Alberta's Two Step Climate Shuffle

Post published in Globe and Mail June 26, 2015

Alberta has reset its climate policy. Provincial Environment Minister Shannon Phillips committed Thursday to put an end date on Alberta’s much maligned GHG policy while aligning its carbon price at or above its trading partners. Alberta has put in place a two-step process to transition the narrowly defined Specified Gas Emitters Regulation (SGER) to something else.

In the first step, the SGER will be updated with increased costs and a higher compliance obligation for the 130 industrial facilities covered by the policy. This first step reflects negotiations from 2013, and should come as no surprise to operators or investors. The costs are well within the carbon risk premiums built into project feasibility.

The SGER update once fully implemented in 2017 will likely impose costs of about $800-million. Netted against this is about $100-million from the sudden appreciation in carbon credit value, where the SGER update doubled the asset value of banked credits held by many emitters. The 21 oil sands operations will experience the most cost, with average cost increases of about $20 cents per barrel less tax and royalty writeoffs.

Electricity prices will also rise marginally above current levels as carbon costs get passed on to consumers. Even in a depressed economy, these costs look more like insurance payments to hedge against market risks rather than job-killing policy.

On the emission-reduction front, don’t expect significant movement with the update. With SGER compliance mechanisms such as technology fund payments and cogeneration credits built into the current SGER, plus a significant quantity of banked credits to draw upon, reductions in the short-term are likely to be small.

The update is setting up a second step to transition Alberta to a new carbon policy. Reading between the Minister’s media lines there are three trends to watch as the newly appointed advisory group, headed by energy economist Andrew Leach, deliberates over the next few months.

First is the absence of a new aspirational GHG target and a focus on prices. This is refreshing change from the usual political rhetoric to pledge deep targets only to backslide on ambition once costs are revealed. Look for this trend to continue as the government contemplates aligning with other jurisdictions on costs and not necessarily on GHG targets.

Second is broadening the scope of the policy to non-industrial emitters. Look for Alberta’s second step to cover vehicle fuels and buildings. Broadening climate policy outside of the large industrial emitters will increase economic efficiency as lower cost reductions are found throughout Alberta’s economy. It will also raise costs to households and therefore will be a source of political heat.

Third is the choice of the preferred policy instrument, whether carbon taxes or cap and trade. Ms. Phillips truly seemed agnostic on the form of the instrument, leaving open to Mr. Leach’s advisory committee the full range of policy tools. While there is merit in both approaches to carbon pricing, it is cap and trade that seems to be the current front runner for a number of reasons.

Cap and trade aligns most closely with the current SGER policy architecture. A host of important design elements from established emission intensity standards to GHGs offset protocols can be easily ported over to an emission trading system. Rolling over banked credits held by emitters to 2017 would also smooth the transition to a more stringent policy.

A new cap and trade system could be made in Alberta or could seek to link with the Western Climate Initiative (WCI) currently used by California, Quebec and soon Ontario.

The SGER renewal end date of 2017 is an interesting inflection point chosen by Alberta. It marks the end of the latest compliance period under the WCI. It is at this point that new entrants such as Ontario and perhaps Alberta could choose to enter the WCI cap and trade system. Joining the WCI is interesting opportunity for Alberta.

Pledging to join the WCI could align Alberta with the manufacturing provinces of Quebec and Ontario, taking away the regional climate policy divide that has for so long defined how we think about GHGs as a nation. Given California’s central involvement in the WCI, joining WCI would nudge Canada and the U.S. closer to aligned climate policy, which can only help on a range of cross-border energy issues.

Finally, Alberta would benefit from the significant rule making that now defines what many regard as a credible system to reduce GHGs. The trade-off would be a significant outflow of capital as WCI permit are used for compliance instead of the domestic mechanisms that now define the SGER. But the benefit would be credible emission reductions rather than compliance payments with an unclear line of sight to emission reductions.

Or, the government could implement a broad based B.C. style carbon tax.

We will have to wait for such conjecture to be proven, but not for long. Alberta has committed to roll out its next climate policy step in advance of the United Nations climate conference in Paris in December of this year.

For now, we should applaud Ms. Phillips and the Notley government for moving so quickly with the much needed SGER update. It is now time to let Mr. Leach and his team sit back and listen and formulate a set of recommendations that could truly push Alberta to the forefront of global climate policy.