Carbon pricing and Canada’s New West Partnership

An $8 billion opportunity

The premiers of British Columbia, Alberta and Saskatchewan have pledged to meet with the federal government to discuss a national energy strategy and the related issue of regulating greenhouse gas emissions. Before that meeting happens, let’s examine their efforts to price carbon, a critical component of any cost-effective approach to dealing with climate change.

Together, the provinces make up the New West Partnership. All three agree with the need to price carbon and both B.C. and Alberta have taken some first steps. B.C.’s carbon tax has received considerable praise since it was implemented in 2008 and has support within the province. The tax is applied equally to all fossil fuel combustion and is scheduled to increase to $30 per tonne this July.

Financial Growth by EP-3 on FlickrB.C.’s carbon tax came into force a year to the day after Alberta implemented its own carbon pricing policy, known as the specified gas emitters regulation. It requires facilities that began operation before 1999 to reduce emissions per unit of production to 12 per cent below their 2003–2005 average. Newer facilities have similar targets that phase in over time, and in either case, those that miss targets can make up for it by paying the government $15 per tonne or by purchasing Alberta offsets.

Saskatchewan has been considering a similar approach to Alberta’s, but has yet to implement regulations.

What makes a carbon price effective?

Four questions can help assess different approaches to pricing carbon:

  1. How strong is the incentive to reduce pollution? The higher the price, the stronger the incentive.
  2. How broadly is it applied across the economy? The more emissions sources that the price applies to, the more opportunities to encourage investment in climate change solutions.
  3. How many loopholes are there? More loopholes mean a less effective policy with less credibility and less public support.
  4. How is revenue invested? Investing in projects that reduce pollution leverages the incentive created by a carbon price.

How do B.C. and Alberta compare?

1. How strong is the incentive to reduce pollution?

B.C.’s carbon price provides at least twice the incentive to reduce pollution, which will be $30 per tonne compared to the maximum $15 in Alberta. Neither price is yet sufficient to spur the types of changes each province has committed to, but the $15 per tonne difference will register when considering investments in cleaner technology.

2. How broadly is the incentive applied across the economy?

B.C.’s carbon tax applies to all fossil fuel combustion in the province, or about 77 per cent of its GHGs. Alberta’s, on the other hand, applies only to large emitters, or about 50 per cent of the province’s emissions. If Alberta expanded its system to include heating and transportation fuels, coverage would jump to 74 per cent. Both provinces could further increase their coverage by about 10 per cent if their carbon prices applied to non-combustion sources of GHG pollution (e.g., the emissions produced when carbon dioxide is stripped from raw natural gas during processing). Many of these non-combustion emissions can be accurately measured so there’s no good reason to give them a free pass.

3. How many loopholes are there?

Loopholes are the bane of good policy. They prevent governments from reaching objectives and do so in a way that undermines public support. In addition to opportunity that both provinces have so far missed to capture non-combustion GHGs, Alberta also allows emitters to buy offsets of questionable quality. Offsets can be controversial at the best of times, but there is a serious problem with quality when over three-quarters of the offsets purchased to comply with Alberta’s regulations between 2008 and 2010 were from projects that happened before those regulations were even put into place (refer to our December 2011 report, “Responsible Action,” page 12). 

4. How is the revenue invested?

Smoke stacks and windmillsWhile there’s no magic formula for what to do with the revenue generated by a carbon pricing policy, there’s good rationale to put at least some it towards the types of low-carbon projects that the policy encourages. By investing all of the revenue it collects (an average of $74 million per year between 2007 and 2010) into the Climate Change and Emissions Management Corporation (CCEMC) — an organization established to invest in low-carbon solutions — Alberta is doing just that.

In 2012, B.C.’s carbon tax will generate about sixteen* times as much revenue as Alberta has invested in the CCEMC on average ($1.2 billion compared to $74 million), and none of that revenue is currently being invested in projects to reduce greenhouse gases. Instead, B.C. uses the revenue to lower corporate and personal income taxes and provide tax credits to low-income British Columbians, an important measure because carbon prices can negatively impact low-income households. By investing some carbon tax revenue into climate change solutions B.C. could increase the tax’s effectiveness.

A model for the New West Partnership

If the New West Partnership took the best of what B.C.’s carbon tax has to offer, adopting a $30 per tonne incentive to reduce pollution across the economy, it would amount to an $8 billion signal in favour of clean energy every year. With recent public polling showing that a majority of citizens in B.C., Alberta and Saskatchewan support B.C.’s approach, there’s little reason not to move forward. The three provinces could go further by following Alberta’s lead and investing a portion of that $8 billion in climate change solutions.

Collectively acting on this $8 billion opportunity will strengthen the business case for everything from more energy efficient homes to carbon capture and storage project. It will also move the provinces another needed step toward meeting their climate change commitments.

* B.C.’s carbon tax raises 16 times more revenue than Alberta’s regulations because of four reasons: 1) the price is higher ($30 per tonne versus $15 per tonne), 2) the coverage in the economy is broader (77 per cent versus 50 per cent), 3) emitters in B.C. pay carbon tax on 100 per cent of their emissions from fossil fuel combustion, whereas emitters in Alberta are only responsible for the last 12 per cent of their emissions, and 4) for that 12 per cent, emitters in Alberta can also comply with regulations by purchasing offsets or credits from other companies that exceed their targets.