A Note on the Implications of the Federal GHG Backstop on Saskatchewan

We look at the recent Saskatchewan modelling (IEESC) of the federal backstop policy and the results reported by the Saskatchewan government. We compare these results to modelling we completed on the federal backstop (see here, here and here), where we apply output-based pricing to the large industrial emitters and an economy-wide levy in Saskatchewan. The table below compares the results with a more detailed deck provided here.

We observe the modelling completed for the government deviates significantly from our view of the impact of the federal backstop on Saskatchewan. The Government’s reporting of their own analysis is not entirely consistent with the results of their modelling. As such, we have identified below some issues and clarifying questions to help all interested parties better understand the published results.

Federal backstop not appropriately specified in the model, leading to an upward bias in the analysis. In the CGE modelling, it looks like a uniform tax is levied on all emissions, with no differentiation between large emitters covered by the output-based pricing system (with only a fraction of emissions priced) and the rest of the economy (with all combustion GHGs priced). If true, the emission base to which the carbon price is applied is too large introducing a significant upward bias.

Question: Are industrial emissions priced according to an OBPS?

Nominal or real carbon price? It is not clear if the carbon tax as modelled is in nominal or real terms. We suspect the modelling specifies the carbon levy rate in real terms, and therefore overestimates the economic impacts since the federal price is not indexed to inflation.

Question: Is the carbon price real or nominal?

Coverage of the carbon price looks wrong, significantly overstating the results. It looks as though non-energy GHGs are covered by the carbon price in the SK analysis. Section 2.4.4 of the IEESC report states “The GHG emissions consider CO2, CH4 and N2O”. The federal backstop does not price non-energy GHGs like CH4 (methane) emissions, which in the oil and gas sector can be 50% of emissions. In the facility analysis at the beginning of the paper, it seems all emissions are priced including fugitive and process emissions. Table 83 provides the “penalty rate” for facilities at a level that supports our suspicion that all emissions are priced. Again, the economic impacts would be significantly overstated relative to an appropriately specified federal backstop scenario where only combustion GHGs are priced.

Question: What percentage of Saskatchewan’s GHGs are covered by the policy in the scenarios?

The GDP reduction is very large. We suspect there is not a good articulation of abatement opportunities in the model. As a result, output drops are the main source of emission reductions, which would partially explain the high economic costs.

Question: What is the share of reductions from abatement relative to output decline?

The lack of revenue recycling leads to a significant upward bias in the economic impacts. Revenue was not recycled in the economy-wide scenario S1, which in effect takes all the money out of the economy (effectively burning it) thereby exacerbating the economic impact. Typically, in these scenarios, the carbon revenue gets rebated back to the economy where it is spent thus offsetting some of the negative impacts of the carbon price.

Question: To close the model, the revenue must go somewhere? Where is the revenue destined in the S1 scenario?

GHG emission reductions are not reported. The baseline GHG forecast and the change from the forecast for each scenario would be a standard metric to report.

Question: What are the GHG emissions reduced by scenario?

The model simulations only went to 2026 but the government analysis reports impacts in 2030. In our experience, simple trend lines should not be assumed from the modelling.

Getting some insight on these questions would help us all better understand the reported impacts of the federal backstop on Saskatchewan. Right now, as reported, we can't credibly use the results.