No evidence to support claim that carbon tax is a “job killer” (Tombe), but there is a good argument that it’s an oil/gas “job saver” (Leach)

Carbon tax (also called carbon pricing or carbon levy): A fee on fossil fuel consumption based on the greenhouse gas emissions produced when fuel is consumed. Raising the cost of emitting greenhouse gas emissions encourages consumers and business to change their behaviour. Economists say a carbon tax is market-based policy and the most efficient (i.e. lowest cost) way to reduce emissions.

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Rachel Notley, Alberta premier.

Rachel Notley and her NDP government have imposed a poorly understood carbon tax on the most tax-averse and lightly taxed province in the Confederation in pursuit of an objective – fighting climate change – that a significant proportion of the populace isn’t sure is happening, and if it is happening, isn’t convinced it’s all that much of a threat.

She didn’t go about it half-heartedly, either. The province-wide carbon levy on consumers and businesses in conjunction with the carbon levy on industrial emitters vaults Alberta to the forefront of climate policy jurisdictions in North America. Even more ambitious than California, according to some economists.

In conservative Alberta, this is not considered a point in her favour.

Why would a savvy politician enthusiastically adopt a policy that in the Texas of Canada appears to be certain political suicide?

Because Notley accepts the logic of climate change, which goes something like this: Climate scientists have presented data for 40 years that greenhouse gases caused by burning fossil fuels are being trapped in the atmosphere and slowly raising global temperatures; that an ever hotter earth will soon lead – or already has – to extreme weather, rising seas, and other damage to the global ecosystem that has unpleasant economic and social consequences; that the only rational response is to gradually transition off fossil fuels over the next 50 years or so in an attempt to limit the temperature increase to 1.5C or 2C above pre-industrial levels; that the best policy tool to slow the release of ghg emissions is carbon pricing.

That’s the argument. It’s rational, science and evidence-based, and in line with the international consensus that emerged from the Paris Climate Accord in 2015, whose goals the Canadian government is busy enshrining in its own climate and energy policies.

It’s also poorly understood, easily manipulated by opposing politicians, and resented by Alberta voters still recovering from the nasty downturn of 2015 to 2017.

Unfortunately, the public discussion around carbon pricing has become a rancid cesspool of partisan politics aided and abetted by oil and gas sub-sectors – juniors and midcaps, service sector, dry gas producers – still losing money four years after the downturn began and resenting every extra nickel of extra cost, especially if that nickel is squeezed from their bleeding balance sheets by a tax.

But there is one shining exception: the oil sands producers.

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Steve Williams (Suncor), Murray Edwards (CNRL), Brian Ferguson (Cenovus).

Long before Notley became a climate warrior brandishing the sword of carbon pricing, oil sands CEOs were grappling with an appropriate response to climate policy, which they perceived as a both a threat (because of their highly emissions-intense heavy crude oil) and an opportunity (de-carbonizing their product will give them a big competitive advantage in future carbon-constrained global markets over competitors like Venezuela, Mexico, and Iran, climate laggards all).

Oil sands CEOs Steve Williams (Suncor), Brian Ferguson (Cenovus), and Murray Edwards (CNRL) were signing onto international carbon pricing agreements and forging informal alliances with environmental groups that included support for carbon pricing in Alberta months and in some cases years before anyone dreamt of a Premier Notley.

The oil sands companies are central to the story of carbon pricing in Alberta because they are the  business case that legitimizes climate policy, emissions reduction, and the business strategy of being carbon-competitive in a future carbon-constrained global economy.

Even as Williams grumbles publicly about Canadian regulatory burdens – which critics were quick to tie around Notley’s neck – impeding Suncor’s willingness to invest in Canada, his company’s carbon risk and climate reports trumpet its unflagging endorsement of the NDP’s Climate Leadership Plan.

Within the Alberta context, the oil sands companies are visionaries. To use the hackneyed Walter Gretzky admonition, they’re skating to where the puck is going, not where it has been.

What Albertans think of the carbon tax

This is the day we step up, at long last, to one of the world’s biggest problems — the pollution that is causing climate change…By putting a price on pollution, we will create a market-based economic incentive to reduce it and to invest in alternatives. – Premier Rachel Notley, speech, November 22, 2015 launch of the Alberta Climate Leadership Plan.

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Source; Abacus Data.

“Albertans feel the same way about the carbon tax as they do all taxes. They don’t like it and they prefer not to pay,” explains pollster Janet Brown.

No kidding. The Alberta province-wide carbon tax is far and away the biggest political liability of Notley’s NDP government. And because burning fossil fuels is considered by scientists to be humans’ biggest contribution to global warming, climate policy is inextricably connected to energy policy in Canada’s biggest oil and gas producing province.

Public opinion polling shows that most Canadians – and even most Albertans – accept the earth is warming and humans are responsible, that government should act to mitigate climate change, and that transitioning off fossil fuels to clean energy is a desirable goal. But once we get past those simple truths, how Canadians feel about climate and energy gets more complicated.

And of all the provinces, Alberta is the most skeptical of climate change and mitigation policies.

Early in 2018, Abacus Data released a poll commissioned by the Ecofiscal Commission, a pro-carbon pricing organization based in Ottawa but supported by many Alberta energy companies. Respondents were asked a series of questions designed to segment their views on climate change.

Climate Believers (42%) – Believe there is conclusive evidence that climate change is happening, think its man-made, and are more likely to think government action should be a top or very high priority.

Climate Leaners (47%) – Believe there is clear evidence that climate change is happening but only two-thirds believe its caused by man-made actions. Despite aligning closely with Believers on the existence and cause of climate change, they are less likely to prioritize government action. More concerned about other issues.

Climate Laggards (11%) – Do not believe there is clear evidence that climate change is happening, most think it’s naturally caused, and most want government to do nothing to solve it.

carbon taxQuebec leads Canada with 48 per cent believers and only eight per cent laggards. Alberta is dead last, with 29 per cent believers and 22 per cent laggards. BC and Atlantic Canada are closer to la belle province , while Saskatchewan and Manitoba are closer to Alberta, and Ontario is somewhere in the middle.

With such a diversity of opinion on climate change, no wonder Canada is conflicted about how to combat global warming.

“The consensus that the climate is changing is broad (60%) and stable, but not universal…[Canadians] do not all agree on what timetable for action is necessary to avert these disasters, what actions will help the most at the least cost, or the degree to which technology might provide solutions that don’t exist today and allow us to avoid expensive and disruptive dislocation,” says Abacus Chairman Bruce Anderson.

One observation from the survey seems particularly pertinent to Alberta: moral arguments about the obligation to fight climate change carry some weight with most people, but on their own are insufficient, according to Anderson.

Canadians are like everyone else, they have many competing priorities, multiple demands upon their attention and their time, which is why a “good number of people remain hesitant about the pace of a shift to renewable energy or the need for a tax on carbon.”

In fact, most Canadians prefer regulations and subsidies to carbon pricing, but prefer carbon pricing to doing nothing at all.

“The nature of most people is to look for the path of least cost and inconvenience, including when it comes to what to do about climate change,” says Anderson.

THE ALBERTA CARBON TAX

There are two carbon tax schemes administered by the Alberta government, one for consumers and businesses and one for large industrial emitters (Carbon Competitive Incentives Regulation).

The Canadian government is also introducing a federal carbon tax that Albertans often assume will be applied on top of the Alberta levy. That is not the case. The federal carbon tax is a “backstop” for provinces that refuse to adopt a carbon tax or whose carbon tax does not meet national standards. The federal program does not apply in Alberta because the province meets those standards and in many ways has been the model for Ottawa.

