Canada's Oil Insiders Want a Carbon Tax

Few oil patch executives have as much experience on the front-lines of Alberta's bitumen industry as Neil Camarta. Retired now from oil and gas development, he has held senior positions at Shell Canada, Syncrude, PetroCanada and Suncor. 

Camarta personally oversaw construction of Shell's $6-billion Muskeg River Mine, a project challenged by persistent labour shortages and a series of explosions not long after it opened. The project's timeline also coincided with a surge in oil prices from $12 to $100 per barrel, which set off an economic boom harder and faster than anything northern Alberta had ever seen. 

Camarta was at PetroCanada by the time the Great Recession of 2008 struck. "Hell on wheels," is how he described it. Oil sands investment shrank just as quickly as it had grown. 

Now, after four years of shaky global recovery, it's set to hit record highs once again.

But the former executive says he has also witnessed an unprecedented shift in thinking within the corporate culture on climate, global warming and the role of carbon in both. The issue has evolved from one that worried only progressive Europe, Camarta says, to something "talked about in every boardroom in Calgary." 

Camarta still feels passionately for the modern oil sands industry he helped create. "Give me some dirt, some good people and a few billion dollars and I can have a lot of fun," he told the Globe and Mail in early 2011, days before his retirement from Suncor. 

So Camarta's answer to his industry's soaring greenhouse emissions may come as a surprise. "If Canada really wants to reduce CO2," he told the Tyee Solutions Society, "there has to be a carbon tax across the whole economy."

That kind of talk helped destroy former Liberal leader Stéphane Dion's disastrous 2008 bid for Prime Minister. Conservative Foreign Affairs Minister John Baird recently told Parliament that a carbon tax would, "kill and hurt Canadian families." 

Yet within Canada's business community, support for a market price on carbon is so broad it could be considered virtually mainstream. 

Senior figures from Suncor and Cenovus, two of the largest and most profitable oil sands companies in the country, told the Tyee Solutions Society directly that they support a national carbon tax. Chief executives from more than 150 of Canada's largest corporations have likewise publicly urged the government to establish a price on carbon.

Advocating for a tax on the nation's carbon may remain politically taboo in Conservative Ottawa. But to many business leaders, both inside the oil industry and outside it, economic prudence dictates that the sooner Canada just gets on with such a tax, the better.  

Understanding this remarkably overlooked consensus requires reorienting some commonly held beliefs about corporate decision-making. After all, wouldn't a carbon tax impose new costs on a company's bottom line? And isn't this contrary to the goal of maximizing shareholder profits?  

Big capital and long horizons

The short answer to both is yes. But in an industry whose investments run into billions of dollars, in projects with lifetimes that run to decades, the short answer isn't always the revealing one.

A 2010 background report from Sustainable Prosperity, an Ottawa-based think tank, revealed the more nuanced approach to strategic planning that really takes place in Canada's corporate boardrooms, especially when it comes to climate change.

From 2008 to 2009, researcher Kaija Belfry Monroe interviewed more than a dozen Canadian business associations and 17 major corporations -- including Suncor, Shell and Nexen -- about their perspective on global warming and the policies needed to address it. 

Monroe's findings surprised her: "The business community in Canada is overwhelmingly in favour of a price on carbon," she wrote.    

The explanation has a lot to do with risk: how companies view it, and how they manage it.

Canada's lack of climate regulations allows oil sands firms and others to release vast amounts of CO2 into the atmosphere -- and pay very little for the privilege. But there's no guarantee things will stay this way forever.

In fact, many of the country's biggest firms think a Canadian price on carbon is beyond a serious possibility. They consider it inevitable. The big unknown is what that price will be. For companies wagering billions of dollars on high-carbon investments, it's a potentially crippling uncertainty. The consequences of guessing wrong could be fatal. 

"In the worst case," the Sustainable Prosperity study argued, stringent climate policy can "lead to bankruptcy if business decisions do not take into account increased costs over the long term."

Uncertainty about the shape and impact of future Canadian climate regulation is already affecting investment in Alberta's oil sands. Nexen, for one, cited a variety of reasons including the global recession for its 2008 decision to delay a major expansion of its oil sands operation at Long Lake, Alberta. But uncertainty about climate change and North America's plan to address it were also factors, a Nexen spokesperson said at the time.

By 2010, Nexen still worried about the "political forces" shaping carbon policy, as it noted in documents filed to the Carbon Disclosure Project. Canada had adopted new climate targets early that year after attending global warming talks in Copenhagen. In the United States, Congressional approval of a national cap and trade system seemed to be inching closer each day.

Things aren't much clearer two years later, with Canada officially withdrawn from the Kyoto accord and U.S. carbon pricing a political dead zone.

A price to uncertainty

Nexen still intends to ramp up production at its Long Lake facility (and has plans for a new in-situ operation named Kinosis). But years of indecision illuminate a wider dilemma for Canada's business community. 

"The greater the uncertainty about a (climate) policy option, particularly one that would increase costs, the more concern it causes for investors," concluded the Sustainable Prosperity report. "Undoubtedly, eight years of policy uncertainty on climate change in Canada has been very bad for business."

Two years have gone by since that study was published and Canada still has no coherent plan to deal with its carbon emissions, a point stressed this May in a scathing report by federal Environment Commissioner Scott Vaughan.

