Why the Alberta carbon tax for industrial emitters works – Part 1

By Eric Denhoff

Public opinion polling shows that Canadians, especially Albertans, don’t like carbon pricing. Call it a carbon tax or a carbon levy, Canadians prefer technology subsidies and regulations to pricing greenhouse gas emissions, according to surveys conducted by Abacus Data. Critics are especially vocal on social media, calling the carbon tax a “job killer” and claiming it hurts business competitiveness, that companies will flee Canada rather than pay (often referred to as carbon leakage). The critics are wrong, as I’ll demonstrate using the Alberta large emitters carbon pricing system – called the Carbon Competitiveness Incentive Regulation (CCIR) – a program I helped design and administer.

Let’s start by looking at Alberta and BC’s approaches a little closer; remember, a price on carbon isn’t new and isn’t really a partisan issue. 

The Alberta Progressive Conservatives put a $15 a ton levy on large emitters–big companies polluting more than 100,000 tons a year of GHG– under a scheme called the Specific Gas Emitters Regulation (SGER). It allowed you to pay into a fund to finance green tech investments; to reduce your pollution and avoid the levy, or even to buy offsets (often cheaper) to meet your compliance obligations.

Companies did interesting things to avoid paying the levy.

A very robust market developed in Alberta for offsets, with an Alberta government program that approved offsets in a host of categories, such as modern agriculture practices that would reduce GHGs. Then they monitored and enforced those schemes. Farmers made a lot of money, millions a year, selling offsets to industry to meet their compliance obligations. A very creative market developed. For instance, an ex-mayor of Calgary developing a methane reduction project that utilized aggregated offsets from farmers to partially finance the scheme. Free market meets climate change-oriented pollution reduction.

Under Stephen Harper, in 2007, the federal Tories proposed a $65 a tonne carbon tax, saying it would save $6 billion in health costs from respiratory and other health costs. He adjusted this, in the face of widespread opposition as the recession got underway, to say he wouldn’t do it if Washington wasn’t going to as well, but since nobody was proposing $65 a tonne except him, at that point, it seems more likely industry lobbying, the recession, and the realization he’d gone a step too far were more likely the reason.

He has been convinced to give a major speech in Berlin, saying climate change was one of the greatest threats to humanity, and that Canada, blessed as we are, needed to our part. As 2008’s recession took full hold, that became a secondary concern as federal coffers bled and unemployment lines grew.

However, Alberta kept its levy. Other provinces, over time, developed their own approaches. For instance, Ontario and Quebec implemented cap and trade systems.

In 2008, the BC Liberal government adopted a revenue-neutral carbon levy system initially. BC’s system offered an offsetting tax reduction, to individuals and corporations, while in Alberta, rebates were offered to the large majority of individual taxpayers, and a small business tax reduction offered for businesses with revenue under $500,000, from 3 per cent to 2 per cent. BC later adjusted its approach to make it less revenue-neutral.

The point is, that by 2015, when Alberta introduced its carbon levies – one for consumers and the CCIR for industry – much of the country’s population was now being covered by one type or another of carbon pricing.

Fast forward to 2019 and criticisms include:

1. The consumer-facing levy (particularly at the gas pump) has no effect on consumer behaviour and is, therefore, a bad policy. The arguments from some folks that you would have to raise the tax to $50, $100, or even $300 a tonne to affect behaviour. Others argue that BC’s levy has already had some impact on slowing or reducing GHGs, per capita or overall.
2. Arguments that having both a levy and regulatory regimes are unfair – pick one or the other, but not both. Many conservatives, from the Royal Bank to Preston Manning, have argued that a carbon tax is the most efficient way to price pollution, but they usually also argue that government should not layer regulations on top of carbon pricing.
3. Arguments that a carbon tax on business drives investment away because other jurisdictions don’t have the levy and capital will flee to those environments. In other words, carbon leakage.

I’ll address the last one first.

Business will, at a certain price, indeed flee a jurisdiction for a lower tax environment, particularly one with few or no regulatory regimes. This was initially the big complaint in Alberta businesses when the Climate Leadership Plan was rolled out in 2015. However, Alberta spent many months in detailed, sector-by-sector consultations with industry, and developed a robust series of measures to  avoid this. It was a nightmare to do, frankly, involving the review of more than one million pieces of data.

Unlike SGER, which compared a facility with its previous performance, CCIR compares the company with others in the same sector. It rewards best behaviour and discourages the worst performers.

It was very difficult to not make a giant screw up of CCIR. Every industry is different, every company within a sector is different, and every large industrial plant has several processes that needed to be benchmarked.

Fertilizer manufacturers, for example, haven’t changed their basic production methods much for decades. Forcing them to perform to the newest available plant isn’t so much the problem as it is forcing them to reduce their emissions year over year (stringency) by an amount greater than technology would enable them to do.

Others, like oil sands and to some extent forestry, improve their GHG story every year, really, reducing emissions often by an average of one to three per cent. In these cases, a reasonable price, a reasonable stringency, and the company appearing on a reasonable place on the benchmark graph will allow them to continue in reasonably good shape with little or no carbon leakage.

To ensure that is the case, Alberta had a complex system of allowances for Emissions Intensive Trade Exposed (EITE) companies.

Basically, the message to large emitters was, you show us how the system will kneecap you and we’ll fix it.

In Part 2, I’ll use some real world examples to demonstrate how the government made CCIR work for Alberta industry.

For more than 30 years Eric Denhoff has been an executive in the private and public sectors. He recently served as deputy minister of environment and climate change in the Alberta government and an advisor on market access.