Canada’s carbon pricing regime needs a major overhaul if governments rely on it to incentivize industrial emitters like oil sands producers to invest in deep decarbonization projects.
The federal government is reviewing its results-based pricing system (OBPS) as part of an update it is due to make to its climate plan by the end of March. The OBPS imposes the carbon tax on a small fraction of the emissions of large industrial producers in order to protect their competitiveness while encouraging them to reduce their greenhouse gas (GHG) emissions. Some environmental groups argue that, to meet oil industry emissions targets, the OBPS should be supplemented or even replaced by a hard cap that would set explicit GHG limits enforced by fines and even criminal penalties.
Ottawa’s political considerations come as oil markets are rocked by Russia’s invasion of Ukraine, global crude prices hitting US$120 a barrel and growing calls for increased oil production in the Western Canada.
Ottawa’s industrial carbon price serves as a backstop in a few provinces and territories that have refused to implement their own pricing systems that meet minimum federal standards. The federal policy accounts for less than 0.5% of national emissions, but also sets a benchmark that provincial governments must meet.
When reviewing OBPS, the Liberal government will need to ensure that any increased rigor is also demanded of the provinces.
It will need to assess industry claims that higher costs will lead to “carbon leakage,” or the displacement of carbon-intensive production from Canada to other countries. However, most of the world’s sources of crude are lower in carbon intensity than the oil sands, so the leakage argument is too difficult to substantiate. Until now, the oil industry in Canada has hidden behind a cloak of competitiveness, claiming that paying the full rate of the carbon tax would put its industry at risk. The reality is that the price of carbon emissions from oil extraction is a relatively small part of the value of a barrel of crude, especially with current oil prices. This is not the case for sectors such as cement or the steel industry, which would have legitimate competitiveness concerns. Paying the full freight on the carbon tax would make them unprofitable since they are very carbon intensive relative to the value of their products.
Ottawa is updating its climate plan to align with the goal set last year to cut emissions 40% to 45% by 2030 from 2005 levels and reach net zero by 2050.
Under legislation passed last year, Environment and Climate Change Minister Steven Guilbeault must release a new plan by the end of March. This plan will implement the Liberals’ promise to impose a cap on oil and gas emissions that will then decline over time to meet federal targets.
The government is currently determining how it will apply such a sliding ceiling. A stricter OBPS – coupled with planned price increases through 2030 – could be an important tool to achieve this goal.
As it currently applies, the OBPS is designed to encourage emissions reductions at the margin, not the deep reductions that would be required by net zero plans. The system is designed to protect the competitiveness of Canadian industry and avoid “carbon leakage,” where regulatory burdens drive GHG-intensive economic activity out of the country.
We should fill the gaps in [the OBPS] Properly price large emitters so that the private sector invests on its own.
-Richard Florizone, Director General of the International Institute for Sustainable Development
“Current large emitter programs provide a perverse long-term incentive,” the Canadian Institute for Climate Choices concluded in a 2021 assessment report prepared for the federal government. “They explicitly reward the highest-emitting facilities in the country for not making the major investments needed to be ready to compete in a low-carbon market.”
The Climate Choices paper concluded that carbon pricing, along with other regulations, “can be a key driver of significant emissions reductions in Canada,” provided some key shortcomings are addressed.
“We need to close the gaps in [the OBPS] to properly price large emitters so that the private sector can invest on their own,” Richard Florizone, Director General of the International Institute for Sustainable Development, said recently on Twitter.
After months of rising crude prices, “the oil industry is also experiencing a windfall of cash,” Florizone said. “The sector should use this to invest in reducing emissions and pivot its business models.”
One of the challenges is the fear of oil companies and other industrial emitters that a new government could render their investments in GHG reduction worthless through a major policy change. Consequently, the federal or provincial governments are asked to provide certain guarantees against this risk of “pencil strokes”.
Indeed, one of the most important contributions Conservative Prime Ministers and MPs could make to climate policy would be to commit to raising prices and tightening stringency for industrial emitters, thereby reducing political risk. companies face when making long-term investment decisions. .
Tar sands companies have announced their own draft climate strategy that aims to eliminate most GHG emissions from the extraction process by 2050 and offset the remaining emissions with credits.
The companies will make significant capital investments, but are seeking support from Alberta and the federal government, Martha Hall Findlay, Suncor Energy’s director of climate, said in an interview.
“It’s going to take all of us,” Hall Findlay said. She insisted that companies realize they need to have a credible climate plan to meet the demands of the government and some investors, but added that they will struggle to attract capital if their climate-related costs climate are not in line with those of their global competitors.
It will take us all.
-Martha Hall Findlay, Director of Climate at Suncor Energy
Producers also need to see a rate of return on their investment, Hall Findlay said. This can result either from greater operational efficiencies that reduce emissions, or from reduced compliance costs related to carbon pricing and regulatory requirements, or from the sale of credits if they exceed their regulatory requirements.
Hall Findlay said producers would seek some sort of floor price on emissions credits that could be generated by large investments in carbon capture and storage (CCS) to ensure they can sell them. and receive a return on their investment.
The industry already faces a carbon price that is expected to rise from $50 per tonne currently to $170 in 2030. However, the impact of a carbon price is significantly mitigated by the relatively low proportion of emissions actually covered by the price.
The federal OBPS system and Alberta’s TIER (Technology Innovation and Emissions Reduction) system collects the carbon price on approximately 10% of a large emitter’s GHGs. This marginal price incentivizes companies to invest in incremental change, but not in innovation at all levels. At a marginal price of $50, producers pay less than $1 per tonne of CO2 equivalent on their total production.
The TIER system has a very modest ratchet mechanism, which means that it covers one more percentage point of production each year. The federal system does not have such an automatic ratchet.
OBPS would be a more useful tool for long-term decarbonization if companies could count on the planned increase to $170 a tonne by 2030 announced by the Liberals, and if it was more rigorous and included a ratchet mechanism robust, David Sawyer, an economist with the Institute for Climate Choices, said in an interview.
As it stands, investments that would result in large GHG reductions would generate large credits that could undermine program intent by lowering both the marginal price and the average price.
Under an alliance called Oil Sands Pathways to Net Zero, the six major producers, which account for 95% of production, have pledged to reach net zero by 2050 through a combination of efficiencies , new technologies, carbon capture and sequestration, and credits.
Alliance companies say they can reduce emissions from their upstream operations by 22 megatonnes by 2030. However, that is far from what is needed to align the sector with the federal goal of a 40-45% reduction from 2005 levels for Canada as a whole.
The centerpiece of the alliance’s strategy is the proposal to build a CO2 pipeline and sequester the captured carbon from eight different facilities, including some production facilities near Fort McMurray. Hall Findlay said the first phase of the CCS plan could cost between $10 billion and $14 billion over 20 years, while others pegged the entire net-zero plan at $70 billion in capital and cost costs. exploitation.
Although carbon capture technology is widely proven, it remains expensive and companies want access to generous tax credits to keep going. However, environmental economist Chris Bataille said a well-designed OBPS could obviate the need for subsidies.
With greater rigor, “there is no need for a subsidy,” Bataille said. “They can make their money by selling credits to other companies.” He added, however, that the government may have to offer protection against a stroke of the pen.