1. Strengthened carbon regulation is a near term measure to allow for extensive engagement. Alberta is renewing and strengthening its existing climate-change regulations, Environment Minister Shannon Phillips announced on June 25th 2015. The newly elected New Democratic government (NDP) has left the Conservative green house gas (GHG) management system in tact, called the Specified Gas Emitters Regulation (SGER), and increased its stringency. The revised SGER doubles the cost of compliance, from $15/tonne to $30/tonne, and increases the intensity of reduction requirements from 12% to 20%. These changes will be phased in over 2 years.
As noted in Oil & Gas Sustainability’s June Analysis (link), there are 2 remaining regulatory levers within SGER:
- Accelerating the pace of compliance, which is currently a 2% reduction in intensity per year; and,
- Increasing the coverage of SGER, which currently covers facilities in Alberta that emit 100,000 tonnes of CO2e/year or more.
It is possible that the NDP may increase SGER coverage closer to the Paris UN GHG summit in December, while pace seems unlikely to change.
The SGER increase was coupled with an announcement that Dr Andrew Leach will be leading a climate change advisory panel, with a mandate to consult and to report to Minister Phillips in the early fall to aid in the formulation of a new climate change strategy for the province. In fact, the revised SGER may be a stepping-stone toward a more extensive GHG regulatory regime.
The urgent question is what will the engagement process try to achieve, and how should emitters prepare?
2. Engagement on the carbon regime is part of larger NDP economic reform. Alberta is in dire economic straights. Oil prices have fallen since June 2014, touching below $50/barrel. Energy revenues have historically made up ~30% of government income and, due to the severe drop-off in energy-related revenues, the province is facing an annual revenue shortfall of up to $7 billion. Alberta’s new government has to tackle both the short and long term consequences of the current fiscal situation, and confront revenue uncertainty due to globally fluctuating energy commodity prices.
The government in Alberta is working on 3 economic priorities, which are to maintain and increase employment and wages in the province, to maintain competitiveness of the province and to reduce income uncertainty associated with fluctuating global commodity pricing. Balancing these disparate objectives could mean dramatically changing the foundations of Alberta’s economy. The main policy and regulatory levers being assessed or announced by the NDP government are:
- The rate of corporate tax for large corporations in Alberta will increase from 10% to 12% in by 2016.
- The minimum wage will increase to $11.20/hour starting October 2015.
- Alberta’s oil and gas royalty regime will be reviewed. A consultation process for the royalty assessment is being led by well-regarded banker David Mowat.
- Increased cost and stringency of GHG management regulation. As noted earlier, Dr Andrew Leach will lead the advisory panel and consultation process.
Further changes to the SGER, or an entire over hall of GHG management regulation in Alberta, must be understood in light of these other announced or contemplated economic reforms. The question being asked in Edmonton is how these 4 economic levers will work in combination, and extensive consultation on both climate regulation and royalties is expected.
The second reason for consultation is political. As a policy insider put it; “whatever this regulation will be, it must be made in Edmonton”. The recent support for carbon tax regulation from oil and gas CEOs and Canada’s Ecofiscal Commission has made any carbon tax announcement run the risk of seeming like a made in Calgary or a made in Montreal regulation. The NDP government wants to be firmly in the driver’s seat making decisions on Alberta’s economic reforms, thus, the political motivation for an extensive, government mandated, local consultation process.
3. There is a relationship between the carbon price and GHG reduction. To effectively engage in the advisory panel it is important to understand the relationship between the price placed on GHGs versus the volume of emission reduction expected. As shown in Figure 1, this relationship between price and emission reduction follows an “s-curve”.
As the cost of emitting GHGs increases, the volume of GHG reduction increases and eventually reaches a point of marginal return where more GHG cost does not equal much more emission reduction. This point of marginal return can be caused by a compliance mechanism being in place at a certain price and emitters simply choose to pay instead of reducing emissions. Another possibility is that the cost of emissions reaches a point where certain activities are no longer economic and certain inefficient plants or process are shut down or move to a new jurisdiction. What follows is an inflection point where a small increase in price generates new GHG reductions. This inflection typically occurs when certain costly technologies, like carbon capture, are implemented for industries that are not geographically mobile (i.e. power production) or if whole industries collapse or relocate with associated dramatic negative economic impacts.
4. To engage, emitters need to know their GHG risk profile. It is imperative that Alberta emitters know their GHG risk profile and preference when engaging with the advisory panel as there will always be some uncertainty in this price signal/emissions reduction relationship, represented by the blue lines in Figure 1. This uncertainty has different consequences depending on the regulatory regime. Setting an emissions reduction target through a cap and trade regulation, i.e. drawing a horizontal line across the s-curve, creates price uncertainty. If the price uncertainty is too high, regulation could trigger the inflection point and motivate a flight in capital. A carbon tax, i.e. drawing a vertical line in the s-curve, creates volume uncertainty and absolute emissions, and even emission intensity, can sometimes grow beyond the baseline. For example, Norway’s offshore oil industry has seen GHG emission growth under its carbon tax regime (link).
Risk is not shared equally. Efficient operators, which in the oil and gas industry mean players with the best reservoirs, favour a carbon tax as the they are more cost-competitive on a cost per barrel basis. Startups typically prefer cap and trade schemes, which normally require large emissions reductions from legacy large emitters. There are several nuances with each regulatory option that can impact emitters’ economics, such as auctioning versus allocating allowances and how funds are collected, earmarked, and if the scheme is made tax neutral through cuts elsewhere. Emitters need to understand how different regimes can impact their operations and economics, on a facility basis and what contractual obligations they may have under the existing regime. Different policy options create different risks; emitters must know their risks profile when engaging the Panel.