The basics of the consumer and business carbon tax

The Alberta government charges the carbon tax on all transportation and heating fuels that emit greenhouse gases when burned, including diesel, gasoline, natural gas and propane at the gas station, and on natural gas used to heat homes. Electricity is exempt from the carbon tax, as are fuels like marked gasoline and diesel used on farms.

The government estimates indirect costs to range from $75 to $110 per household in 2018.

Economists differ about whether the Alberta carbon tax is revenue neutral. Critics like Prof. Jack Mintz say that personal and business taxes should be lowered to offset monies raised by the carbon tax, like the BC system.

Proponents like Prof. Andrew Leach argue rebating carbon tax revenues to 60 per cent of households and using the rest of the revenue to support energy efficiency, public transport, and other “green” projects qualifies as revenue neutral.

Full rebates will be paid to single Albertans earning less than $47,500 a year and families earning less than $95,000. The government estimated that $1.6 billion would be rebated over the first three years of the carbon tax, which came into effect on January 1, 2017 at $20 a tonne.

The combination of a lower Alberta small business tax rate and the Capital Investment Tax Credit – Clean Tech Stream will provide $632 million over three years to the business community.

DOES CARBON PRICING WORK?

It’s complicated. Most economists agree carbon pricing (both taxes and cap-and-trade systems) reduces emissions, but they do not agree about how well it works or the best carbon pricing policy design.

By my count there are four carbon pricing camps.

One, most Canadian economists, especially in academia, who heartily support carbon taxes + regulations.

Two, a wrinkle on the first camp, economists like Jack Mintz who like carbon taxes but prefer them to stand alone, without regulations.

Three, Vancouver-based consultant Aldyen Donnelly who actively worked in emissions trading schemes and now prefers regulations and standards, but no carbon pricing at all.

Four, consultant Erik Haites of Toronto who co-authored a paper (to be published in December) that reviews all the carbon pricing regimes on the planet, concludes a tax doesn’t work as well as advertised (for a variety of reasons), and endorses the cap-and-trade + regulation model as the most efficient and effective.

The carbon + regulation tax camp

Energi News has probably interviewed 20 or more carbon tax-endorsing economists from around the world over the past two years. Here are excerpts from a few of those interviews:

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Prof. Trevor Tombe, economist, University of Calgary.

Prof. Trevor Tombe, University of Calgary: There are millions of ways to lower emissions. Ideally, we want the cheapest ways to lower emissions first. 

The trouble with central planning [regulations] is that there is a lot of information government doesn’t have about all the individual circumstances we face as households and businesses, and the costs to lower emissions.

So, the market-based approach is one that harnesses the information from the minds of millions of people, leaving it up to them to think about their own situation, their own options, their own costs, and putting a price on something will almost automatically incentivize those cheap ways to lower emissions first.

It’s just markets. That’s basic economics.

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Chris Ragan. economist, Ecofiscal Commission.

Chris Ragan, Ecofiscal Commission: I actually think the Alberta system has been quite well designed. It’ll be economy wide, which I think is a very important element because broader coverage improves the overall cost-effectiveness of the policy. The government knows there’s going to be two kinds of impact.

One, the impact on households. They are taking that seriously.

Some of the revenue is being rebated, especially to low income households, to make them whole again financially.

Two, they’re very concerned about the business competitiveness issue, especially in the emissions-intensive sector like oil sands.

That’s why they’re introducing output-based allocations, which is basically giving back some cash value to some of the emissions-intensive firms to address the competitiveness issue head-on.

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Prof. Kent Fellows, economist, School of Public Policy.

Prof. Kent Fellows, School of Public Policy, University of Calgary: the carbon tax costs households money. We don’t like that, so we give a lump sum payment (rebate) back. Some people ask why, if you’re just giving the money back, where’s the incentive to reduce emissions?

Within the field of economics, however, this issue of what we call substitution and income effects is quite well understood.

The idea is that consumers respond to relative changes in price in one way and to changes in their income in other ways.

So, it’s entirely possible to change relative prices, give money back to consumers, and still change the pattern of consumption.

The carbon tax with no regulations camp: interview with Prof. Jack Mintz

In 2008, University of Calgary economics professor Jack Mintz co-authored a paper entitled “A Simple Approach for Bettering the Environment and the Economy: Restructuring the Federal Fuel Excise Tax.” Back then, carbon pricing was called “environmental taxation.” In the study he accepts the rationale for mitigating damage from fossil fuel consumption, but argues that policymakers should ensure a new carbon tax – or revised federal fuel tax – should be accompanied by few or no regulations, leading to greater economic efficiency.

“In short, converting the existing tax on vehicle fuels into a broader, environmentally based fuel tax, and using the revenues to reduce other taxes, could contribute to both a better environment and economy,” he wrote, adding that it should also be revenue neutral, meaning that other taxes are lowered to offset revenue from a carbon tax.

Revenue neutrality and no regulations to impair the efficiency of carbon pricing. These were the twin themes of his conversation with Energi News.

Markham: What’s your opinion of the design of the the province-wide Alberta carbon tax?

Mintz: It wasn’t revenue-neutral as the premier first claimed it was. Experts kind of laughed because usually if you make it revenue-neutral, you put on a tax and you reduce other taxes. This was putting on a tax and running some reductions like transfers but the rest going into a bunch of subsidies and government spending programs. 

In some ways I think a federal one is better partly because, even though I don’t like the idea of doing rebates and paying for all of these rebates out of taxes on business because that’s going to create a competitiveness problem especially when rates get high. Right now, it doesn’t matter as much because of the low carbon tax rate.

Markham: When governments introduce a new tax should they be expected to get it right from the outset?

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Prof. Jack Mintz, economist, University of Calgary.

Mintz: I don’t think any tax is perfect in the end because there’s critical decisions that have to be made. Even this carbon tax if you look at it, they are exempting farmers and fishers from carbon taxes on inputs they buy. You’re bound to get imperfections because there’s various political things you have to deal with, so I don’t expect a perfect system.

But I think that there’s some things that you really have to do to make sure that you’re on the right track and I’m beginning to think that we’re making a big mistake to have the provinces bringing in carbon taxes. Maybe it should just be a single carbon tax at the federal level because only the federal government can put taxes on imports. They can harmonize it across the country that way. If they want to return the revenues to each provincial government, they are fine to do it.

Do they want to have a carbon tax with a uniform price or do you want to play around with regulation? If you’re still going to play around with regulations, then what’s the point of the carbon tax, especially at low values?

So, I just don’t know what the policy direction is. I just find it all over the place.

Markham: I’ve interviewed a few experts who told me the BC carbon tax, introduced in 2007, was accepted relatively quickly by voters because the government lowered other taxes, made it mostly revenue neutral. What’s your take on that?

Mintz: I think that is right. BC did drop the personal income tax rate so a lot of people got a lot of benefit, not just low-income people. They dropped corporate rates, so businesses were shielded a little bit from the higher energy prices that they were going to face. So, it’s a much more balanced package, more acceptable to the population that didn’t want to have more taxation.

And we also have to remember, electricity, almost all electricity in BC is hydro so there is no carbon tax to be raised there. It’s negligible. It’s only on transportation and on heating in BC. So, by and large, I think there was an acceptance because of the way it was done.

But here in Alberta you’ve got two-thirds of the population against the tax even with all the rebates and everything else.

The anti-carbon pricing camp: interview with Aldyen Donnelly

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Aldyen Donnelly, economist.

