Tuesday, December 6, 2016

Why is Alberta's Carbon Price ('tax') a Blessing in Disguise? Part I

Part I: Making Alberta more competitive now and in the future

(this is Part I of a three-part series of articles on why Alberta's new carbon price, levy or 'tax' is a blessing for Alberta and Canada.

Prepared by: Mark Anielski and Krzysztof Palka

December 6, 201

A Note to the Reader

The following research paper was prepared by two independent Alberta economic and energy consultants, Mark Anielski (an ecological economist) and Krzysztof Palka (a mechanical engineer and renewable energy expert) to help inform the debate about Alberta’s energy future and the new carbon price that will impact all Albertans come January 1, 2017.

The purpose of our research is to help Albertans become better informed about what for many is a complex and even emotional subject; the imposition of a carbon levy. Our hope is that this research and our observations will provide decision makers and all Albertans with a common-sense perspective on this issue. Our goal is simple: do we believe the new carbon levy or tax on carbon emissions provides a positive, neutral or negative impact on the overall well-being and future of Albertans?

We have drawn from publicly available statistics for our analysis. Our analysis was completed based on what we believe are reasonable analytic protocols and assumptions. The opinions and conclusions we have arrived at are our own based on our professional disciplines in accounting, economics and engineering. We were not influenced by the opinions or positions of political parties, think tanks, energy sector organizations or lobbyists, or by the energy industry.

Making Alberta more competitive now and in the future

The introduction of Alberta’s carbon levy (not a tax per se) of $20/tonne CO2e in 2017 and rising to $30/tonne in 2018 is creating all kinds of anxiety and fears. Will the carbon levy, tax or price that is expected to raise almost $2 billion per annum be as scary and damaging to Alberta’s economy as some people believe? Or will pricing carbon result in an important opportunity for Alberta to make the shift to a sustainable and renewable energy future, make our oil & gas resource more competitive in the changing global landscape, make our economy more resilient and increase our quality of life and happiness?

What do Albertans think about the new carbon tax or levy that will be introduced in January 2017? Abacus Data asked Canadians about a carbon tax in April 2016. In this survey, 73 per cent of Albertans indicated “putting a price on carbon” is a very good, good or acceptable way “of encouraging people and businesses to reduce emissions.” However, in that same Abacus survey, when asked their opinion of a “carbon tax,” Albertans’ support dropped to 51 per cent. Other recent polls have showed Albertans’ support as low as 37 per cent. However, in the same Abacus poll Canadians said that they would support spending any carbon taxes on 1) investing in research and development and clean energy; and 2) investing in infrastructure.
We believe Alberta’s new carbon levy is an important opportunity to build clean and renewable energy capacity, achieve greater social acceptance for our oil and gas outside of Alberta, reduce carbon emissions and Alberta’s carbon liability, and improve Alberta’s economic well-being.
In this research paper we hope to provide you with a common-sense assessment of this complex issue, revealing the trade-offs, costs and benefits of Alberta’s efforts to diversify our energy economy. We will use current statistics on Alberta’s electrical energy infrastructure, planned renewable energy projects, energy efficiency opportunities and estimate the real costs of moving Alberta to a green energy future.

It’s a Carbon Levy not a Carbon Tax!

There is much confusion regarding Alberta’s carbon pricing; some refer to it as a levy and some as a tax. Is it just semantics or should we be concerned with the name and how the money is collected and spent?

Both terms describe an almost similar mechanism for collection of fees that are imposed on individuals and corporations by the government. The difference is how the money is allocated and spent.

Taxes are general fees consolidated into a single fund and allocated towards the government budget. They are collected to deal with a current liability. As budgets may be allocated differently every year, there is no guarantee where the money will go. But one thing is sure, you will always pay taxes, the amount may change but the requirement to pay will not.

