Distortions: The policy introduces some economic distortions. Leach found that Alberta’s policy effectively puts different prices on different ways of reducing the very same GHGs. The industry-based approach championed by Ottawa would further distinguish between units of carbon according to which sector of the economy they come from, even though emissions do the same environmental damage regardless of origin.