Being a well-trained economist, I was preparing for that embarrassing day when I would stand up in front of everybody to whom I had been yelling, “cap and trade, cap and trade” at for 13 or 14 years and have to tell them, “It’s not cap and trade, we can’t make this work because these market designs are not sustainable.” I thought they would ask, “If not cap and trade, what’s the right answer?” I assumed the right answer would be, “a carbon tax.” Then I discovered carbon taxes don’t work, either. – Donnelly interview with Energi News.

Finding an economist to make the case against carbon pricing is difficult; academia seems to be firmly in the carbon tax camp. Enter Aldyen Donnelly, a Vancouver-based economist and consultant who began working with the cap-and-trade version of carbon pricing 30 years ago and has now become a passionate opponent, arguing that the evidence shows direct government intervention is far more effective. In 1996 she headed up Greenhouse Emissions Management Consortium, a not-for-profit organization formed by more than a dozen energy companies across Canada to share experiences with emission reduction schemes.

Markham: When did you begin to think carbon pricing doesn’t work?

Donnelly: At the time, 2003 or 2004, there were nine CO2 tax regimes that had been operating for at least 10 years, all in Europe. Each of the carbon tax designs was very different. My intent wasn’t to prove a carbon tax wasn’t working, I wanted to form an opinion about what was the best design. To my great surprise, it took about six months of study to discover that, in fact, none of those carbon tax regimes even back then were working the way the academics and everyone were saying they were working.

Markham: In your opinion, why didn’t those carbon pricing systems work?

Donnelly: In every case, the carbon tax was accompanied by command and control regulations. In every case, the actual emission reductions were coming from the regulations, and sometimes to a much lesser extent a direct subsidy program. But not the carbon tax. I was really startled to find that out then and it’s still true today. It’s as true about the new carbon tax jurisdictions as it is about the old ones that I looked at.

Markham: Can you provide an example?

Donnelly: Sure. There’s the case of Denmark. Before Denmark put a carbon tax in place in 1989, they made it illegal to install a natural gas or electric furnace in your house. All businesses and residences were required to switch to local district energy systems that use hot water systems – just like in the Olympic Village in Vancouver – to heat space and water.

That change accounted for all of Denmark’s emissions reductions, not the carbon tax, which came well after that.

carbon taxMarkham: What about Canadian examples?

Donnelly: In 2006, the Maritime provinces signed a letter committing to link up with the US northeast states cap and trade market, the Regional Greenhouse Gas Initiative. Nova Scotia hired me to help them figure out what kind of rules and regulations and reporting they needed to put in place. I discovered that there was a huge  oversupply of CO2 allowances.

I advised my client to not join RGGI and to figure out their own market approach. So, they took my advice and reversed their decision.

Markham: If your view of carbon pricing is accurate, how can so many economists be so wrong?

Donnelly: I have to say, I don’t think it’s wilful deception. Most of these economists that I’m criticizing are people that I actually really like and I’m absolutely convinced that they have the best intentions, that they’re convinced that they are correct that pricing carbon is the right answer.

They are seeing carbon taxes coincident with emission reductions and giving all the credit to the carbon tax.

What we’re seeing in the literature is confirmation bias.

The cap-and-trade + regulations camp: interview with Erik Haites

We estimate the taxed emissions for 17 taxes in 12 jurisdictions from 1991 through 2016. All published assessments of carbon taxes have found that they have reduced business-as-usual emissions. Actual emission reductions, a more stringent criterion, were achieved by six of the 17 taxes. In at least three tax jurisdictions where emissions declined, the reductions appear to be due to other policies. The small reductions achieved by almost all carbon taxes reflect, inter alia, the low tax rates and even smaller price changes for fossil fuels subject to the taxes, the modest and uncertain changes in tax rates over time, and the limited response of taxed sources to price changes. – “Experience with Carbon Taxes and Greenhouse Gas Emissions Trading Systems,” Duke Environmental Law and Policy Forum.

The following interview has been edited for length and clarity.

Markham: If total emissions in the countries you studied were not significantly reduced by carbon pricing, is that because of the tax rate or the tax design?

Haites: Two things: the tax rate in most cases is relatively low and secondly, after an introductory period – such as the 5 years that BC had – in 40% of the cases the rate was not adjusted for inflation, increases in income or technology improvements.

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Erik Haites, Margaree Consultants Inc.

Markham: What about the other 60% where there was an adjustment in the tax rate? Did that make a significant difference?

Haites: No. Adjusting the whole tax system for inflation is not enough to improve the impact. In Alberta and in Canada, we have a system of government budgets and every year as part of the budget process, all tax rates and other features of the tax design are open for political adjustment. So, there’s a regular opportunity to lobby for deferring adjustments or making the adjustment smaller or making special exceptions.

What we found with emissions trading systems is that all the major ones now put in regulation or legislation, annual [emissions] reductions over periods of five to eight years. If there is political pressure to revisit that commitment, because it’s a revision to the regulation there typically has to be an impact statement and an opportunity for consultation. Therefore, the process of adjusting the tax [for cap-and-trade] tends to be more isolated from political pressure than the process for adjusting [carbon] tax rates.

Markham: Based on the evidence you reviewed, what works to reduce emissions and what doesn’t work?

Haites: Regulations work and carbon taxes work and emissions trading systems all work.  In practice, every jurisdiction that has the carbon tax or a trading system, there are also other policies that impact the emissions that are subject to the tax or the trading system.  For example, you could have a cap that covers emissions from power generators and a policy to promote renewable energy. Both would have an impact on emissions of the power generators.

Markham: Is it fair to say that carbon pricing – both taxes and cap-and-trade – work but they have to be priced at appropriate levels to bring down overall emissions?

Haites: Yes. But what is the appropriate price? Partly what is appropriate is whether you have other policies.

So, it becomes very complicated.

Markham: So, you would be in favor of emissions trading (like cap-and-trade) plus regulations?

Erik: Yes. I am definitely not in the Jack Minz camp or in Donnelly’s camp of just regulating.

Cap-and-trade with regulations is very common practice and probably necessary for political support and effectiveness.

Why Alberta chose the carbon tax + regulations model

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Sharon Mascher, faculty of law, University of Calgary.

Sharon Mascher is a professor in the faculty of law at the University of Calgary and a co-author of Haites’ paper, which included Alberta in the 17 carbon pricing jurisdictions it considered (although given the timelines involved, researchers were only able to use dated SGER data).

While she agrees with her co-authors that the evidence suggests the cap-and-trade + regulations is the most efficient and effective carbon pricing regime, she understands why Alberta chose the carbon tax + regulations model to accommodate the oil and gas sector.

Markham: Do governments usually develop their own hybrid carbon pricing model to fit their unique economic structure?

Mascher: There’s every kind of model you can imagine, including an explicit carbon tax plus cap-and-trade plus regulation model, for example. None of these things are mutually exclusive.

They are all tools that different jurisdictions have chosen to fit their particular circumstances.

Markham: What about the province-wide carbon levy? Is it a unique hybrid as well?

Mascher: It’s very much like the BC carbon tax. Just a straight-ahead, limited exemptions price per tonne applied to the fossil fuel-type combustion emissions. The only real policy difference is that BC chose to be revenue neutral, whereas Alberta made the choice to use some of the carbon levy to achieve other legitimate carbon mitigation goals like the phaseout of coal-fired power.

And BC just recently moved away from the revenue-neutral choice, allowing them to support other projects or objectives in their carbon policy. So, they have now essentially fallen into line with the Alberta approach.

carbon taxIS THE ALBERTA CARBON TAX A JOB KILLER?

The NDP’s job-killing carbon tax just got more expensive. Sign our petition to tell the NDP to axe their job-killing carbon tax. – Jason Kenney, Facebook post, December 5, 2016.

