Replacement for large emitter tax is combination of carbon levy, output-based allocations, $1.4 billion innovation fund
After months of consultations and public hints, the Alberta government finally unveiled the Carbon Competitiveness Incentives program. This is big news for the provincial oil patch, but will also after other industries like cement production, chemical manufacturing, and electricity generation that create 100,000 tonnes or more of greenhouse gases a year.
“The CCI program is a combined tax and output subsidy system designed to incentivize firms to reduce emissions while also mitigating competitiveness concerns and carbon leakage associated with significant climate action by Alberta and Canada in the absence of similar action by other countries and major competitors,” said Prof. Jennifer Winter, assistant professor of economics at The School of Public Policy, University of Calgary.
“While the extent to which it will achieve the government goals of emissions reductions and mitigating negative economic consequences depends on the level of the tax and the amount of the per unit of output subsidy, as designed, it will achieve both policy goals.”
For the oil and gas industry, the CCI is designed to both drive down emissions and operating costs at the same time.
Sounds like a tall order, doesn’t it?
Last year, Environment Minister Shannon Phillips explained simply – much more simply than the bureaucrats who wrote backgrounders on the new program – how the system is intended to work on an exclusive Energi News webinar.
The program has two components, a carbon levy (initially set at $30 a tonne) and output-based allocations (see the government’s overview of OBA’s here. Canada’s Ecofiscal Commision provides a relatively simple explanation of OBAs here).
To start, the government sets a threshold for the carbon intensity of a barrel of crude oil.
The next 25 cent of production pays a small levy, the next 25 per cent pays a bigger levy, and the bottom 25 per cent pays the biggest levy.
The best producers are encouraged to innovate in order to continue cashing government cheques and the poorer producers want to avoid paying any more carbon levy than absolutely necessary.
As producers lower their emissions, the government moves the threshold so that companies are always motivated to keep improving.
Dave Collyer, long-time Shell Canada executive and a former head of the Canadian Association of Petroleum Producers, said in an email that, “I support the approach – a structured mechanism to address competitiveness and incentivize emissions reductions. Makes sense to move to broader performance standards and away from facility-specific provisions in Specified Gas Emitters Regulation.”
The key to the CCI working is continuous innovation by industry.
As I’ve explained in numerous columns, the Alberta oil sands is experiencing a technology Renaissance, what Kevin Birn of IHS MarkIt calls the “third stage of oil sands development (the first was mining, followed by in situ using steam assisted gravity drainage, which is forecast to account for all 1.3 million b/d of new production between now and 2030).
Companies are frantically developing and adopting new technologies because they understand that using less natural gas to make less steam lowers operating costs.
How low, you ask?
Cenovus is already as low as $7 to $10 a barrel depending upon the operation and Harbir Chhina, VP of technology and godfather of the SAGD process, told me he expects another 20 per cent reduction over the next decade.
Both Cenovus and Suncor have announced in the past few months that their goal is to reduce GHG emissions by 30 to 33 per cent, which would put the carbon-intensity of their crude oil within spitting distance of the average American crude.
To spur even more innovation, on Tuesday the Alberta government announced $1.4 billion innovation fund, which will be mostly funded by the provincial carbon tax.
The fund has five specific programs:
- $440 million – to help oil sands companies increase production and reduce emissions while adjusting to the CCI.
- $225 million – for innovation projects across sectors that support research, commercialization and investment in new technologies that reduce emissions.
- $240 million – industrial energy-efficiency projects that help companies reduce emissions and costs by upgrading equipment or facilities to lower energy use. Support will be available for large industrial, agricultural and manufacturing operations.
- $63 million – grants for bio-energy projects, including bio-diesel and ethanol, biomass-based electricity generation.
- $400 million – loan guarantees to support investment in efficiency and renewable energy measures to reduce risk for financial institutions and make it easier for companies to invest.
Taken together, the Carbon Competitiveness Incentives and Innovation Fund are an aggressive strategy designed to prepare Alberta for a global economy – especially the energy sector – which will be increasingly “carbon constrained.”
Industry boosters are already dismissing CCI as just another tax intended to make Alberta oil and gas uneconomic. The exact opposite is the intent and very likely the consequence of an innovative policy that was designed in part by oil sands producers, who were consulted extensively, according to Phillips.
As economist Trevor Tombe tweeted Wednesday, “Regardless of who forms the next government, the changes to SGER (now called CCI) will remain. They just make too much sense. One can prefer smaller or larger subsidies (the OBAs), but the structure is sound.”