Regulating Carbon Emissions in Canada

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Source: GLOBE SERIES

A new IISD report says aligning a national GHG policy for Canada with Alberta

GLOBE-Net, May 6, 2013 - The International Institute for Sustainable Development (IISD) has issued a report analyzing three policy proposals currently in play to mitigate greenhouse gas (GHG) emissions in Canada, and recommends alternatives to what is being contemplated by governments and the oil and gas industry.

Notes the Institute, the provinces, Canada and the oil and gas industry are under pressure to ramp up policies to achieve Canada's 2020 GHG intensity-based emissions target of 17 per cent below 2005 levels. IISD's analysis aims to bring coherence to the three proposals, as the outcome of the negotiations between the three parties is likely to become the basis for federal regulations and be rolled out across Canada.

IISD states Alberta is at the leading edge of provincial policy, and Alberta policy choices could establish a template for other provinces. As a result, ongoing negotiations could very well establish the basis for federal regulations that will be applied nationally.

The Numbers that Matter

All of the proposals pair an emission-intensity improvement target with a price ceiling per tonne of CO2e (e.g., 20 per cent/$20). See Table 1. Together, these parameters interact to set the compliance obligation, the marginal incentive to reduce emissions and the cost of the proposal to emitters.

The first key element in the proposals is the required emission-intensity improvement. This number defines the total compliance obligation that regulated firms will face. It does not in and of itself set the emission reductions that can be expected, but instead interacts with the price ceiling and compliance mechanisms to determine GHGs reduced. Proposals on the table are purported to seek an intensity improvement between 20 and 40 per cent.

The scenarios range from a 20 percent intensity reduction in 2020 and a price ceiling of $20 per tonne (Scenario 1), to a 30 percent intensity reduction in 2020 and price ceilings of $30/$60 per tonne (Scenario 2), to a 40 percent intensity reduction in 2020 and price ceilings of $30/$60 per tonne (Scenario 3).

In each case it is a balancing act - settling a price on carbon that leads to emissions reduction, but not so high a price that the industry becomes non-viable.

According to the report 'The policy objective of the intensity target is to reduce emissions per barrel of oil produced or units of natural gas by a certain percentage in 2020 relative to a historical base year. The choice of fixed base year matters since the emission intensity of the sector is falling in time as new, more energy-efficient capital stock is deployed.'

The problem is that when measured against 2005 levels, the intensity improvements contained in the three proposals are likely to deliver little, given ongoing improvements that the oil and gas industry has already achieved. Based on Statistics Canada published direct plus indirect GHG intensity ratios the oil and gas extraction sector has reduced its GHG emissions by 27 percent from 2005 to 2008.

Even so, against today's emission performance, a more likely benchmark, the 2020 compliance demand would be significant and could do much to address the Government of Canada's emission gap.

However, cautions the report, recent analysis by IISD indicates that it is unlikely the sector can achieve much more than a 20 per cent intensity improvement by 2020 at costs short of $100 per tonne (See Figure Left).

Scenario 2 is more ambitious relative to Scenario 1. The sector has significantly higher costs, with total costs doubling when the 20 per cent intensity standard rises to 30 per cent.

Compliance in the Scenario occurs primarily below the first-tier price, with 31 Mt of the 32 Mt target achieved. Then, with the second-tier price in play, in-sector abatement delivers an additional tonne of reduction. With Scenario 3, the 40/40 proposal, costs rise quickly as the intensity standard increases, again reflecting the limited abatement opportunities in the sector and the importance of the price ceiling.

In this scenario, tech fund compliance is significant and in the order of 46 per cent of total compliance. Whether or not these 'in-lieu' payments to the tech fund deliver future reductions is an open question, with concerns raised by environmental non-governmental organizations that the current proposals provide little incentive to reduce emissions.

'Such a policy could deliver 42 megatonnes (Mt) of compliance in 2020, at an average cost of $28 per tonne or $0.42 per barrel of oil produced,' he said, adding that it would bring Canada considerably closer to meeting the target agreed to under the Copenhagen Accord. See Table 2.

'While all proposals on the table will deliver emission reductions at costs that seem reasonable, a 40 per cent intensity standard with pricing in the range of $40 per tonne of CO2 could strike a good balance,' said David Sawyer, report author and IISD vice president for climate and energy.

The amount of emissions actually reduced would depend on how payments in lieu of emission reductions, one compliance pathway that is being contemplated, are spent. Ideally, payments would be oriented to some mix of short-term emission reductions and long-term technology investments.

To achieve reductions while minimizing costs and hence competitiveness impacts, notes the report, the ideal policy is one that has the highest marginal cost to reduce the intensity of production and has the lowest average cost to dampen competitiveness impacts. If the objective is to slow new oil sands development, however, then a higher average cost matters more. But dividing the cost to the policy across all emissions and calling it a weak incentive to abate emissions is flat out wrong, notes the report.

Scenario 3, the 40/40 proposal is also in step with industry expectations on future carbon exposure (Sustainable Prosperity, 2013), according to the IISD assessment, which notes that industry project hurdle rates, which set 'go' or 'no-go' investment decisions, already account for a $40 marginal cost.

Sawyer notes 'We cannot therefore say that formalizing this $40 cost will significantly affect project economics and therefore investment decisions. Formalizing this shadow cost will certainly hit sector profits, but that seems unlikely to cast a long shadow of doom over industry investment. Indeed, the average cost of all the proposals is certainly well below one dollar per barrel produced nationally, even before tax and royalty interactions reduce the impact further.'

Also notes the report, the 40/40 proposal sets an incentive to abate comparable-to or well-above world-leading GHG policies such as British Columbia's carbon tax at $30, California's carbon permits at $13 (California Air Protection Agency, 2013) and European Union permits trading at $3.75 (as of April 18, 2013).

What does this all mean?

In conclusion, Sawyer says the various proposals aren't far apart in terms of their ambition, and a compromise is possible. 'While setting a national GHG policy aligned with Alberta's 40/40 proposal won't please everyone, it strikes a good balance,' he argues.

Taken together, the proposals on the table provide a legitimate basis to deliver emission reductions at reasonable costs, in effect balancing environmental performance and competiveness, concludes the report.

The IISD Report is available here.

The 'Renewables and the Changing Energy Landscape' will be a major topic at GLOBE 2014, the next in the celebrated GLOBE Series Conferences on the business of the environment taking place in Vancouver Canada, March 26-28, 2014. Reserve your place now. Check here for more details.

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