To Spur Innovation, What Price to Put on Oil Sands Carbon?

British Columbia won high praise in 2008 for implementing North America's first carbon tax. Technically, it was. But in truth the idea of putting a market price on greenhouse gas emissions was pioneered exactly one year earlier, by Alberta. 

Like B.C., Alberta charges emitters for the privilege of releasing CO2 into the atmosphere. Also like B.C., and despite doom-sayers, it has managed to do so without wrecking its economy. But there the similarities between the two approaches to penalizing carbon end. Now both provinces' carbon levies are up for review. There's little evident political will to raise either, despite a widely held expert consensus that doing so is a prerequisite for a low-carbon economy. 

The stakes are highest for Alberta. It's responsible for more than one-third of all Canada's greenhouse gas emissions, the largest share of any province. Its carbon footprint, the highest per-capita in the world alongside Qatar, is under intense international scrutiny. Yet there is mounting evidence that its groundbreaking carbon levy is not only failing to advance climate progress on the prairies, it may be outright blocking it. 

For other Canadians, Alberta's failure to rein in emissions could single-handedly ruin the country's chances of meeting the global warming targets it agreed to at the last international climate summit, in Copenhagen in 2009. 

For all those reasons some observers think Alberta's policymakers could learn a thing or two about carbon pricing from their neighbour over the mountains. But there may also be a few ideas that B.C. could usefully pick up from Alberta, innovations the entire country would be wise to build upon. 

Apprehension in advance

In 2007, when Alberta became the first jurisdiction in North America to put a price on CO2 emissions, Neil Camarta remembers a frenzy of debate and speculation within Calgary's corporate boardrooms. 

"All of a sudden there was going be an economic cost to producing carbon," the former executive at Shell Canada, PetroCanada and Suncor told The Tyee Solutions Society. "It was discussed a lot. What were the costs going to be? What can you do to mitigate them?"

When it was eventually revealed, the cost of releasing carbon in Alberta was set at $15 a tonne -- on paper. The cost to oil sands producers in reality turned out to be something else -- both more complicated and less expensive.

For one thing, the new carbon price applied only to industrial emitters that released more than 100,000 tonnes of carbon each year. That meant only Alberta's largest companies, and about half its emissions, came under the pricing discipline.

A second quirk was that the price was not levied directly on all the carbon that a company releases. Rather, companies were expected to reduce the carbon "intensity" of their operations by 12 per cent. Practically speaking, oil sands companies like Suncor had to figure out ways to release 12 per cent less CO2 for each barrel of oil they produced (their carbon "intensity").

That standard might make oil sands operators more efficient in their use of carbon. But it wouldn't necessarily place any limits on their overall climate footprint, if production volumes grew faster than carbon intensity fell.

A third feature of the Alberta policy charged the $15-per-tonne price only on emissions that exceeded reduction targets. That is, only operators who failed to reduce their carbon intensity by 12 per cent paid the price; and, they paid only for emissions they had failed to squeeze out.

The upshot was that more than 90 per cent of their total emissions could still be released free of charge. That concession, the Pembina Institute calculated, saved Alberta's largest emitters about $1.5 billion per year in carbon payments.   

Further cushioning the blow to industry was that all carbon levies the government collected -- an average of $74 million a year -- would go toward a new clean energy technology fund. If companies came up with innovative ways to slash their carbon, they could even apply to the fund for financial support to implement them. 

Lastly, emitters in danger of exceeding their reduction targets had the final option of buying "offsets" -- certifying that reductions in carbon emissions elsewhere made up for their own excessive releases.

"Once we were able to run the numbers," recalled Camarta, who worked at PetroCanada at the time, "there was no feeling that 'wow, this is going to be a particularly painful thing for the company.'" Still, he said, the policy drove corporate thinking on emissions to become "sharper." Firms wouldn't have to pay very much to emit, but it was a new cost nonetheless.

Time to step it up, or back off?