Trevor Tombe says it’s too early to say if the Alberta carbon tax is a job killer because there isn’t enough data available yet.

“The conversation around jobs is hard to have whether we are talking about carbon taxes or regulations because wages tend to adjust and employment seems to shift around,” the University of Calgary economist said in an interview.

But there is plenty of data available about the British Columbia carbon tax because it’s been around for a decade. Several doctoral students in his department have recently written academic papers on the employment effects of the tax.

Chi Man Yip’s study, “On the labor market consequences of environmental taxes,” found that BC manufacturing jobs were lost among males with low education levels.  

“…the unemployment rate of the low-educated workers increased by 3 percentage points in 2011 solely because of the carbon tax policy. The reason is that less-educated workers tend to work in industries with higher energy-intensity level. This unemployment effect is not permanent but could last over several years. This unemployment effect is “short-term” because wages are adjusted. I found the wages of new hires, on average, drop by 5.1 percent. But for this wage adjustment, the unemployment effect would have been more severe,” Yip told Energi News in an email.

Yip notes that workers in Alberta energy-intensive industries tend to be better educated, meaning “the story could be slightly different” than BC.

PhD. student Akio Yamazaki’s study, “Jobs and Climate Policy: Evidence from British Columbia’s Revenue-Neutral Carbon Tax,” sound that between 2007 and 2013 the carbon tax caused some job losses in energy-intensive industries, but some job creation in energy-efficient businesses.

The impact on jobs is likely a wash, says Yamazaki.

There is just no evidence to support the claim that the carbon tax is a “job killer,” says Tombe, but he also cautions that carbon pricing does have effects on employment.

“Blanket statements that it’s a job killer are false in that we can look at BC to refute that,” he said. “On the flip side, blanket statements that carbon taxes have no economic costs at all, which we hear from proponents of the federal government carbon tax, are also false. There are economic consequences of any action to lower emissions.”

IS THE PROVINCE-WIDE CARBON TAX A JOB-SAVER?

While there is no evidence for the Alberta carbon tax being a job killer, there is an argument that it should save jobs in the oil and gas sector, says Prof. Andrew Leach.

The argument revolves around a simple question: should all the burden of reducing emissions and paying the carbon tax be borne by the big emitters, particularly the oil sands, or should all Albertans pay a little bit so that the burden is lighter on the economic engine of the province?

And if Alberta oil and gas producers pay less tax, they will employ more people.

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Prof. Andrew Leach, economist, University of Alberta.

“It would be economically inefficient to ignore the oil sands as part of Canada’s national target. But it would be equally inefficient to argue that we have to drive big reductions in that sector instead of looking economy-wide and asking where we can find the cheapest reductions,” he told Energi News in an interview.

“What we should be doing as a national economy is looking to cut emissions in sectors were we get the least economic value. The oil sands, on the other hand, generates significant amounts of value per tonne of carbon emitted.”

Each year, Canada generates about 700 metric tonnes of CO2 equivalent, with Alberta accounting for almost 36 per cent (249 Mt) of the national total; the oil sands alone pump out more than 70 Mt and account for about 10 per cent of emissions across the country. The provincial government’s goal is to lop 50 Mt from that total by 2020 and by 2050 reduce emissions to 50 per cent below the projected “business as usual” scenario.

The economists assume that the emissions with the highest economic value support the higher number of jobs, or at least a high number relative to emissions with a low economic value.

Therefore, Leach reasons, the best way to protect jobs is to eliminate emissions at the low end of the value chain.

Economist Dale Beguin of the Ecofiscal Commission agrees with Leach’s logic. He says governments and regulators don’t have – and couldn’t possibly have – enough information to eliminate low-value emissions by regulation.

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Dale Beguin, executive director, Canada’s Ecofiscal Commission.

“A carbon price doesn’t require any of that knowledge. Government applies the price ideally across the most emissions possible and lets the market do its work. And where there are higher-value emissions that justifies paying the carbon price, that is exactly the point. That is exactly the means by which the carbon price ferrets out the lowest cost abatement,” he said in an interview.

Think of it like this. Let’s assume the carbon price paid by Alberta’s oil and gas producers is $30/tonne, the same amount consumers pay in 2018. Without the province-wide carbon tax, the oil and gas rate might have to be $40 or $50 or even more. At those rates, industry cuts costs – including jobs – to remain competitive.

Economists think of in terms of incentivizing reductions on the intensive margin, not the extensive margin.

In other words, policy makers want to maintain the same level or even grow industrial production (extensive) while encouraging consumers to become more energy-efficient (intensive) while finding ways to avoid the carbon tax, according to Kent Fellows, a professor of economics at the University of Calgary.

“It’s not producing less, it’s producing smarter,” he said in an interview. “It’s really a government trusting the free market. We’re letting millions of people and thousands of businesses in Alberta decide the easiest place to cut emissions and to make those cuts.”

The oil sands are the very definition of “producing smarter.”

Innovation and new technology has been at the heart of the industry since its beginning in the 1970s, both in the mining and in situ, which employes the SAGD (steam-assisted gravity drainage) method of production.

If the industry carbon price starts low and increases gradually over time, then industry will innovate and find ways to reduce emissions in order to pay as little carbon tax as possible and be as efficient as possible, according to Harbir Chhina, VP of technology for Cenovus.

“The best thing I like about the carbon policy is that it was a staged approach. If they had applied a really high carbon cost off the bat, that would have really hurt a lot and it would not have been good for our industry,” he said in an interview.

“By slowly ramping up the carbon cost, it gives us time to develop new technologies. It has a small enough impact that we can still earn enough cash flow to invest in new technology. We are very comfortable with the increases that are envisioned for the future.”

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Arlene Strom, VP of corporate sustainability and communications, Suncor.

Suncor shares a carbon pricing outlook similar to Cenovus.

“There are other methods but we favour appropriate and effective carbon policies that continue to incent technology and innovation in a measured way and starting now, starting yesterday. We’ve been working on this stuff for awhile. It is important,” said Arlene Strom, VP of sustainability.

“What you are doing with the carbon price – especially a price that starts small and ramps up slowly versus a regulation – is you are giving consumers and firms more choice and we know that there is huge value in choice,” adds Fellows.

The economists say that the effect of millions of Alberta consumers and businesses making small adjustments in response to the carbon tax then allows the big job-creating industries like the oil sands to bear a lower carbon cost, thus preserving jobs.

“Industry bearing the cost of carbon has implications for individuals and their households. Obviously, those industries provide us jobs and profits in terms of investments and all kinds of other things that matter for individuals,” says Beguin.

CARBON COMPETITIVENESS INCENTIVES REGULATION

I think the goal has to be, for our oil sands producers – and these are conversations we’ve had in successive technical engagements with them on this matter – to be as clean as conventional extraction. – Shannon Phillips, minister for environment and climate change, in a 2016 Energi News podcast.

Each sector is assigned an emissions-intensity benchmark. In the case of oil sands in situ and mining production, the benchmark is  “top-quartile performance or better.” That means the 25 per cent of production above the benchmark, with the lowest GHG emissions and carbon-intensity, receives a subsidy from the carbon levy, which is estimated to be $800 million in 2018.

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 CCIR encourages the best producers 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.

An issue for “emissions-intensive trade-exposed” industries like oil and gas is that setting the carbon price too high raises production costs so much that companies switch investment to jurisdiction with no carbon pricing. This is called “carbon leakage.”

To prevent carbon leakage, the Alberta government includes “output-based allocations” as part of CCIR to provide an 80 or 90 per cent discount to the carbon price. Over time, as the carbon-intensity of oil sands crude comes down, the discount will drop until producers are paying the full brunt of the carbon price.

