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What you need to know about Alberta’s 40/40 carbon pricing proposal

Published April 5, 2013 by Simon Dyer

Simon Dyer

News broke this week that Alberta is considering strengthening greenhouse gas regulations on the province’s energy industry. The so-called “40/40” plan proposed by the Environment Minister Diana McQueen would increase Alberta’s intensity-based emissions target and its carbon price. The very mention of such a move has kicked off a long-overdue conversation about what it’s going to take to curtail greenhouse gas pollution and develop Alberta’s resources responsibly.

First things first: the Minister and her government deserve credit for acknowledging that Alberta’s regulations need to be strengthened and starting the work of improving the province’s carbon pricing system.

Pembina has long believed that better environmental performance — especially reducing greenhouse gas pollution — is necessary to enable Canada’s oil and gas sector to compete globally and earn social license. That message has become crystal clear thanks to policies in the EU and in California promoting lower-carbon fuels, and to the climate change concerns raised by opponents of the Keystone XL pipeline proposal.

It looks like the Government of Alberta is reading the writing on the wall and is now considering what kind of policies they need to adopt in response. This is encouraging, and it shows leadership.

But we’re also happy to hear, as the minister said in a statement this week, that “these discussions are ongoing.” Because while the approach we’re reading about in the newspapers is a good starting point, the “40/40” proposal on its own doesn’t get us on track to meeting Canada’s emissions targets.

40/40 in context

An oilsands facility bordering the Athabasca River. Photo: David Dodge. It’s important to remember that Alberta’s oilsands represent the fastest growing source of greenhouse gas pollution in Canada, and as a result is the biggest barrier to meeting our international climate obligations under the Copenhagen Accord. So how Alberta regulates the oilsands producers operating within its borders is critically important to Canada’s overall efforts to curb emissions.

Right now, industries in Alberta — oil and gas, but also coal and other large industrial operations — have a target of improving their “emissions intensity” (emissions per unit of production, such as per barrel of oil) by 12 per cent relative to the baseline, or typical emissions performance, for specific facilities. If they can’t meet that target by improving performance in their operations, they can pay into a technology fund instead, at a rate of $15 a tonne.

The “40/40” approach would increase the target to 40 per cent and raise the technology fund price to $40 a tonne. In both cases, that would represent a noteworthy jump from the status quo.  

Most of the climate policy scenarios used in Canada and around the world assume that policies start relatively slowly and steadily increase in stringency over time. If the new Alberta proposal is as described, it doesn’t include this steady improvement over time. As a result, the one-time increase to Alberta’s policy would fall short of getting Canada on track to hit its 2020 climate target. In a report we released earlier this week looking at greenhouse gas regulations for the oil and gas sector in Canada, we recommended strengthening Alberta’s model so that it delivers:

  • A 42 per cent intensity improvement from the oil and gas sector
  • A technology fund price of at least $100 a tonne by 2020, with $150 a tonne offering a better shot at hitting Canada’s target, and
  • A limit on companies’ access to offset credits.

Alberta’s 40 per cent target is in the range we recommended, but its technology fund price – if left unchanged between now and 2020 – falls well short of what’s needed to get us on track to Canada’s 2020 target that we agreed to in Copenhagen.

From 40/40 to 2020

So here’s an idea for Alberta’s cabinet to consider as it debates Minister McQueen’s proposal: why not start with 40/40, but add $10 a tonne every year after that? Assuming the policy goes into effect in 2014, that would get Alberta to the $100 per tonne technology fund price we need to have a chance of hitting Canada’s target in 2020. Call it the “40/40 Plus 10” package.

Because many emissions improvements in the oilsands will cost $100 a tonne or more, companies need a strong and predictable price signal to convince them to invest in technology to improve their emissions performance.

Alberta’s current greenhouse gas regulation has been critiqued for being a static policy — its stringency has not changed since the regulation took effect in 2007. (In contrast, B.C.’s carbon tax started at $10 per tonne and increased by $5 each year until it reached $30 per tonne last year after the last scheduled increase.)  

A predictable schedule that ratchets up the policy’s effectiveness over time gives industry more certainty while achieving the triple-digit carbon price level that Canada will need to reach its climate goals. It also avoids hitting companies with sudden price shocks so that they have time to prepare for investments while prices are still relatively low.