Shadowing future risk

Absent a national climate strategy, many oil sands companies, including Nexen, Shell, Suncor and Cenovus, now factor a range of potential future carbon prices into their medium and long-term strategic planning.

The practice, known as "carbon shadow pricing," provides a degree of confidence that their operations, current and planned, will be able to survive more stringent limits on greenhouse gas emissions.

"We want certainty as business people because we're making big investments, and our shareholders would like certainly as well," Suncor's VP of sustainable development, Gordon Lambert, told the Tyee Solutions Society.

Lambert's Suncor models carbon prices as high as $45 per tonne, $15 higher than B.C.'s internationally-lauded carbon tax. According to a recent corporate update, Suncor is confident that a price in the upper range wouldn't "cause material disadvantage to the company." Cenovus thinks it could handle a carbon price of $65.

Even so, both companies, and their investors, would breathe more easily if they knew for sure the requirements that a Canadian climate policy would place on them.

And the leading oil sands producer has no qualms about how that should be done. "We think a price should be put on carbon," Suncor's Lambert said. "Ideally the model would be a national carbon tax."

The same message went repeatedly to Prime Minister Stephen Harper from the National Round Table on the Environment and the Economy (NRTEE). Not only would a carbon price be the most effective way to achieve Canada's greenhouse targets, the arms-length, multi-stakeholder panel advised, it would also be the most cost-efficient. Indeed, the NRTEE concluded, the current patchwork of provincial climate policies will cost Canada's economy 20 per cent more than a national pricing policy would by 2035.

The 2012 federal budget eliminated the NRTEE. Conservative ministers later revealed that its push for a "carbon tax" was a major factor in its demise.

"Why should taxpayers have to pay for more than 10 reports promoting a carbon tax, something that the people of Canada have repeatedly rejected?" Foreign Affairs Minister Baird told Parliament in May. "It should agree with Canadians. It should agree with the government. No discussion of a carbon tax that would kill and hurt Canadian families."

The federal government instead plans to regulate emissions from each of Canada's industrial sectors separately. It has promised to roll out oil and gas regulations by early 2013.

Reward the innovators

For an oil sands producer, there are several reasons to prefer a carbon tax. One is that it inherently rewards economic activity that is carbon efficient and punishes activities that aren't.

On the surface, that would seem to hurt Alberta's oil sands, widely identified as Canada's fastest-growing source of carbon emissions. What is not often acknowledged, though, is that from an economic perspective, many bitumen operations are actually quite efficient with their CO2.

"They may be a new, large and growing source of emissions," wrote University of Alberta business professor Andrew Leach on his blog, "but they are also among the highest value uses of carbon, at least among industrial activities, in the country."

Leach has calculated that one tonne of CO2 released during coal production is tied to about $20 to $30 in profits. Compare that to the oil sands, he estimates, where each tonne of emissions generates profits in the range of $400 to $500.

"If you think that an investment with that kind of value proposition is going to dry up in the face of a $30-$50 (or even much higher) per tonne carbon tax," Leach argues, "think again."

Carbon pricing would still be expensive for the oil sands. At that upper $50 range, it could cost a company such as Suncor more than $1 billion per year, Leach estimates.

But attacking emissions through government regulation instead could effectively nullify any chance for competitive advantages between or within industries. Typically such brute-force regulations impose blanket limits on all operators within a sector, then penalize companies for not meeting them.

"It's not clear to me how regulation drives innovation," Kirk Andries, executive director of Alberta's Climate Change and Emissions Management Corporation, told the Tyee Solutions Society. "Regulation is really good at bringing up the laggards to a minimum, but it doesn't promote leadership."

An economy-wide price on carbon, in contrast, leverages the power of the market. Companies and industries that develop the most cost-effective ways of reducing their emissions first, gain a competitive advantage.

For a major oil sands producer such as Cenovus, which claims to have some of the most carbon-efficient operations in the industry, that's an appealing proposition.

"If you're going to regulate carbon, it should be done through economic measures rather than regulation," Jon Mitchell, Cenovus's team lead for environmental strategy and policy, told the Tyee Solutions Society. "I think the most efficient way to do it is economy-wide and with a price."

Sources I reached could only speculate about why the Harper government prefers regulation, traditionally anathema to free-market conservatives, to an industry-supported tax. One called it "the $64,000 question."

But perhaps it's because a true "economy-wide" price on emissions would impact ordinary Canadians, not just industrial producers. Instituting a national carbon tax would raise transportation and heating fuel prices for everyone -- a politically dicey proposition that may explain the claim that such a tax would "kill and hurt Canadian families."

CEOs: Bring on a tax

Others, though, think more expensive energy is exactly what Canada needs.

"The most effective means of promoting energy conservation is to allow energy prices to rise," read one non-governmental organization's report from December 2011. "Governments must resist the temptation to shield Canadians from higher energy prices."

That forceful statement didn't come from any environmental group. Nor was it written by any of the parties opposing the government in Parliament. Rather, the views were those of the Canadian Council of Chief Executives, a group representing more than 150 of Canada's largest corporations.

"The present trend is unsustainable," these CEOs concluded. "It is time for Canadians to get serious about energy conservation, for the health of our economy as well as the environment."

Tomorrow: When it comes to putting a price on carbon, B.C. and Alberta have much to teach each other. For the whole series to date, go here.