Nobel Prize-winning climate economist Mark Jaccard helped advise the Alberta government on its carbon-pricing regime. For policy leaders, he said, there was some justification to kicking things off slow and easy. "If you're going to put a price on emissions before others [do], you don't want to hammer industry overnight," he told The Tyee Solutions Society. 

But for that price ever to be effective, Jaccard argues along with most mainstream climate policy thinkers, it must go up over time. In a 2007 report Jaccard helped prepare for the Alberta government, he predicted that doubling or even quadrupling its carbon price to $60 a tonne would have minimal impact on the province's GDP. 

An even more aggressive price of $100 might actually boost economic growth, Jaccard concluded, as a rapidly expanding clean energy sector could more than compensate for lower crude oil production.

So far the Alberta government has not heeded his advice. In the five years since the province's carbon levy was instituted, its Progressive Conservative government has given no indication when, if ever, it will be raised. And the entire scheme will be up for review in 2014.

British Columbia's Liberal government faces a similar dilemma. Its carbon tax started out at $10 per tonne in 2008, and rose in $5 increments every year until 2012, when it was capped at $30, pending a comprehensive review. 

Environmentalists met that decision with outrage. "At a time when scientists are saying we need to take immediate measures to curtail global warming, it's disappointing to see this government pull back on its commitment on the carbon tax," Sierra Club spokesperson George Heyman told reporters. 

But in fairness the B.C. government, like its counterpart in Alberta, confronts a question that faces all policy leaders at some point: do you forge ahead, or wait for the world to catch up?

In some important ways B.C.'s carbon tax goes deeper and further than Alberta's. It applies to about 77 per cent of the province's greenhouse gas emissions, including those released from people's cars and trucks.  

B.C.'s carbon price is also now double that of Alberta's. And since, in contrast to Alberta, eligible emitters are taxed on every tonne of CO2 they release, B.C. raises substantially more money from its tax: $1.2 billion per year versus $74 million.

But B.C.'s government also opted to buffer the introduction of its tax by promising that it would be "revenue neutral." Almost every dollar of carbon-tax revenue raised went to reduce personal and corporate income taxes and give tax credits to the province's lowest-earning citizens.    

Alberta, by investing its more modest carbon earnings in clean energy solutions instead, may have better "understood the nature of the [climate change] problem," argues McGill University economics professor Christopher Green. Turning carbon revenue into climate innovations, he argues, is one aspect of the Alberta model that the entire country should follow.

"If Canada can make a real contribution in testing and demonstration of transformative technologies, ones that can then be copied and used elsewhere around the world, it will have done more than other country to contain emissions," Green told The Tyee Solutions Society.

Promising models

Earlier this year Pembina Institute program director Matt Horne proposed a regional climate regime for Canada's three westernmost provinces. Alberta and Saskatchewan could take "the best of what B.C.'s carbon tax has to offer," he wrote, by applying a $30 carbon price broadly throughout their economies. Across all three western provinces, this could potentially raise government revenues worth $8 billion. At the same time, Horne wrote, B.C. and Saskatchewan, "could go further by following Alberta's lead and investing a portion of that $8 billion in climate change solutions."

For the moment though, Alberta's carbon levy is stalled at $15 per tonne, a price even its own government acknowledges is too low to drive a significant reduction in carbon emissions. Quite the opposite: it may actively be discouraging climate solutions.

Alberta got a stark lesson in that last April, when TransAlta Corp. abandoned four years of work developing a much-vaunted $1.4 billion project to capture and store fossil-fuel carbon. 

The company, along with partners Enbridge Inc. and Capital Power Corp., had planned to capture 1 million tonnes of CO2 each year from the smokestacks at TransAlta's Keephills-3 coal-fired power plant, 70km west of Edmonton. Once captured, the carbon was to be buried nearly 3km below the Earth's surface. 

That feat would have met a fifth of Alberta's 2015 carbon reduction target in a single stroke. The provincial government had such high hopes for the scheme that it pledged $436 million towards its completion. The feds promised a further $343 million. 

