The introduction of a carbon tax of $20/t CO2e in Alberta in 2017 is certainly going to create all kinds of political rhetoric and anxiety.  Will discover and tax be a scary as some people might make it out to be or will it be an opportunity actually increase our quality of life’s unhappiness?

Alberta’s Carbon Liability

First,  the emission of carbon into the atmosphere  through our lifestyles and industrial behavior imposes what some economist called an unfunded liability on the planet and the well-being of our children and future generations.  Alberta’s emissions of 274 megatonnes of CO2 in 2014 contribute, representing over 37% of Canada’s total carbon emission. The vast majority of Alberta’s emissions comes from industrial emissions.

I’ve estimated that the estimated cost of Alberta’s carbon emissions as a liability imposed on Canada and the world at $13.7 billion valued at  $50/t CO2 (a rough estimate of the global social cost of carbon). Alberta’s carbon tax in 2017 will be based on a carbon price of $20/tCO2 and will rise to $30/tCO2 in future years. Consider that the largest reinsurance companies in the world such as Munich Re and Swiss Re along with Canada’s The Co-operators Insurance company and Shell International use $50/tC02  internally in ‘shadow’ pricing carbon in their risk analysis scenario planning since they are directly exposed to financial risk from climate-related events.

It’s important to note that the $13.7 billion carbon liability is not posted on anyone’s balance sheet whether the province of Alberta, the Government of Canada, oil and gas companies, or reinsurance companies that insure oil companies. This is why it constitutes an unfunded liability.

By comparison, the estimated $13.7 billion carbon liability is considerably greater than the estimated $2.47 billion in oil and gas royalties Alberta will collect from Alberta’s oil and gas industry in 2016.

Nova Scotia Energy Efficiency Efforts

Of Canada’s overall GHG emissions in 2014 an estimated 46% emissions came from Canadian households, meaning the remaining 54% came from industry, businesses and governments. Canadian residential energy use contributed 6% (46 megatonnes) to Canada’s total emissions in 2014 while ground transportation (including private vehicles, buses and transport trucks) contributed 19.1% or 140 megatonnes to Canada’s total emissions.

Alberta’s GHG emissions have grown by 17% since 2005 due to the expansion of the oilsands.

In Nova Scotia, energy efficiency retrofits are expected to reduce provincial energy demand by 20-30% over the next few years. Over $110 million has already been saved in energy costs in 2016 by an estimated 225,000 Nova Scotians (or 28% of the adult population), both households and businesses, who have participated in Nova Scotia’s energy efficiency program (EfficiencyOne). The result has been an 8 per cent reduction in total electricity load.

The megatonnes in carbon emission reductions and the estimated reduction in the carbon liability of Nova Scotia has not yet been calculated. However, Stephen MacDonald who oversees the program says he expects greenhouse gas emissions to be “12 per cent lower than they otherwise would have been if not for energy efficiency.” Nova Scotia emitted an estimated 16.6 megatons of CO2 equivalent in 2014 so we could say that Nova Scotia will realize a net reduction of almost 2 megatonnes of CO2 emissions valued at $50/t C02 would mean that annual societal savings of almost $100 million per year.

If you add these societal costs savings to the estimated energy costs savings Nova Scotia has seen a $220 million per year economic benefit, not counting the value of lower health-care costs, from their energy efficiency program, to date.

Alberta’s Efficiency Opportunities

Alberta is currently setting up its own Energy Efficiency Alberta agency to be funded by $542 million from carbon taxes. Early estimates of energy efficiency savings by the Alberta Energy Efficiency Alliance have estimated a total of $510 million in annual energy savings, 3000 more jobs, $550 million in increased GDP, and the equivalent of taking 900,000 vehicles off the road.

Estimates by Dunsky Energy Consulting for Alberta in 2015 estimated efficiency savings for Alberta could range from 6.35 to 14.45 megatonnes per year. Estimating the societal cost of carbon savings based on $50/tC02 then societal costs savings could amount to between $317 million and $722 million per year; that would mean as much as a 5% reduction in Alberta’s total current carbon liability.

How much will we pay in addition to the taxes we already pay for something that some of us may not even believe in such as climate change?