On the other hand, levies are a temporary tax collected for a specific purpose to deal with a future liability. They are collected to provide for a social purpose or to mitigate an impending crisis which is understood and supported by society. For example, if our government were to collect a flood levy, all the money would go to building flood defences and helping to relocate individuals and businesses from flood prone areas. This would ensure that when the flood comes, there would be no loss of life or property and minimal disruption to social and industrial activities.
It is our understanding that the guiding principle behind establishing the Carbon Levy in Alberta is to redirect all the collected money towards energy efficiency and minimizing GHG emissions from personal and industrial activities in our province.
While there is no exact formula or plan available from the government at this time, by choosing the name “Levy” the government signals its clear intentions to direct the funds towards a specific purpose. The money will be spent to build greater personal and industrial resiliency which is often associated with increased energy efficiency as demonstrated by many jurisdictions and organizations around the world.

Alberta’s $13.7 Billion Carbon Liability

We've estimated that the cost of Alberta's carbon emissions as a liability imposed on Canada and the world at $13.7 billion valued at $50/t CO2e. This $50 price is not only a reasonable proxy for the global social cost of carbon but is also the future price of carbon the federal government is putting on carbon and which Alberta recently agreed to. In addition, reinsurance companies such as Munich Re have estimated the future costs to their insurance business from current levels of carbon emissions; using their global estimates of risk we’ve calculated an average carbon cost of US$55/t CO2e. So our rough estimate of $50/t CO2e as a societal cost of Alberta’s carbon emissions is quite reasonable.

The emission of carbon into the atmosphere as a result of our modern lifestyle and industrial behavior imposes what we call an unfunded liability. This liability is unfunded in the sense that it does not appear on the balance sheet of Alberta, Canada or oil companies as a monetary burden or cost to the planet and the well-being of our children and future generations. 
A proper balance sheet for Alberta should include a valuation of the future risk imposed by carbon emissions on the well-being of future generations.
Alberta is certainly a contributor to this liability, as Alberta's emissions of 274 megatonnes of CO2e (MT CO2e) in 2014 contributed to over 37% of Canada's total carbon emission. While most of other provinces are on a steady path to lower their carbon footprint, both total and per capita, Alberta’s GHG emissions have grown by 17% since 2005 primarily due to the expansion of the oilsands. In the changing world, this trend will put us at an economic disadvantage.

The vast majority of Alberta's emissions come from industrial sources and the majority of industrial carbon emissions are from the oil and gas sector. Of Canada’s overall GHG emissions in 2014, an estimated 46% emissions came from Canadian households, meaning the remaining 54% came from industry, businesses and governments. Canadian residential energy use contributed 6% (46 MT) to Canada’s total emissions in 2014 while ground transportation (private vehicles, buses and transport trucks) contributed 19.1% or 140 MT to Canada’s total emissions.

Of Alberta’s estimated $13.7 billion unfunded carbon liability, we estimate that roughly $2.25 billion per annum is attributed to Alberta’s oilsands (16%) and $1.3 billion (9.4%) is attributed to the burning of coal for coal-fired electricity plants. In comparison, the Alberta Government projects oil and gas royalties will be only $2.5 billion in 2016-17.

From an accounting perspective, it is important to note that this estimated $13.7 billion carbon liability is not posted on either the province of Alberta’s balance sheet or Alberta’s oil and gas company balance sheets. Reinsurance companies like Munich Re and Swiss Re, as well as Canada’s The Co-operators Insurance, have been testing how to treat carbon risk and liabilities as part of their internal risk-analysis planning in response to climate change risk; they have used a carbon liability or risk cost of $50/t CO2e in their risk analyses. When the reinsurance industry begins to express risk to its industry in terms of carbon pricing, we know that carbon emissions have become a real liability.
We believe that at some point the insurance industry will most certainly consider placing a carbon price on existing client insurance premiums commensurate with the carbon footprint their corporate and residential clients impose on the planet.
In this context, Alberta's carbon levy of $20/tonne CO2e beginning January 1, 2017 and rising to $30/t CO2e in 2018 and the proposed federal government carbon tax of $50/t tCO2e seems like a reasonable proxy for the societal cost or risk of carbon emissions that all citizens should share. Consider that Norway has placed a $94/t CO2e price on carbon and Sweden a $221/t CO2e price.

