Ever since the left-leaning NDP’s surprise win in the May provincial elections this year, the province’s mainstay industry has more than just a severe commodities price drop to concern itself with.
Much has already been made of the government’s plan to go through with royalty review and corporate tax increases. This has tended to obscure the government’s equally significant decision to carry out a comprehensive review of the province’s climate change policies.
Much like the Royalty Review Panel, the Climate Change Advisory Panel is in the process of preparing recommendations on how to best execute the government’s respective policies. To this end, the panel has put together an introductory discussion paper, partly to summarize the issues and options facing the province and partly to set the agenda for the ongoing public commentary stage of the province’s prospective new policies.
To put it simply, the NDP government is concerned about greenhouse gas (GHG) emissions. The advisory panel’s focus is not limited simply to oil & gas production. It focuses also on activities further downstream, including refining and power generation as well as general end-use activities such as power consumption and transportation, both commercial and residential.
Recently, the news media’s attention has been focused on a consultancy report – not available to the public – that recommends raising carbon taxes to $50 per tonne of carbon dioxide equivalent. For context, Alberta’s 2013 emissions stood at 267 million tonnes. This is incidentally 67% higher than the $30 per tonne requirement the NDP recently mandated for 2017. So far, coverage appears to focus on the report’s recommendations touching on reducing coal-fueled electricity emissions. Coal power comprises 55% of Alberta’s power generation. That a report released in August 2014 has attracted this much attention today probably has much to do with Premier Notley’s desire to phase out coal generation in Alberta.
Lest this recent coverage create the impression that Premier Notley’s government is primarily concerned with coal-sourced emissions, the fact remains that the advisory panel’s own GHG emissions breakdown pegs both the oil sands’ and the rest of the oil & gas industry’s contribution to Alberta’s emissions at 22% and 24% of the total.
Moreover, the explicit wording and structure of the panel’s discussion paper focuses on GHG emissions comprehensively. This in itself is not surprising or unusual, since existing provincial GHG regulations already apply to oil & gas.
The consultancy report is simply one of many items that will be considered by the advisory panel. The report’s recommendations might give read-through to potential bad-case scenarios, although its persuasive effect is currently unknown. Regardless, the fact remains that there will be added costs to the industry. Drawing a bead on these costs is difficult, partly because the climate review policy is still in its infancy and partly because of a host of other uncertainties plaguing the local business environment.
To be sure, there are estimates. CAPP has expressed concern that the increased $30 per tonne carbon tax plus planned corporate tax increases would alone raise industry costs by $800 million over the next two years. Analysts pointed out back in June – when oil prices were in the $60 per bbl range – that even if carbon tax cost increases are below $1 per bbl, severe stress would still be placed on producers, many of whom are not in a free cash flow position. The pile-on effect of increased royalties and corporate taxes would exacerbate this.
Some producers already operate under a $40 per tonne assumption, which could potentially result in increased oil sands costs of $2 per bbl. True, oil sands producers achieved a 20% reduction in GHG emissions per bbl between 2007 to 2014 and it is entirely possible that the industry’s track record of technical innovation could again moderate the impact of some of these new policies. But given that many oil sands producers are just at or below their breakevens, there is still reason to be concerned.
As it stands, the costs will be higher. But what will the regulatory environment look like? The discussion paper broadly lists the options available, including:
- Carbon taxation, which already applies in the form of the current $15 per tonne tax on emissions over a set threshold;
- Cap and trade, which sets a cap on emissions and involves tradable allowances – created by below-cap emitters – that permit emissions beyond the cap at the market price of the allowance and which depends on supply and demand to ensure an appropriate cost of allowances whereby the system is neither too lax nor too restrictive on emissions; and
- Performance standards, which dictate end results via broad means including technology mandates and restrictions or outright bans on certain practices.
Incidentally, the panel will also investigate means to promote renewable energy as well as ways to structure a formal energy efficiency program, the latter a catch-all for any measure that favourably alters the ratio of energy output to input, either by getting the same with less, or getting more with the same.
As the discussion paper notes, Alberta’s regulatory system in its current form is a mix between carbon pricing and performance standards. Whatever structural and substantive form the new regulations ultimately take depends on the panel’s final recommendation.
Naturally, this compounds the uncertainty already engendered by royalty review and higher taxation. The industry’s concerns are hardly ill-placed given the government’s willingness to aggressively promote these policies in the midst of a prolonged downturn.
Lukewarm support for pipelines and the appointment of a prominent anti-pipeline activist to a key position adds to the premier’s image problem.
Finally, there is the disconcerting appearance that the government has a rather peculiar understanding of how capital markets work. Resources are fixed, but capital is fluid and globalized. The more costs and restrictions imposed, the greater the capital outflow to more business-friendly jurisdictions. This does not necessarily mean total capital flight, but it does imply that over time there might be a slower rate of industry growth, reduced government revenue, and lower employment. It is asking too much to place unquestioning faith in well-marketed but unproven “green” technologies as a panacea for these substantial economic and societal costs.
This is not to disparage the importance of addressing climate change. It is to criticize the manner in which the government has communicated and timed its new policies, irrespective of their merits.
As a consequence, it is perhaps best to take up the advisory panel on its offer to be heard.