As I often point out most carbon estimates are based on models and not measurement of actual carbon emitted at the point of omission. I believe only when we know the absolute reductions in CO2 emissions which can be verifiable to real measurement can we get real behavioral changes. For example I believe that all of her utility bills should have a carbon levy attached to every monthly statement that is directly connected to our consumption of electricity and natural gas. It is easier to attach a 4 1/2 cent carbon levy to the price of gasoline at the pump since we know exactly how much were pumping. Ironically we do not have statistics on the total amount of gasoline pumped or consumed in Edmonton or other cities in Alberta. nor do we have an annual summation of the amount of electricity being consumed at the neighborhood level or city level in Alberta; most of the statistics are also modelled yet if we simply added up the data from our individual utility bills we would have such a summation statistic. my point in all of this is that knowing what the carbon levy is in relationship to my consumption will motivate me and my household to pursue energy efficiency options and ultimately renewable energy options that will affect my bottom line mainly reduce the cost of living and improve my disposable income. my concern is that the tax on carbon will become another source of political rhetoric and fail to achieve the overall goal of reducing carbon liability on the planet and future generations.

Will the 100 MT cap on oilsands production be such a bad thing?

Currently Alberta oil sands producers are emitting around 66MT of GHG while producing around 2.4 millions of barrels per day of bitumen. Average GHG intensity (CO2e) per barrel of bitumen is 75kg. Current estimates from CAPP (http://www.capp.ca/publications-and-statistics/publications/284950) assumes that in 2030 crude production will reach 3.67 millions of barrels per day of bitumen. This number is consistent with 100MT of GHG at current GHG intensity of 75kg of CO2e per bbl of bitumen.

Current legislation allows for additional 10MT of Emissions for cogeneration of heat and electricity for upstream processing of oil sand bitumen and some upgrading. If only 5MT is attributed to cogeneration, effective cap at current GHG intensity of 75kg of GHG per barrel of bitumen will be 3.84 millions of barrels per day of bitumen.

If we look at the largest bitumen producer, Suncor, their GHG intensity in 2015 is 425kg of GHG per cubic meter of oil equivalent which equals 67.5kg of GHG per barrel of bitumen (http://sustainability.suncor.com/2016/en/environment/2015-ghg-performance.aspx).

Clearly Suncor is already achieving performance that is better than average in the industry and this translate to much better operational performance as GHG emissions directly translate to lower operating cost as energy consumption: natural gas, fuel and electricity is the primary driver of the operating cost. Suncor plan is to achieve 54kg GHG per barrel of bitumen by 2020. If average GHG intensity targeted by Suncor was achieved by all producers in the same range,  100MT cap would translate to 5.0 millions of barrels per day bitumen production which is more than doubling of production from today and at the industry own forecasted growth will allow for continuous increase in production volume past 2040 (4.94 millions of barrels of bitumen per day in 2040).

The key to Alberta & Albertans to get full benefits from oil sand production is ability for oil sands producer to lower operational costs and for the prices to recover. As we cannot control market prices, we need to focus on operating cost, and this cost is directly coupled with energy efficiency and GHG emissions. Effectively by creating cap on GHG emissions, Alberta government is creating mechanism to nudge oilsands producers to become more energy efficient and as a result they will lower their operating cost and become more competitive and resilient to low price environment in the future.

As current push for low carbon world is gaining momentum globally, there is a high probability for the oil demand to peak (http://www.mckinsey.com/industries/oil-and-gas/our-insights/energy-2050-insights-from-the-ground-up “oil, which is predominantly used for transport, will slow down as vehicles get more efficient and more electric; here, peak demand could come as soon as 2030”, http://www.bloomberg.com/news/articles/2016-11-02/europe-s-biggest-oil-company-thinks-demand-may-peak-in-5-years “ Shell Says Oil Demand Could Peak in Just Five Years”) is is very likely that crudes that are GHG emission heavy, to be less desirable and carry a significant discount. To ensure continuous demand for Alberta bitumen without heavy discounts, lowering GHG intensity has much higher potential for creating prosperity in Alberta than waiting for the price to recover which may not happen if Shell’s or McKinsey’s predictions are correct.  

The best direction to create more demand for our oil sand crude in the next 20 years, eliminate volume restrictions under 100MT cap and to create more jobs and security in oil sand sector is to heavily invest in renewable electrification by the industry players to first provide abundance of clean energy for its own operation and lower GHG intensity of upstream operations and then became 21st century clean energy generators when electrification of transportation gains momentum which is inevitable future. Interestingly Suncor is already shifting its strategy in this direction as it applied in January 2016 for 240 MW solar projects planned to be connected to the grid by March of 2018 and 440MW of wind projects to be completed in the same time frame (http://www.nationalobserver.com/2016/03/23/news/suncor-build-multiple-solar-and-wind-projects-alberta and http://www.fool.ca/2016/03/26/suncor-energy-inc-is-looking-to-become-a-larger-renewable-energy-provider/)

 

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