A Price on Carbon can be a Powerful Tool to Make the Economy Stronger

Alberta’s carbon levy is projected to generate an estimated $9.6 billion over the next five years once the $30/tonne CO2e price is fully in place by 2018. Of this total $6.2 billion will be invested to diversify Alberta’s energy industry and create new jobs:

  • $3.4 billion for large scale renewable energy, bioenergy and technology
  • $2.2 billion for green infrastructure like transit.

An additional $645 million will go to fund the new Energy Efficiency Alberta enterprise, a new provincial agency that will support energy efficiency programs and services for homes and businesses.

The remaining estimated $3.4 billion will go to help households, businesses and communities adjust to the carbon levy:

  • $2.3 billion for carbon rebates to help low- and middle-income families (about 67% of Alberta households)
  • $865 million to pay for a cut in the small business tax rate from 3% to 2%
  • $195 million to assist coal communities, Indigenous communities and others with adjustment.

Estimates of the impact of the carbon levy on households suggest it will amount to roughly $470 in increased heating, electricity and transportation costs for an average household in 2018, assuming that household consumes the same amount of fossil fuels as it did in 2015. For many households, with annual incomes of less than $95,000, the tax will be rebated (about 67% of Alberta’s households).

When the $20/tonne CO2e carbon levy comes into effect January 1, 2017 it will increase gas prices by 4.5 cents per litre and 5.35 cents per litre for diesel. That’s about the same increase we experience every long weekend. It will also affect our utility bills and in other places where we use fossil fuels. The Alberta government has estimated the impact will be $191 to $338 per household.

However, individual Albertans that make $47,500/yr or less will receive a rebate of $200 whether they pay income tax or not. Families making less than $95,000 will receive a rebate of $300. Essentially, after the rebate there will be no monetary impact on the majority of Alberta families.

In addition, small business tax rates will be cut by one-third from three to two per cent. More than 95 per cent of business in Alberta are small businesses. This cut will mean $185 million in tax reductions. The levy will not apply to marked gas or diesel used by farmers. And there will be a series of programs to help farmers, businesses and individual Albertans save energy.
Albertans and Alberta businesses that participate in energy efficiency programs funded by the levy will actually wind up in a better economic position.
Measures differ for each sector, but for example the installation of one simple device such as a programmable thermostat by home owners can save between 10 and 30 per cent on heating costs.

Other Benefits: What hasn’t been included in the carbon levy calculations are the expected well-being benefits of investing some of the carbon levy revenues in building Alberta’s renewable energy capacity, diversifying Alberta’s energy industry and reducing Alberta’s $13.7 billion carbon liability. While there will certainly be short-term pain which we will experience at the pump when gassing up our vehicles on January 1, 2017, the long-term benefits to Alberta in ensuring a more resilient and green-energy future are going to benefit future generations.

The Scandinavian Experience

Norway demonstrates an important example of how nationally taxing carbon can be used to make a country's own oil and gas industry more resilient to the low pricing environment and be successful in the low carbon economy of the future. In 2013, Norway petroleum production and natural gas extraction carbon tax was increased to US$71.84 per tonne CO2e (C$94.50/t CO2e). In Sweden, the price of carbon is even higher, now at US$168/t CO2e or C$221/t CO2e. Norway’s climate policies, along with the carbon tax, are resulting in economy-wide energy efficiency improvements and a clear shift toward electrification including investment and incorporation of renewable electricity in offshore petroleum extraction.

