In Part 1, Eric Denhoff explained how the Alberta industrial emitters carbon tax, called the Carbon Competitiveness Incentive Regulation (CCIR), worked. Some emitters felt the CCIR imposed an unfair burden and the government agreed to address those concerns.
For some oil sands producers, the poor quality of the resource or the use of older technology, led to more GHGs and a higher carbon levy assessment under the CCIR. The companies argued that they were being treated unfairly because while other oil sands firms had invested in newer, cleaner technology, they felt their past capital investments were made in good faith and government was treating them unfairly.
This was a complex discussion.
The CCIR only covers roughly 80 per cent of a large emitters’ GHGs. With other exemptions and adjustments, the coverage was sometimes much less. As a consequence, oil sands producers were paying the carbon levy on, at most, 20 per cent of their pollution, while consumers were paying on 100 per cent of the carbon tax on gasoline and natural gas for home heating.
Most consumers received rebates, but there were always arguments about whether the rebates were high enough to cover all costs and whether they were available to enough Albertans. We thought they did, but plenty of folks argued they didn’t.
The fairness issue dogged the CCIR program from the beginning. Adjusting the program for companies already enjoying a free pass on 80 per cent of their emissions was – and remains – a challenge. The data didn’t always support oil sands producers’ arguments about geography or technology. In the end, rather than mucking with the principles of the program, we decided to work on a transition ramp with key companies facing larger burdens that could be reasonably be expected to be resolved by technology after the first few years of the CCIR.
Of the more than 100 companies covered by CCIR, both energy and non-energy firms, only about a dozen told government they were going to be really hobbled by the new system. Admittedly, no company was happy, some companies were really unhappy, and some companies were so unhappy they lobbied the crap out of government. But when we said, “If you can show us the data, we’ll fix it,” less than a dozen still had significant concerns.
And we fixed them all, using a variety of tools. For example, energy efficiency grants helped them install new equipment to reduce emissions below the carbon levy threshold, or so low that the impact of the levy was minimal.
One company was frank with us. They said if they had to pay the full impact of the new levy they would shut down Canadian operations and move to the United States right away. Why? Their primary competitive advantage was that they were using very old technology compared to their competitors and it gave them a cost advantage. After extensive discussions, we discovered that the cost of moving to new technology was actually modest. One of the many carbon-levy funded emissions reduction transition programs put in place had funds to pay for part of the new technology costs. In fact, GHG reductions were so high, they received credits.
Suddenly, change became profitable. Problem discussed, problem solved, and with significant GHG reductions.
Here’s another example.
Nexen CNOOC Ltd. wanted to make a major GHG reduction at a less-than-attractive oil sands site, where their well pads were sited on one of the least productive and most expensive geographies. They wanted to spend $400 million to drill new well pads in much more efficient geography that would have the added advantage of cutting their GHG emissions by half. But, if they had to pay the full impact of the new levy (they were off the chart in terms of levy costs, because the GHGs were so high), they couldn’t afford to invest the capital. We worked for a long time with them on an innovation funding solution that would enable them to avoid the EITE (emissions-intensive, trade-exposed) exposure they were facing, and the even worse hammer on profitability and sales. We wanted business to pay a levy but we wanted them to stay in business so they could actually pay it.
Eventually government and company worked out a solution. The capital investment is now underway. Problem indentified, problem solved.
But the biggest issues, and most creative solutions, came from business. For instance, they developed an arbitrage-like strategy for buying and holding offsets at $15 and $20 per tonne, knowing the price was headed to $30. This allowed them to use the offsets later to satisfy higher cost compliance. Instead of paying CCRI’s $30 per tonne, they could comply at half that or two-thirds, in many cases avoiding or minimizing the levy costs.
Another company had emissions from a meat packing plant holding pond, and needed to invest in a covered system. Again, an energy efficiency program contribution, combined the move to a waste-to-power project, made all the difference. A long-standing dispute was resolved, GHG emissions were reduced, and the company wasn’t hammered with unreasonable costs.
I want to make one point here.
The Notley government assessed whether companies’ profits or sales would be affected as a primary metric in determining who was significantly affected. That approach generally worked. Sure there were complaints, but no one offered a significantly better approach despite calls for suggestions to companies and industry associations like the Canadian Association of Petroleum Producers.
In the end, we decided we had a reasonable approach.