What do economists says about the CCIR?

“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,” said Prof. Jennifer Winter, assistant professor of economics at The School of Public Policy, University of Calgary.

Arguments for and against a “modified SGER”

If economists and Alberta’s biggest oil and gas producers favour the current design of the Alberta government’s carbon pricing, what are we to make of Jason Kenney’s proposal to scrap the province-wide carbon tax and replace the CCIR with a “modified SGER”?

The Special Gas Emitters Regulation was created by Premier Ed Stelmach in 2007. Industrial plants emitting more than 100,000 Mt a year could be levied a $15 a tonne charge. Even though this was North America’s first carbon tax, the ground breaking rules had so many loopholes that the actual price per tonne was a fraction of $15.

Kenney’s position is that individuals and households should not pay a carbon tax, only those industries responsible for large emissions.

“There are implications of this choice. Without pricing on smaller emitters (i.e., you and me), there will be less emissions reductions than otherwise. To achieve the same emissions reductions as current policy, the opposition would have to adopt a higher price on large-emitters or more stringent rules and regulations. This would come at greater costs. And by cancelling carbon rebate program, lower income households in Alberta will be made financially worse off,” Prof. Tombe wrote in a Maclean’s article comparing the Notley and Kenney carbon price models.

The changes promised by Kenney would almost certainly trigger the federal carbon price backstop, which is very similar to the Alberta model.

What, then, is the net advantage to Alberta if it ends up with the same carbon pricing scheme but administered by Ottawa instead of Edmonton?

Kenney’s promise of a carbon tax lawsuit

We’ve been clear that should the United Conservatives form government in Alberta, our first measure will be to repeal the NDP carbon tax and join with Saskatchewan and Ontario in the fight against the Trudeau carbon tax. – Jason Kenney, UCP media release, June 15, 2018.

Would a Premier Kenney win his case? An exhaustive legal opinion commissioned by the Manitoba government suggests he would not.

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Bryan Schwartz, faculty of law, University of Manitoba.

Dr. Bryan Schwartz holds an endowed chair at the University of Manitoba law school, has over 35 years experience as a university professor and practicing lawyer, and authored 10 books and over 100 academic articles.

He concluded that the Canadian government does have the authority to impose a national carbon tax.

“There is a strong likelihood that the Supreme Court of Canada would uphold the proposed carbon tax/levy. It would probably do so on the basis of the federal government’s taxation power,” Schwartz wrote in the opinion. “The backstop measure, in and of itself, is unlikely to render an otherwise valid federal carbon tax/levy unconstitutional.”

But the issue isn’t clear cut. If the provincial government crafted a Made-in-Manitoba plan that reduced emissions just as effectively as the federal plan, Schwartz noted a provincial government could argue that this discriminated against the provinces by denying them the right to develop their own equally effective approaches.  Such an argument “…would likely be considered by the (Supreme) Court as being worthy of serious contemplation.”

University of Alberta constitutional law expert Eric Adams told the CBC that suing Ottawa “may make good politics for their constituents…but the realities are that most experts who look at this issue think the federal government very likely does have that constitutional authority.”

OIL SANDS COMPANY SUPPORT FOR CARBON PRICING

Suncor believes that industry has a key role in developing climate change policy and publicly advocates for a broad-based carbon levy, equitably applied to both energy producers and consumers, as the most effective, practical and cost efficient policy design. –  Suncor’s Climate Report: Strength Through Resilience, 2017

Cenovus has long recognized the need to assess and manage climate change related risks. We believe that thriving in a highly competitive, lower-carbon economy must be a priority for our industry and for Canada. That requires new solutions to solve the emissions and energy demand challenges our world faces. – Cenovus’s Carbon Disclosure: Managing climate-related risks, 2018.

Ironically, the province with the fewest climate believers and the most climate laggards is home to the most progressive fossil fuels companies in Canada: the oil sands producers.

A handful of corporations – Suncor, Cenovus, Canadian Natural Resources Limited, Imperial Oil, Husky Energy – control over 80% of oil sands extractions. All of them recognize anthropogenic global warming and climate change as a threat to human civilization and a material business risk, believe that the transition to a global low-carbon economy is well underway, and endorse climate policy and carbon pricing.

In this respect, they are more like the international super-majors – Royal Dutch Shell, BP, Total, etc. – than they are the rest of the Alberta oil patch. But two stand out: Suncor and Cenovus.

Suncor is Canada’s biggest integrated energy company, with total upstream production of 743,800 barrels of oil equivalent per day (boe/d) in the third quarter of 2018, with the oil sands operations contributing 476,100 b/d in the third quarter of 2018. Cenovus production averages just under 500,000 495,592 boe/d, of which 377,000 b/d is from oil sands operations.

For the past decade, oil sands management teams have grappled with climate and emissions issues for four reasons.

One, lowering their emissions and de-carbonizing their heavy crude oil will give them a competitive advantage in future global markets like Asia.

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Suncor’s Fort Hills bitumen mining extraction process.

“Our goal is to be carbon competitive over the long-term.  We are already producing a barrel of oil from Fort Hills that has a carbon footprint that is equal to, or better than, the average refined barrel in North America,” says Suncor’s Strom.

Two, greenhouse gas emissions created during oil sands extraction are mostly caused by burning natural gas to create steam used in SAGD and mining processes. Gas comprises roughly one-quarter to one-third of oil sands operating costs. Reduce gas consumption significantly reduces costs, increasing competitiveness.

Three, investors increasingly want to know how oil sands companies manage “carbon risk.” Not actively managing that risk could lead to higher financing costs or problems accessing capital in the future. When bankers and pension fund managers demand action, CEOs pay attention.

Strom credits a concerned investor at the 2016 annual meeting with spurring the company’s climate reporting: “I would say over the last number of years we have increasingly had investors talking to us about a broad range of environmental, social and governance matters. So, in this case, we felt it was important to take that to the next level to demonstrate that we were effectively working through scenarios and that our disclosure reflected that our strategy was resilient.”

Four, the oil sands have been the target of eco-activists and international protest campaigns for years – with serious consequences for the industry. When President Barack Obama rejected the approval of the Keystone XL pipeline in 2015, he cited the oil sands’ “dirty oil” as the primary reason for his decision.

Oil sands CEOs support climate policy and carbon pricing because it is in their self-interest. They are canny managers, anticipating and preparing for the trends shaping their industry. They are hard-headed business planners, not altruists.

Isn’t Steve Williams backtracking on his support for climate policies and carbon pricing?

We’re having to look at Canada quite hard. The cumulative impact of regulation and higher taxation than other jurisdictions is making Canada a more difficult jurisdiction to allocate capital in…Absent some changes and some improvement in competition, you’re going to see us not exercising the very big capital projects that we’ve just finished. –   Williams during an earnings call, as reported by the Financial Post.

The Suncor CEO’s comments in early 2018 about declining competitiveness and his company’s reluctance to invest in more Canadian mega-projects are often pointed to by critics as proof positive that the bloom is off the Alberta carbon pricing rose.

Of course, Williams didn’t single out climate policies and carbon pricing in these or subsequent public comments. But he is referring to the growing regulatory burden, of which carbon policy is a part.

carbon taxEnergi News asked Strom if she agreed that her CEO was fine with Alberta government initiatives, which were likened to drinking from a garden hose, but the addition of federal climate policies like the Clean Fuel Plan turned it into a firehose, which was just too much for the oil patch.

“I think the metaphor works,” she said, adding that effective climate policy and competitiveness are not mutually exclusive.