What would 40/40 mean to industry?

Alberta hasn’t yet announced the details of this proposal, and details matter. You might think that Alberta’s proposal would mean a somewhat stronger incentive to cut emissions (“marginal cost”) than B.C.’s current carbon tax, which is set at $30 a tonne.

It isn’t an apples-to-apples comparison because the approaches are fairly different — take a look at the graphic below. Under Alberta’s proposal, the large emitters that it applies to would pay up to $40 per tonne for up to 40 per cent of their emissions (compared to 100 per cent in B.C.’s case). That means that the cost of Alberta’s proposal averaged across 100 per cent of a facility’s emissions would be up to $16 a tonne (40 per cent of $40).

Graphic: comparing carbon pricing approaches in Alberta and B.C.

Still struggling to make sense of it all? Check out our blog: "How carbon pricing currently works in Alberta"

A 40/40 average cost per tonne works out to just under $1.50 a barrel of bitumen for a typical in situ oilsands facility. Once you account for the interaction with royalty rates and taxes, the company would see an effective cost of under 75 cents per barrel. (For comparison, the effective cost of Alberta’s current system works out to less than 10 cents a barrel, and the system we recommended in our oil and gas report this week would mean an effective cost of less than $3 a barrel.)For a typical oilsands project, complying with the government’s 40/40 proposal is likely to cost less than 75 cents per barrel of bitumen produced

Some of the companies operating in Alberta also have facilities in B.C., so they’ve learned to compete under that province’s carbon tax. Many energy companies already consider far higher carbon prices in deciding whether or not a project proposal makes economic sense. So despite the inevitable grumbling from some industry players, the prices we’re talking about here are completely manageable.

In fact, far from harming Alberta’s industries, effective climate regulations would be good news for the future of the province’s energy sector, which is struggling to gain market access precisely because it is environmentally uncompetitive.

As everyone knows, Alberta’s oilsands are under scrutiny at home and abroad. Right now, neither Alberta nor Canada has a good enough environmental track record to reassure the sector’s critics or decision makers in other jurisdictions. Strong regulations would help the sector gain the public support it needs to operate, spur innovation and give companies certainty as they make investments that can last for decades.

Alberta’s government has a lot to consider as it finalizes a stronger regulatory proposal on carbon emissions — and it needs to move swiftly to put some meat on the bones of this proposal. Let’s hope it builds on the minister’s 40/40 plan as a starting point to craft the effective climate regulations that Alberta and Canada urgently need.

Find more content by topic: Climate Change, Green Economics, Oilsands, Alberta, Carbon Pricing, Electricity Generation, Oil & Gas, Pipelines, Provincial Action, USA.

bob stewart — Apr 10, 2013 - 08:00 PM MT

ANOTHER issue is that Alberta does not allow carbon offsets for projects outside of Alberta which seems rather ludicrous since coming to terms with carbon balance is a global issue- I know of some great reforestation projects in Latin America that would benefit tremendously from offset projects

Randy Mikula — Apr 08, 2013 - 04:30 PM MT

This is a great summary of a pretty complex situation. The problem as I see it is that taxing the companies doesnt change the carbon footprint. We need to tax the users which means anyone who drives or flies. There is approximately 10kg of carbon dioxide in a gallon of gas. At $150/TONNE, that would add only $1.50 on to the price of a gallon of gas.....only 33cents a liter. If that could be implemented, the resulting drop in fuel use would presumably drop oil prices to the point where further oilsands expansion would be reduced. The net effect is a smaller carbon footprint for Canada. Lets face it, as the Pembina analysis suggestes, 40/40 by 2020 will be subsidized by taxpayers through the royalty system. How about making the polluter/user pay.

Simon Dyer — Apr 10, 2013 - 12:04 PM MT

Hello Randy,

We agree that carbon prices need to get to upwards of $150 per tonne by 2020 for Canada to do its fair share in fighting climate change and effective climate policy must include producers and consumers. The policy conversation in the country is still a ways off of that mark, but that conversation is also starting to shift, which is encouraging.