Some of the new policies under consideration will result in Norway moving away fully from petroleum-based transportation maybe as early as in 2025 and will minimize its future consumption of petroleum products, however this will not diminish Norway’s ability to continue to export oil and gas. Norway is well positioned to benefit from continuing consumption of natural gas and oil in Europe during their transition to a low carbon economy. When considering the cost and full lifecycle GHG intensity per barrel, pursuing low upstream GHG emissions and energy efficiency resulted in very low operating costs, and has made Norway’s oil and natural gas one of the best options for Europe. Additionally, investment in wind projects by the oil industry is diversifying Norway’s energy production. Norway is well on it’s way to becoming a renewable electricity powerhouse of the future while benefiting the most from their oil and gas exports. 

Let's compare the economic performance of Canada to Norway and Sweden. The current account balance is an important economic indicator of the health of an economy as it compares a country's net trade in goods and services, plus net earnings, and net transfer payments to and from the rest of the world. It provides insight to the results of the type of approach Norway and Sweden have embraced. The current account balance for Norway in 2016 is +$23.6B or +5.3% of GDP and Sweden’s is +$25.4B or +5% of GDP. In contrast, Canada’s account balance is -$51.1B or -3.4% of GDP. Clearly, a high carbon price has not impacted the competitiveness of these economies or the quality of life of their citizens, and many economists familiar with the approach would suggest that the carbon tax was an important factor in building the economic resilience of those countries. When we look at how to improve our economic performance we should look at the best examples in the world and learn from them; a price on carbon can help us to look in the right direction.

Economic impact modelling for Alberta completed by Alberta Finance economists project a short-term reduction in Alberta’s GDP of 0.3 or 0.4 per cent by the year 2022, which translates into slower growth of .05 per cent per year during that time. However, what these GDP forecasts ignore are the other net positive impacts to Albertans including improved health and quality of life benefits associated with expected reductions in greenhouse gas emissions and pollutants that will result from increased renewable energy capacity, elimination of coal-fired electricity, and improvements in energy efficiencies.
If these other societal and environmental benefits were properly accounted for Alberta’s economy is likely to show a net positive well-being return on investment from the carbon levy.

Alberta’s Efficiency Opportunities

Alberta is currently creating its own Energy Efficiency Alberta agency to be funded by $645 million from carbon levies. Early estimates of energy efficiency savings by the Alberta Energy Efficiency Alliance have estimated a total of $510 million in annual energy savings, 3,000 more jobs, $550 million in increased GDP, and the equivalent of taking 900,000 vehicles off the road.

Dunsky Energy Consulting estimated that efficiency savings for Alberta in 2015 could range from 6.35 to 14.45 MT per year. Estimating the societal cost of carbon savings based on $50/t CO2e could amount to between $317 million and $722 million per year, which would mean as much as a 5% reduction in Alberta’s total current carbon liability.

To enrol every Albertan in energy efficiency improvement efforts, we need to make the cost of energy and the associated carbon levy very transparent, based on real and easily verifiable measurements. For example, utility bills should have a carbon levy attached to every monthly statement that is directly connected to our consumption of electricity and natural gas, water and cost of waste disposal. It is easier to understand a 4 1/2 cent carbon levy attached to the price of gasoline at the pump since we know exactly how much are are pumping and we should extend this approach to all major activities that consume energy. We should measure and be aware of energy consumption on a personal, municipal and regional level. Today we do not have easily visible regional and city level statistics on the total amount of gasoline and diesel consumed in Alberta. Nor do we have an annual summation of the amount of electricity being consumed at the neighbourhood level or city level; most of the statistics are modelled rather than using more powerful measured data.
Knowing what the carbon levy is in relationship to personal consumption, will motivate each citizen and their household, each municipality and each region to pursue energy efficiency options and ultimately renewable energy options that will affect their bottom line and will actually reduce the cost of living and improve disposable income.
Without a high level of transparency and awareness, our concern is that the tax on carbon will become another source of political rhetoric and fail to achieve the overall goal of reducing the carbon liability on the planet and for future generations.