“Sometimes we just lump it all together in one big discussion on competitiveness. They are related, but I think the solutions to making climate policy competitive and making our broad cumulative policy burden competitive for attracting global capital to Alberta and to Canada can be quite different.”

To drive home Suncor’s support for the Alberta Climate Leadership Plan, the carbon report called it the “the most ambitious in North America” and noted “We further believe that leading climate change policy applied to our sector will play a part in restoring confidence in the energy industry necessary to advance pipeline and market access decisions.”

Suncor also became a member of the Carbon Pricing Leadership Coalition in 2016 and supports Canada’s Ecofiscal Commission, a non-profit that “brings together economists to inform the critical discussion about the ecofiscal reform that Canada’s future requires.”

“The other piece that Steve talks about is ‘directional leadership.’ He has said in the media that we believe climate change is happening and doing nothing is not an option,  so let’s fix our compass and start heading in that direction,” said Strom.

There is no contradiction between the oil sands continuing support for the Climate Leadership Plan while complaining about excessive regulations that negatively affect competitiveness.

To use our metaphor, industry is asking the provincial and federal governments to better manage the layering on of new regulations so that the burden returns to being a garden hose.

“One thing that folks aren’t really tuned in to is that we need to start looking at all these policies in combination with each other. When we look at them in isolation, they do seem to be not as impactful, so we need to take [new federal and provincial climate rules] as a package,” CAPP climate director Patrick McDonald told Energi News during a June, 2018 interview.

carbon taxIf de-carbonizing is good business, why do oil sands CEOs support policy?

If the oil sands producers are preparing to compete in a carbon-constrained future, and reducing natural gas consumption to lower emissions also lowers costs, why do they need government policy when de-carbonization is supported by a solid business case? Why not just do it?

Prof. Kent Fellows acknowledges that companies already face some some incentives to economize in those areas in order to reduce natural gas consumptions, but policy makes those incentives more predictable and consistent.

“Carbon pricing is a way to strengthen the incentive. It gives firms a reason to pursue emissions reductions more aggressively without forcing them to make decisions that might not be economical,” he said.

carbon tax

“With the price of natural gas where it is in Alberta (extremely low) the incentive to be efficient might not be there (or might not be strong enough) without a carbon tax.”

He points out that developing new technology is costly and stretches over many years. The CCIR provides both a carrot (the $1.4 billion Innovation Fund) and a stick (100 megatonne emissions cap, carbon price) to encourage that innovation.

“It is compelling to think of these things as ‘all or nothing’ outcomes. Either you work to reduce fuel usage to the maximum extent possible or you don’t. In reality we see a combination of big research and development spending (things like the development of paraffinic froth treatment for mining operations) and small tweaks here and there to deliver this outcome,” he said.

“To get them to spend on new capital to lower emissions, we need to give them an incentive.”

Suncor’s Strom agrees. She says that oil sands investments involve large amounts of capital and the investment is intended to pay out over a very long period of time – they are more akin to a manufacturing facility than conventional exploration and development.  

“Often, new technologies must overcome significant regulatory hurdles.  And not surprisingly, regulation requires certainty of outcomes, when by definition new technologies involve a certain degree of risk.  Policies must therefore address these dynamics in order to foster further environmental improvements,” she said.

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Ed Whittingham.

Ed Whittingham is the former CEO of the Pembina Institute and he was involved in the informal negotiations between the five oil sands CEOs and five environmental groups that began in late 2014 and was responsible for proposing the 100 megatonne oil sands emissions cap that the Notley government enshrined in the Climate Leadership Plan.

“The oil sands producers are sophisticated enough to recognize that regulation [like the emissions cap] will drive improvement. It makes it all real. You can’t afford to be complacent when you know you’ve got an emissions limit and a date attached to it,” he said in an interview.

The final word goes to Fellows: “To plagiarize the Prime Minister (who himself is simply paraphrasing the late economist Arthur Pigou), ‘when pollution is free, we pollute too much.’ The carbon tax better aligns the private cost of ghg emissions (the cost incurred by the firm) and the social cost of ghg emissions (the damage done to future economic growth and wellbeing) in order to get closer to a socially responsible level of emissions.”

Why small and medium-sized oil and gas producers hate carbon pricing

Smaller producers and the service sector are also pursuing their self-interest by opposing climate policies and carbon pricing because they add costs at at time when they are, by and large, losing money.

Twenty-five cents a barrel here and 10 cents a barrel there and pretty soon we’re talking real money, from their point of view.

And where oil sands companies have abundant cash to invest in innovation and new technologies that reduce their exposure to carbon pricing, struggling juniors and midcaps do not.

The Climate Advisory Panel and Climate Leadership Plan

During the summer of 2015, the Notley government created the Alberta Climate Advisory Panel, chaired by Prof. Leach, to consult Albertans about the best methods of reducing greenhouse gas emissions and to provide recommendations.

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Shannon Phillips (left), Alberta’s Minister of Environment and Parks, and Dr. Andrew Leach, Alberta’s climate change advisory panel chair, announced the remaining members of the panel at a news conference in Edmonton August 14, 2015. (Chris Schwarz/Government of Alberta)

At the same time, the government released a discussion paper designed to frame the panel’s consultations and the provincial discussion around climate change. The paper set out a variety of policy approaches – including carbon tax, cap-and-trade, performance standards and regulations (fuel efficiency standards, for example), and carbon offsets – that mostly mirror the options set out in the four policy camps described above.

Prof. Leach’s panel undertook extensive consultations into the fall of 2015, engaging with citizens, businesses, the oil and gas industry, indigenous communities, and many other interested stakeholders.

The panel’s report was submitted on November 20 and recommended carbon pricing as the “backbone” of a “policy architecture” that also included regulations and standards to address issues like fugitive methane emissions.

Notley launched the Alberta Climate Leadership Plan a few days later, accepting the bulk of the panel’s recommendations, especially around the design of the province-wide carbon tax and the carbon competitiveness incentives for the oil and gas sector.

Interview with Prof. Andrew Leach

Alberta Environment and Climate Change Minister Shannon Phillips says no other expert has influenced the Notley government more than Leach:

I credit Andrew Leach with a large amount of the careful, thoughtful advice around the climate plan. There’s no question in understanding how that interacts with the energy industry at every step of the way. I don’t always agree with Andrew and he doesn’t always agree with me, however, it’s hard for me to find a Canadian for whom I have more respect – other than perhaps Rachel Notley – because his advice, how he brought together the energy industry and other experts to plug into the climate leadership development, how all of those pieces work together around the energy-intensive trade-exposed sector, around the innovation advice, was really exemplary. 

Markham: What are your impressions of the policy-making process used by the Alberta government?

Leach: The biggest misconception of the process was this story that there’s some kind of a hidden agenda that was put to us as a climate change panel.

It ended up being important to consider the new federal government and also the state of the Alberta economy, which was deteriorating all through the time that we were doing our work.

The platform had its planks – coal phase-out, renewable energy, energy efficiency, carbon pricing – and basically the question that was asked of us was: What do we have to do? How do we do it? How do the answers to those questions fit into the overall context of Canada’s national targets?

The idea that this was a cooked thing before anything started couldn’t be further from the truth.

Markham: What role did people like Rachel Notley and Shannon Phillips play vis a vis your panel?

Leach: Our climate panel was getting information from the bureaucracy, combining that with information we were able to bring in through our own panel process, and on a regular basis updating the relevant minister, which would be Phillips, and when required, the Premier and her office. They both know this file very well.

The Premier was a critic on both energy and environment for years, and Shannon Phillips also worked on some on these areas during her time with the Alberta Federation of Labour.

