Choices for Carbon Pricing in Alberta

The new government in Alberta has made climate change a priority issue.  The appointment of Andrew Leach and an as yet unnamed panel signals an intent to implement a significant climate change policy.  Carbon pricing will be a key tool in any such policy.

A few facts are in order (numbers are from the recent EcoFiscal Commission report of April 2015).  Alberta currently emits about 250 million tonnes of carbon, the most of any province (Ontario is second at 160 million tonnes).   This represents about 35% of Canada’s current emissions of 725 million tonnes.  Alberta’s emissions are projected to rise to about 275 million tonnes by 2020.  Canada’s emissions for 2020 are projected to be significantly above its’ Copenhagen target of 611 million tonnes.

Of Alberta’s 250 million tonnes, 60 million comes from resource extraction (mostly oil sands), 60 million from manufacturing, 50 million from electrical generation (mostly coal), 40 million from transportation and 40 million from everything else. 

The real question is, even with a price on carbon, can the engineers deliver any actual reduction of total emissions in any of these sectors?  The conversion of coal fired plants to natural gas would help.  A concerted effort to convert to renewables (likely wind in windy Alberta) would also help.  The challenge is that all of these steps would be difficult to implement by 2020.  The emissions from manufacturing are likely spread over many different operations (refineries, upgraders, assembly yards etc.).  Again, it will be difficult to make any meaningful reductions by 2020.

The reduction in emissions from resource production will also be difficult.  The mantra of CAPP to date is that emissions intensity (tonnes of carbon per barrel of oil or bitumen produced) has been improving in recent years.  Left unsaid is that with the projected increase in total production, the total emissions from the oil sands will still increase by 2020. 

The bottom line is that it will be difficult if not impossible, to keep emissions from increasing by 2020, let alone reduce them.   This message will not resonate well in the December climate change meeting in Paris.

Given this, what might be an appropriate policy for the Alberta government to pursue?  The main choices will be to impose a carbon tax (as B.C. has done) or to enter into a cap and trade regime (as Ontario and Quebec have done).  Simply put, a cap and trade regime places a limit on the quantity of carbon to be emitted, and the emissions trading market sets the price of carbon (much like the stock market).  A carbon tax puts a price on carbon, and the decisions of innumerable emitters of carbon, based on the higher price of carbon, will determine the quantity of carbon emissions.

There are a few political facts that will weigh on this decision.  If a cap and trade regime is chosen, it is virtually certain that Alberta will be a purchaser of emission credits, since it is unlikely that industry and the consuming public will be able to reduce the gross amount of emissions.  If Alberta wants to show a paper reduction in emissions through the purchase of emission credits from Ontario/Quebec/California etc.,  it will cost a significant amount.  Using a price of $30 per tonne, the purchase off 25 million tonnes of emissions credits (about 10% of total Alberta emissions) would cost $750 million per year.  Given the nature of cap and trade, most of these costs would be borne by large emitters such as oil and gas producers, electrical utilities, manufacturers etc.  A number of end users may well claim exemption from a cap and trade program.  In addition, it is money lost to the Alberta economy.

An alternative is to impose a carbon tax, as was done in British Columbia.  This has the advantage of simplicity, is applicable to all emitters of carbon, and would keep revenues within Alberta.  A carbon tax is supported by the New York Times, the Pope and ExxonMobil Corporation, three groups that are not usually mentioned in the same breath.  A carbon tax in Alberta would show a meaningful step in climate change because it puts a price on carbon.  Such a step should enable Alberta (and Canada) to have a better reception in Paris in December.

A carbon tax would also give credibility to Alberta and Canada when they ask that other countries impose a similar carbon pricing.  This is particularly true for the United States, since it is the major competitor to Canadian industry.  My understanding is that a carbon tax is a partisan political issue at the federal level in the U.S.  – the Democrats want it as an environmental initiative, and the Republicans resist it because they do not want to raise taxes and increase government spending.  Given this, the real carbon pricing response will likely come from the states within the U.S.

The EcoFiscal Commission noted in its April 2015 report that different provinces may choose to approach carbon pricing in different ways that are suited to their local needs.  The government of Alberta may wish to consider the above thoughts as they decide how they will proceed.