Following Nova Scotia’s Lead

Alberta could learn from Nova Scotia’s energy efficiency efforts. Nova Scotia is a Canadian leader in improving energy efficiency and creating a lot of economic benefits along the way. In Nova Scotia, energy efficiency retrofits are expected to reduce provincial energy demand by as much as 20-30% over the next few years.

Over $110 million has already been saved in energy costs in 2016 by an estimated 225,000 Nova Scotians (or 28% of the adult population), in both households and businesses who have participated in Nova Scotia’s energy efficiency program (EfficiencyOne). The result has been an 8 per cent reduction in total electricity load.

The megatonnes in carbon emission reductions and the estimated reduction in the carbon liability of Nova Scotia has not yet been calculated. However, Stephen MacDonald who oversees the program says he expects greenhouse gas emissions to be “12 per cent lower than they otherwise would have been if not for energy efficiency.” Nova Scotia emitted an estimated 16.6 MT of CO2e in 2014 so we could say that Nova Scotia will realize a net reduction of almost 2.0 MT of CO2e emissions, and valued at $50/t CO2e that would mean annual societal savings of almost $100 million per year.

If you add these societal cost savings ($100M) to the estimated energy cost savings ($110M), Nova Scotia has seen a $220 million per year economic benefit, not counting the value of lower health-care costs, from their energy efficiency program, to date. Energy efficiency initiatives are the easiest and most obvious yet often overlooked opportunities to lower cost and improve competitiveness. 
Through this initiative Nova Scotia has effectively doubled its return on investment!

Embracing the Carbon Levy

By embracing the carbon levy, Alberta can reap similar benefits as demonstrated by our sister province of Nova Scotia, and by other jurisdictions that have embraced carbon pricing without negative impacts on their long term economy. In Alberta, the carbon levy is designed to cover the cost of implementing energy efficiency initiatives. The inevitable transition to a low carbon economy will leave us with a large liability if won’t address it today. In the short term, this may look scary and costly, however by analogy an investment in your child's education may seem expensive and with little short term returns but the long term benefits of an independent and successful adult are worth the short term efforts.
This is what we need to do for each other, for our children and for our province.

In Part II (released December 7) of this analysis, we will address the issue of long term competitiveness of our oil and gas industry, how we can ensure that the energy transition does not exclude carbon-based energy and how it will help the competitiveness of our resources on the global market.

Part III (released December 8) will look at the opportunities for Alberta to quickly become the world's renewable energy super power, eclipsing Germany the world's leading PV solar power, by developing Alberta's natural solar energy advantages on 900,000 Alberta rooftops and converting some of Alberta's car fleet to electric.

About the Authors

Mark Anielski is President of Anielski Management Inc. an Alberta-based economic advisory consulting firm that advises governments, corporations and First Nations on economic well-being. Mark is an economic strategist who specializes in the economics of well-being. He taught corporate social responsibility, business ethics and entrepreneurship at the University of Alberta’s School of Business between 2003-2012. He is schooled in economics, accounting and forestry. He served as a senior economic advisor to China between 2003-2006 in helping China develop natural capital accounts, green GDP estimates and new economic well-being indicators. Mark believes that our measures of progress should be focused on the well-being of people and the planet. He is the author of award-winning book The Economics of Happiness: Building Genuine Wealth. In 2008 Alberta Venture magazine named him one of Alberta’s 50 most influential people. 

Krzysztof Palka has diverse expertise in sustainability focused business strategy, renewable energy, sustainable operations, technology development, lean manufacturing and oil and gas production optimization along with an executive education from Harvard Business School and MSc in Mechanical Engineering. Krzys is a serial entrepreneur with a keen sense for innovation, process improvement and personal bias towards applying simple, knowledge based solutions to solve complex problems. He is currently pursuing business opportunities in clean technologies, carbon-negative plastics and energy efficiency to fulfill his passion for sustainable future.


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