Fantastic challenges, great questions back and forth, open to different ideas and working through understanding our recommendations – that was all part of the process.

Markham: What do you say to Albertans who want to end carbon pricing for both households and industry?

Leach: I think our work stands up well to what previous conservative governments have  looked to do in this province, whether you’re looking at Premier [Alison] Redford’s record or that of Premier [Jim] Prentice, who was heading down a very similar road.

In fact, we built on some of the stuff from previous PC governments. If there is a Premier Kenney in the future, he’s already said his first act of government will be repealing the downstream carbon tax. Part of me hopes that he’ll recognize a really important argument: that if you take his logic and apply it at the national level – which is to say we think of climate change as only a large emitter problem, not as an everybody in their car, everybody in their house, everybody in their building, problem – that sets the stage for a very discriminatory policy against Alberta and Saskatchewan because we’re the provinces that have the highest share of emissions from large industrial causes.

Markham: What climate policy work remains to be done after the 2019 election?

Leach:  Some of that depends on what happens nationally. The federal government still has a big gap to close on its greenhouse gas targets. Part of what our panel accomplished, which I think hasn’t received the attention it should have, is that we have effectively changed the national conversation from how much provinces should reduce emissions below 2015 levels by some arbitrary year in the future to “What’s your greenhouse gas policy?” Assuming action on greenhouse gas emissions continues to be an important part of the federal policy agenda, then I think in some ways that’s going to determine what happens in Alberta going forward.

Part of the discussion around the climate panel’s work was that Alberta is facing discriminatory policies aimed at the oil sands that will be imposed on us by others outside the province, by proxy through opposition to pipelines, for instance. The climate plan presented a way to fight against those in a much more credible way. That situation is pretty clearly going to extend beyond the next provincial election.

Alberta confused about how carbon tax works

carbon tax

Bruce Anderson, chair, Abacus Data.

For those who feel this debate has fully matured with the public, the data in this study provide a sobering reminder of the degree to which many policy debates happen with only passing interest by the public. A majority of people say they don’t understand what carbon pricing is….A considerable number of people (47%) have doubts about whether the theory of carbon pricing will work in practice – fearing it will only increase the cost of living and energy use won’t change. – Bruce Anderson, Abacus Data.

If economists (for the most part) love the carbon tax, oil sands companies like Suncor and Cenovus are vocal proponents, many (though not all) governments are onside, why don’t Canadians share those warm and fuzzy sentiments?

And why do Albertans share them less than any other province?

The Abacus survey for the Ecofiscal Commission is insightful on this question: most Canadians don’t understand carbon pricing.

“Less than half [of Canadians] feel familiar with carbon pricing. This hasn’t changed much in three years – the discussion is still largely an elite level discussion,” the survey reported.

Another bit of illuminating data: the majority in BC, Quebec, and Ontario didn’t know in February that their provinces already had a carbon tax, and majorities in the other provinces weren’t aware of the plan.

A case study of confusion over how carbon pricing works

It’s not just average Canadians who don’t understand carbon pricing, as illustrated by a minor political flap in August.

carbon taxThe Canadian government made some small adjustments to its carbon pricing backstop program, adjusting the discount provided by output-based allocations for four emissions-intensive industries – like cement production – that face foreign competition. A preliminary round of economic modelling suggested the carbon tax discount should be set at 70 per cent. More sophisticated modelling indicated a rate of 90 per cent would be more appropriate.

“This is not a softening of the carbon price. The price, and coverage of the carbon tax remains totally unchanged,” University of Calgary economist Kent Fellows told Energi News in an email.

What did change was the discount, which could be re-adjusted in the future as the affected industries innovated and became more energy efficient.

Economists praised the move as an example of good policy making, but two Alberta public figures misunderstood the change and mistakenly criticized Ottawa when they should have praised it for doing the very thing they had previously demanded.

UCP leader Jason Kenney on Twitter: “Nice of PM Trudeau to admit his carbon tax hurts industrial competitiveness. Yet Trudeau Libs & NDP accomplices persist in pushing carbon taxes on everyday families, raising cost of gas, home heating & even groceries. How about an average family’s ability to compete & thrive?”

Tim McMillan, CEO of the Canadian Association of Petroleum Producers as reported by Postmedia: “Until we make economics a fundamental part of our climate policy, we are going to struggle to get investment in Canada.”

carbon taxYou could hear economists across the country collectively facepalming in frustration. 

This anecdote shows how public discussion of carbon taxes is fraught with misunderstanding and misinformation.

And it should come as no surprise that Canadians as a rule don’t think carbon taxes will reduce greenhouse gas emissions or lead to higher energy efficiency. All in all, they prefer regulations or subsidies for more efficient technology.

“The existence of alternatives allows some to imagine that there might be a better way to reduce emissions than to increase their cost of living or cause serious disruptions in the economy,” writes Anderson.

And all of those anti-carbon pricing national trends are exacerbated in Alberta.

As Anderson argues, “The public opinion math for carbon pricing is challenging…The left and the right, (small but vocal subsets of the population) disagree markedly on the priority which should be attached to climate action. And so elected policy makers experience criticisms borne of disappointment and fear from those on the left and attacks borne of economic anxiety from those on the right, all the while knowing that most people prefer a middle course.”

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Source. Abacus Data.

Selling the Alberta carbon tax…or not…whatever

[D]ebates will support good policy decisions only if they are based on facts and evidence. And there is strong evidence, grounded in solid economics and policy experience, that carbon pricing works. Part of the problem is communication. Governments and policy analysts (including here at the Ecofiscal Commission) haven’t always done a good enough job explaining carbon pricing to Canadians. – Carbon Pricing Works, Ecofiscal Commission, 2018.

$747 in carbon tax on this small business’s gas bill – almost equal to the price of gas itself (a 94% tax)! How are they supposed to make this up? Staff cuts? Price hikes (and potentially losing customers)? Closing down? And the cost keeps going up further under Trudeau-NDP plan. – Jason Kenney tweet, Oct. 13, 2018.

Why carbon taxes aren’t gaining traction with the Canadian public and especially Albertans is on full display in the two comments above.

The Ecofiscal Commission thinks the solution for Canadians not understanding carbon pricing is to explain it better. Public relations professionals everywhere are rolling their eyes.

Kenney, on the other hand, makes the emotional pitch. He hits Alberta where they live – their pocketbooks.

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Janet Brown, pollster, Trends Research.

And according to Calgary-based pollster Janet Brown, the UCP leader completely owns the political messaging around carbon pricing.

“What I think has been sort of the problem for the Alberta government, is they’ve never been able to frame this carbon tax as something positive for the economy,” she said in an interview.

“People in this province are completely preoccupied with the economy. They’re looking at everything through the filter of the economy. And so, they look at the carbon tax and it’s like, “Okay, I’m spending this money. Am I getting an economic benefit out of it? Yes or no.” And Albertans aren’t seeing the economic benefit.”

Brown points out that governments supporting carbon pricing  – like the Liberals in Ontario – are going down to defeat, which suggests Notley may want to modify the way she talks to Albertans about the carbon tax.

“One thing that’s going to be critical for the NDP in the next few months is reframing the carbon tax as not something that’s hurt the economy but something that’s been essential, that’s helped the economy. And that the removal of the carbon tax has the potential to do more damage than continuing with it,” she said.

“I think she’s got to frame the carbon tax in an economic context. The clean energy side of things, like absolutely. That stuff matters to Albertans, it’s very wrong to think Albertans don’t care about the environment. But they also have to be able to see sort of the economic benefit of this as well.”

