Carbon Tax: How will it impact oil sands producers?

By Peter Davidge and Matt Slavin

Earlier this year, Justin Trudeau and the federal Liberal government announced their intention to implement a Canada wide Carbon tax in the coming years, to the tune of $50/tonne at its peak. The reaction to this announcement was mixed, with recognizable names on either side of the debate. Brad Wall, Saskatchewan’s Premier, was particularly outspoken, saying, "The Carbon tax will siphon over $2.5 billion from Saskatchewan's economy when fully implemented and make our province a less competitive place to do business.”.

The figure below shows the Greenhouse Gas (GHG) emissions per province in 2014. Provinces like Alberta and Saskatchewan are among the largest emitters despite their relatively small populations compared to Ontario and Quebec. In fact, on a per-capita basis Alberta and Saskatchewan emit more than 5x more CO2e than Ontario. Much of Alberta and Saskatchewan’s poor emissions performance can be blamed on their reliance on coal as a primary source of energy; this industry will likely face significant impact from a Carbon tax. 

Coal is not the only issue, however, as 46% of the emissions below come from the oil and gas sector. As a result, perhaps the most pertinent question is not how will the Carbon tax will impact the average Albertan homeowner, but how will a $50/tonne carbon tax impact Alberta oil sands producers?

Figure 1 – Greenhouse Gas Emissions by Province in 2014 (Source: StatCan)

Current Carbon Policy – Goals and Outcomes

Since 2007, Alberta has had the SGER (Specified Gas Emitters Regulation) which mandated a 12% reduction in GHG intensity from facilities that emit more than 100,000 tonnes or more of CO2e per year. This means that, on a per barrel basis, producers must remain 12% more efficient than they were in 2007, indefinitely. Any emissions beyond this threshold are subject to a $15/tonne CO2e tax. Under NDP leadership, the SGER was amended to target a reduction in site-specific emissions intensity by 15% in 2016 at a price of $20/tonne, increasing to 20% at $30/ton as of Jan 1, 2017.

Suncor’s Base Plant, a facility that has been operating since 1967 (with numerous expansions and upgrades), emitted over 9 million tonnes of CO2e in 2007. Since then, Suncor has increased production by ~30%, while keeping emissions relatively constant. From one metric, this can be seen as a success, as the increased production has not led to any increases in emissions. However, if the goal is overall emissions reduction (regardless of production increases), then this regulation may not be providing the correct incentives.

In 2016, when the price on carbon was increased in Alberta, Base Plant was already performing well below the emissions target. As it is currently structured, the provincial regulation provided no additional incentive for Suncor to further improve environmental performance at base plant. In fact, Base Plant has only had to contribute to the fund 1 year since the regulation was implemented. Suncor has made progress in reducing their emissions per unit production, despite an overall increase in emissions. If this increased production displaces production from other sources that may have inferior emissions records, this is certainly a successful outcome for the province. If the increased production is due to growing energy demands and increasing emissions from all producers, however, then more incentives may be required to ultimately cap GHG emissions.

Currently, the SGER only applies to 15% of the emissions from large emitters. Since these large emitters account for less than 50% of total Albertan emissions, the SGER price effectively applies to only 6% of all emissions in the province. As a whole, the Alberta government is expecting to collect $330 million from the SGER in 2016/2017 fiscal year. During this time, the province is on track to emit approximately 275 mega-tonnes (MT) of carbon. This works out to an average of $1.20/tonne of carbon emitted in the province, significantly below the stated price of $20/tonne. Since the purpose of the SGER is emissions reduction, not revenue collection, this may not be a large concern. From an expectations point of view, however, it is important to understand that the relationship between the price of Carbon and total provincial emissions is not perfectly one-to-one.

Figure 2 – Suncor Base Plant Actual and Projected GHG Emissions, and SGER-Mandated Emission Targets (Source: Suncor Energy and the Government of Alberta)

Figure 2 – Suncor Base Plant Actual and Projected GHG Emissions, and SGER-Mandated Emission Targets (Source: Suncor Energy and the Government of Alberta)

Adopting a blanket carbon tax of $50/tonne would be a shock for Alberta’s oil industry. For instance, in 2015, Suncor emitted 20.5 MT of CO2e. At the $50/tonne rate, this would cost Suncor over $1 billion in Carbon tax. At Suncor’s Base Plant, a $50/tonne tax equates to a per barrel cost of $3.62/bbl, more than a 15% increase to its current blended supply cost (~$22/bbl of oil equivalent). The province understands the need to strike a balance between implementing an overly aggressive tax and promoting economic activity. If the price is too low, the incentive may be too low to drive a meaningful change in behavior for oil sands producers; if the price is too high, the producers may fail, leading to a significant economic hit for the province.

However, the likelihood of a blanket $50/tonne Carbon tax on oil sands producers coming to fruition is far from certain. The federal government stated while announcing the Carbon tax plan that large emitters in Alberta would fall under a different system with emission reduction targets (likely anticipating the issues the blanket tax would cause the oil sands). In addition, the NDP have proposed implementing a cap-and-trade program for the oil sands, where an overall Carbon “cap” would force companies to innovate to reduce emissions or “trade” with other producers to increase their own allowances. A common figure cited for the Carbon cap is 100MT, which is around a 50% increase from the current yearly emissions from the oil sands industry (and a target that is not projected to be hit until 2030).

It’s still unknown how the Provincial and Federal government plan on further implementing GHG reduction targets for oil sands producers, leaving many questions for the industry. Will a Carbon tax de-incentivize further investment in the Alberta oil sands for multinational oil producers who are free to spend their capital elsewhere, leading to a decrease in emissions but a consequential slowdown in economic output? Will the new incentives lead to a new era of innovation in the oil sands that ensure a Carbon cap will never be met? In the ever-changing landscape of public and environmental policy, a single announcement from the Prime Minister can change the game quickly for any large-scale producer.