While this blog was in response to specific proposals to strengthen Alberta's Specified Gas Emitters Regulation we certainly don't want to lose sight of the bigger picture. Note, there is some preliminary evidence that BC's carbon tax has resulted in a drop in fuel use in that province.

Bob Mitchell — Apr 08, 2013 - 03:11 PM MT

Simon,

I am glad that you are writing a blog on this interesting topic but Pembina should do a more complete job in your analysis. Your diagram and example is misleading and shows that Pembina still doesn't understand the difference between a climate change policy like BC's that is intended to raise revenue and Alberta's which is intended for two purposes -- to send a price signal to cause emitters to reduce their emissions (and all such decisions are made on the margin, not the average) and to recycle the revenue raised back into technologies that will lead to bringing down the marginal costs or reductions over the medium to long term.

The average cost of emissions per tonne or per barrel is completely irrelevant and misleading. Those figures do not represent a pricing signal for behaviours that will drive emission reductions. Those numbers are only relevant if you are interested either raising revenue or punishing all emitters equally.

For example, with a marginal price of $40 in Alberta, it will be in every LFE's self-interest to implement all emission reduction opportunities with a marginal cost of $40 per tonne or less. If we couldn't meet the emission reduction requirement of 40% reduction by making all these <$40/tonne reduction, then we would have to pay $40 for every tonne for which we fell short. If you were to transfer the BC policy system to Alberta, we would have no incentive to implement the emission reduction opportunities where our cost is between $30 and $40 per tonne. We would therefore not reduce our emissions as much as we would using a higher marginal priced system. We would definitely pay more in total so in the short-run, the government would raise more revenue but reduce emissions less. In the long-run, a BC-style regime may reduce emissions more in the long-term because that kind of system in the has a bigger adverse effect on the economics of businesses operating in BC. It discourages investment.

This difference in philosophies in the policy design of the two provinces is further reinforced by the way that they provide for offsets. The Alberta system encourages economically efficient and environmentally effective reductions by allowing the offset buyer to use each tonne of the transfered reduction against its emission reduction target. This policy has allowed a fledgling offset sector to begin to blossom in Alberta. In BC, the government is the only party that can apply offsets so it decides what it will to pay someone who makes a verified emission reduction. It doesn't tell you that price until you have verified your reduction so an offset sector is being asked to make emission reductions and hope that the government a fair price . . . no guarantees.

So, in the future, I encourage you to be more precise in your explanations of the differences -- a marginal system is more in line with a Triple-Bottom-Line or Creating-Shared-Value approach in that it allows for economic development and sends a significant price signal to encourage emissions reductions. It allows for 'both-and' or 'win-win' for environment and economy. The average price system is very different in that it takes money out of the economy and discourages business investment. It is designed for the older-school 'win-lose' approach to sustainable development/T-B-L for the environment and the economy.
Bob

Simon Dyer — Apr 10, 2013 - 11:57 AM MT

Hello Bob,

Thank you for your comments and taking the time to craft a thoughtful response and I hope we can continue this conversation.

In our recent reports and this blog we’ve included reference to both marginal and average cost, and I think they are both relevant to public policy conversation in Alberta and Canada. Marginal cost will be the main determinant of investment in GHG reduction technologies. Average cost is the best estimate we have on the competitiveness impacts of the policy, so given the degree to which any SGER changes will be debated around that issue, I think it is appropriate to use that measure. Having both measures in use (given they are both $/tonne figures) does introduce the potential for confusion –it’s a complex topic and both measures are important to have a meaningful conversation.

I think my colleagues in BC would disagree that the BC carbon tax was designed to raise revenue. Given that the BC government reduced other taxes with the revenue, it is a policy with the primary intention of reducing GHGs. I'd also say that while BC's carbon tax may discourage investment in high carbon infrastructure, it will encourage investment in low carbon alternatives.

Anyway, thanks again for your comments. This is a complex topic and there seems to be a low level understanding that Alberta and BC’s approaches are quite different, so we sought to simplify and illuminate with the blog and infographic.

Simon

Guy Dauncey — Apr 08, 2013 - 12:05 PM MT

Many thanks for this clear explanation!

Laurie Adkin — Apr 08, 2013 - 10:30 AM MT

Thanks for this timely, antedotal post.

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