A feasibility study showed that "the technology works and capital costs are in line," the TransAlta partnership disclosed. But other factors were not. In the end, the decision to cancel the project came down to a simple calculation: the price Alberta charges for excess emissions was less than it was going to cost to bury them.  

"What's really needed," TransAlta's vice-president of policy and sustainability, Don Wharton, said at the time, "is a regulatory framework that puts [adequate] value on that CO2. If that's done properly, then [carbon capture and storage] projects, as well as other emissions-reducing projects would be more encouraged to go ahead."

Gaining traction

So how much would it take to motivate such projects? One independent 2010 analysis by IHS-CERA, a U.S.-based energy consulting firm, concluded that the cost of releasing carbon to the atmosphere would need to reach at least $50 per tonne before its capture and storage became economic. For some projects, it would have to be closer to $100 or even $150.

That's a far cry from Alberta's current price of $15 per tonne, which isn't high enough even to drive much less ambitious initiatives.   

Energy producer Nexen acknowledged as much in documents it filed in 2010 to the Carbon Disclosure Project. The Calgary-based company produces hydrocarbons in B.C., the North Sea, the Gulf of Mexico and offshore West Africa, in addition to its major oil sands operations in northern Alberta. 

Nexen has run internal projections to figure out whether it's cheaper to actually reduce emissions in any of those places, or pay each jurisdiction's carbon penalty instead. Nexen's conclusion: "Initial findings show that our internal costs of abatement are higher than other compliance options," according to corporate documents. 

In other words, Nexen had no financial incentive to shrink its carbon footprint -- in Alberta or anywhere else.

Penalties aren't reductions

Moreover, the company argued that because the money it paid under Alberta's carbon regime helps fund clean energy technology, "[this] has the same net environmental effect," as reducing emissions at its oil sands operations.

The assertion equated hypothetical cuts from future innovations with real reductions in present-day releases. It leaves many unconvinced.

"What you really want these [oil sands companies and others] to do is implement emissions reductions on-site at their operations," Pembina policy director Simon Dyer told Tyee Solutions. "Paying into a technology fund should be the last resort."

The problem, as Nexen's experience suggests, is that there's little financial incentive to do otherwise. Indeed, Pembina recently calculated that the average oil sands firm could ignore the intensity targets set by the Alberta government entirely, pay the $15 per tonne carbon price, and add only 20 cents to the cost of producing a barrel of crude oil worth $80 or more.

"It's less than the daily fluctuation in the price of oil," Dyer observes. "If you're an oil sands CEO, [that price] would have zero impact on your investment decisions or technology decisions."

It's a point the Alberta government acknowledges. "We do have a $15 price signal, but it's probably not sufficient to drive the technology that we need long-term," Bob Savage, head of the province's Climate Change Secretariat, told Tyee Solutions. 

Without better traction or some other form of stringent regulation, Environment Canada expects emissions from Alberta oil sands alone to hit 92 megatons in 2020. To put that into context, every provincial and federal climate measure currently on the books is expected to slash no more than 65 megatons of CO2 from Canadian emissions by the same year. 

On the eve of the Copenhagen talks several years ago, then-Alberta environment minister Rob Renner agreed that the province's $15 carbon price had to rise. "We're not tied to $15," Renner said then. "We believe it has to go up much beyond [that], as long as our competition -- Venezuela, California, Russia and the Middle East -- faces the same... The writing is on the wall and industry knows that."

But when the province's new energy minister, Ken Hughes, was asked recently whether the price should go up, he demurred.

Bob Savage wouldn't speculate. "I can't tell you what ministers will think and decide," the head of Alberta’s Climate Secretariat said. Still, he agreed, "we need to have a price signal on emissions, [and] over time it needs to rise."

When it comes to putting a price on climate pollution, it appears, the number makes a difference. Charge too little for CO2, and the low-carbon transition our climate desperately needs just doesn't add up to economic good sense.

Tomorrow: Meet an Alberta wind farmer who explains why he believes the oil sands' future depends on his green energy. For the whole series to date, go here.