Jason Kenney’s message is closer to the thinking of the average Albertan than the NDP’s message, according to Brown.

“Albertans, we like to think of ourselves as fiscally conservative but I’d say we’re more tax averse than we are fiscally conservative. Albertans always hate paying a tax. It’s not that they don’t see the benefit of taxes, but we’re really reluctant to pay taxes if we don’t see an upside to them,” she said.

Did Notley lie about the carbon tax during the 2015 election?

We will take leadership on the issue of climate change and make sure Alberta is part of crafting solutions with stakeholders, other provinces and the federal government. – NDP 2015 election platform.

The NDP did not utter the words carbon tax in the last election. A hidden agenda is not a mandate. It’s a lie. – Jason Kenney tweet, January 1, 2017.

A key part of Kenney’s political messaging around the carbon tax is that Notley lied to Alberta voters during the election campaign.

carbon tax

Prof. Duane Bratt, Mount Royal University.

Unfortunately for the UCP leader, according to political scientist Duane Bratt, the NDP running on climate policy (of which carbon pricing is obviously a subset) and bringing in a carbon tax after extensive public consultation by the Climate Advisory Panel doesn’t even come close to being a falsehood.

“This idea that you can’t do anything in government unless you explicitly campaigned on it, it would be very difficult to function as a government in that respect,” Bratt said in an interview.

The Mount Royal University professor uses an example from Kenney’s time in the Stephen Harper cabinet to make his point.

“One example I can cite was Harper’s decision to eliminate income trusts, not something that he campaigned on. Or the bailout of General Motors,” he said. Propping up the Canadian auto sector in 2008 cost Ottawa $9 billion and an estimated loss of $3.5 billion on the deal.

“The NDP campaigned on a climate strategy even if they didn’t campaign on a carbon tax.”

Since Notley and her party formed government in 2015, she has frequently used panels and advisory committees to consult Albertans about policies changes, then accepted the recommendations (or most of them) in the report, which Bratt considers excellent policymaking process.

“To me, it highlighted the difference between governing and being in opposition and the discipline of power,” he said.

Bratt says opposition parties criticize governments for unpopular policies, that’s the nature of the political system.

“I think it’s easy to run against because nobody likes taxes, but I think it’s going to be very tough to completely remove the carbon tax.  It can be dismantled, but at what cost?” he asks.

carbon tax

Source: Angus Reid Institute.

Alberta government needs new carbon tax narratives

Poll after poll shows that Albertans hate the carbon tax, with only Saskatchewan hating it more.

The latest poll by Angus Reid in early November showed that Ottawa’s decision to provide carbon tax rebates directly to voters bumped national support over 50 per cent. Not in Alberta, where those in favour remained about one-third of the electorate.

It doesn’t have to be this way, says Brown: “She’s got to frame it in an economic context. It’s okay to talk about clean energy and working towards a clean future, but I think it’d be far more effective to talk about working towards a diversified economy.

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Gil McGowan, president of the Alberta Federation of Labour.

There is plenty of room to promote the role of carbon tax revenue in funding the provincial downstream energy diversification strategy, says Gil McGowan, head of the Alberta Federation of Labour and co-chair of the Energy Diversification Committee, whose report formed the basis for $2 billion of support for partial upgrading, Phase II of the petrochemical diversification program, and incentives to build more petrochemical infrastructure.

“I’m particularly concerned about the impact that abandoning the carbon tax will have on diversification of the Alberta economy. Money from the tax is being used to support innovative new approaches to adding value to our oil and gas resources, particularly partial upgrading,” he said in an emailed comment.

“All of these things create jobs, thousands of them.”

And what about the incentive provided by CCIR (there is an associated $1.4 billion Innovation Fund) that is believed to have helped get Nexen’s low-emissions $400 million Long Lake Southwest expansion project approved by the Alberta Energy Regulator in June?

If the Notley government can draw a straight line between CCIR and final investment decisions, why wouldn’t the Premier very publicly and frequently take some of the credit?

Then there’s the “carbon for no oil sands production cap” understanding arrived at in early 2015 between five oil sands CEOs and five environmental non-government organizations that included acceptance of carbon pricing and first proposed the 100 megatonne oil emissions cap.

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Dave Collyer.

Environment Minister Shannon Phillips and former industry executive Dave Collyer told Energi News that industry’s objective was to turn a discussion about production constraints to meet emission targets, which had been a position advanced by environmental groups, into a conversation about emissions constraints that still allowed industry to grow production. 

Collyer said the CEOs had long supported carbon pricing for the oil sands sector. 

And what about the oil sands producers’ insistence that their heavy crude oil be “carbon-competitive” so they can compete in the future global market?

Prof. Victor Flatt, an economist with the University of Houston, says low carbon-intensity heavy crude will provide Alberta with a huge competitive advantage as important Asian markets, particularly China, adopt carbon pricing over the near to medium-term.

“They started their carbon-intensity cap-and-trade system in China [in Dec.] and there are a lot of questions about whether they’re going to enforce it well but that’s the signal they’re sending,” Flatt said in an interview.

“The big question is, is China going to hit the tipping point or force the tipping point of peak oil demand in China by basically requiring a transition to all electric vehicles? In the next 10-15 years, I think the answer is, yes. To do that, I think they’re going to go into carbon pricing for the downstream emissions in [crude oil] imports and refining.”

Framing the Alberta carbon tax as a competitive advantage in a carbon-constrained future economy would be a novel approach, but it fits with Brown’s polling data on Albertans’ attitude toward carbon pricing.

Whither the Alberta carbon tax?

The battle over the Alberta carbon tax looks like one of those old World Wrestling Federation cage matches from the 1980s.

In the orange trunks, Rachel Notley and the NDP, many prominent economists, Canada’s biggest oil and gas companies (oil sands producers), a minority of Alberta voters, and Justin Trudeau and the federal government.

In the opposite corner, wearing the blue trunks, Jason Kenney and the UCP, junior and midcap producers, industry trade associations (CAPP, EPAC, etc.), service sector companies, a majority of Alberta voters, a number of provincial governments (Ontario, Manitoba, Saskatchewan), and the Conservative Party of Canada.

A real donnybrook looms between now and the May election. But who can predict how this political slugfest will turn out?

Kenney is miles ahead in the polls. He could win, axe the tax the day after the election, only to be slammed over the head by Trudeau wielding the national carbon tax backstop.

And then he could be rammed headfirst into a turnbuckle when an appeal to the Supreme Court of Canada fails.

And receive a vicious kick to the gut if Trudeau triumphs over CPC leader Andrew Scheer and forms another majority government.

Or Notley wins the Alberta election – a long shot given the latest polls shows the UCP leading the NDP by 15 points – and the reigning champion repeats and the status quo prevails even if Scheer bests Trudeau in the fall 2019 national election.

Albertans will have to wait six months to see which team wins. In the meantime, they can debate what should happen with the carbon tax.

But how to sort all those competing interests to arrive at a reasonable conclusion?

One yardstick might be the sector where growth is forecast for the next 20 years: the oil sands, which could expand by 1.2 million b/d by 2035, according to CAPP, reaching a total of 4.2 million b/d.

The Canadian Energy Research Institute’s high case scenario thinks oil sands supply could reach 7.5 million b/d by 2038.

Conventional crude oil production was about 440,000 b/d in 2017 and it will rise slightly for the next few years before beginning a gentle decline out to 2027, according to the Alberta Energy Regulator’s latest forecast.

If the oil sands is the Alberta oil and gas growth engine for the next 20 years or more, and oil sands companies are the biggest supporters of carbon pricing, that’s a pretty good argument for maintaining the carbon price regardless of which party forms government in May.