Alberta’s recently announced carbon policy has received received considerable attention from various climate analysts and commentators. Much of it laudatory. A major hydrocarbon producing jurisdiction has imposed on itself a credible carbon tax as the cornerstone of its carbon policy. The tax, initially set at $30/ton, will rise at 2% above inflation, subject to some conditionality on the prices set in other relevant jurisdictions.
However, this policy contains one element that has proven to be extremely controversial within Alberta: an absolute physical cap on future emissions from the oil sands sector. The cap allows a roughly 25% growth in emissions from current levels. Unless there are improvements in the carbon intensity of oil sands production over time, the cap will translate into a physical limit on production.
Alberta’s current government chose to include the oil sands emissions cap to gain support for its overall carbon policy initiative from environmental NGOs, and especially to reduce opposition from these groups to the remaining major pipeline projects intended to provide tidewater access for oil sands production. However, no explicit quid pro quo agreement between Alberta and ENGOs has been announced.
The overall initiative is projected to result by 2030 in a stabilization in overall Alberta carbon emissions, but not to significant absolute reductions.
To date, ENGO support for the overall policy initiative has been modest, but the introduction of the absolute cap on oil sands- related emissions has been its most attractive element from their perspective.
The production limit implicit in the current emissions cap is roughly somewhat more than 3.0 million barrels/day of oil sands derived crude. A material improvement in crude oil prices and possibly carbon intensity in the production processes would be required to restore oil sands growth to a level sufficient to exceed that limit. For those within Alberta’s oil sands production community that have acceded to this cap, a major rationalization has been essentially that it is unlikely to act as a binding constraint over the short term. If it were to become one, the hope would be that the government of the day would revisit the cap.
Conversely, if the ENGOS expect that as Canada tries to actually meet its Paris emission reduction target (INDC, Intended Nationally Determined Commitment), this Alberta cap on oil sands related emissions will have to be made more stringent. The fact that a cap already exists on such emissions will facilitate that. The current cap is imperfect, from their perspective, but it is strategically valuable to them.
Historically, Canada has been disingenuous about its carbon emission reduction targets. From Kyoto to Copenhagen, Canada has come nowhere close to meeting its avowed national reduction commitments. This has contributed to the erosion of Canada’s credibility globally with respect to carbon policy, and earning it special opprobrium from the ENGO community.
Canada requires over 200 megatons a year of net emissions reductions by 2030 to meet its current INDC commitment of 530 megatons of annual emissions. Canada has only about 40 megatons of coal-related emissions to phase out over that time period. Emissions related to hydrocarbon production currently make up roughly 40% of Canada’s overall emissions, or about 240 megatons a year. The remainder of Canadian emissions relate to end-use consumption. Practical alternatives to achieve the requisite emission reductions by 2030 will be politically very difficult to implement. The choices are to constrain Alberta’s hydrocarbon production even further, or to impose significant interventions in Canada’s transportation and thermal heating sectors. Even if Canada were to apply a national pricing standard on terms akin to what Alberta has imposed on itself, the requisite carbon emission reductions are unlikely to materialize.
Due to its inherent carbon intensity, coal would logically be the first hydrocarbon to come out the fuel mix in response to rising carbon taxes. Crude oil would follow much later–if at all–for a given global emission reduction target. For a country like Canada, with relatively little coal in its electric generation fuel mix and significant hydrocarbon production, this should imply a significantly lower near-term INDC than that of a country with significant coal use to transition out of. However, Canada’s current INDC was set to maintain some equivalence with the United States’ Copenhagen target, ignoring the two countries’ fundamentally different energy consumption mixes and hydrocarbon production as a proportion of their national emissions.
Perversely, by 2030, Canada could be constraining production of an economically viable commodity–oil sands derived crude oil–even as the rest of the world is not able to impose on itself (explicitly or implicitly) carbon prices that would actually materially impact its economic viability.
Of course, Canada could again choose to simply not comply with meeting the INDC, and take its chances on what consequences–if any–actually arise from that. Or it could establish new, less ambitious national emission targets, founded more on Canada’s energy realities, regardless of what was tabled at Paris. Or, it could reinvent the entire Canadian approach by asserting that paying a credible carbon tax was the equivalent of an actual emission reduction.
The Alberta government has implicitly opted for the carbon pricing option, albeit with a cap that may or may not prove to be a binding constraint on oil sands emissions out to 2030.
Ultimately, the INDC commitment is one that is “owned” by the federal government. The newly-elected Liberal government has mused publicly about Canada making an even more ambitious contribution to the global effort to contain climate change. That is said even as the current INDC is fundamentally implausible without costly economic intervention and contraction. Early in the new year, the federal government intends to resolve with the provinces how Canada actually intends to achieve its current INDC commitment. Alberta has laid down its marker. Whether this new government can come to terms with Canada’s actual energy circumstances and economic interests versus its ambitions to see Canada “rehabilitated” as a climate contributor is a very open question.
Canada’s circumstances are instructive to all advocates of carbon pricing as the preeminent policy instrument. Paris is all about hard targets. How does carbon pricing relate to that? At best, as a complementary policy instrument, subordinate to the target? Targets are fixed obligations, regardless of what might be a globally more economically efficient adjustment through pricing. Paris is a real challenge to advocates of carbon pricing. Paris is a real problem for Canada.