Blake Shaffer is an adjunct professor of economics at the University of Calgary and Energy Policy Fellow at the C.D. Howe Institute.
On Tuesday, Alberta’s United Conservative Party government announced the details of its carbon-pricing plan for large emitters, the Technology Innovation and Emissions Reduction Regulation (TIER). At its core, TIER is a carbon tax, in the sense that it puts a price on emissions. While the large-emitter piece of carbon pricing receives far less attention than the notorious “carbon tax,” TIER will cover more than double the emissions.
It was highly anticipated, given the party’s rhetoric around climate change: The UCP’s seeming raison d’être was fighting the carbon tax espoused by the provincial NDP and the federal Liberals, and it wasn’t so long ago that Premier Jason Kenney mused openly about reviving coal power and vowed to cancel a planned shutdown of coal-powered plants. And a divisive federal election just concluded with the Liberals claiming victory on the strength of its climate-change bona fides, campaigning against the bogeymen of Mr. Kenney and Ontario Premier Doug Ford.
The policy, in some ways, lives up to that rhetoric. It weakens the stringency of the previous governments plan by changing the benchmarks above which costs are incurred. There is one notable exception: the power sector. Much like the federal Liberals’ plan, the Alberta government will price carbon emissions from electricity generators.
But while one levels the playing field, encouraging the growth of renewables and conversion of coal to natural gas, the other subsidizes coal and provides no advantage to renewables over existing natural gas.
It might come as a surprise which party put forward which plan.
In a rare moment of seeming bipartisanship, the UCP will largely keep the NDP’s superior carbon-pricing design for the electricity sector. All electricity generators will face a $30-a-tonne carbon tax, and each will face the same performance benchmark – a “good-as-best-gas” standard. This means that generators emitting more than a modern and efficient natural gas plant (a “best-gas” plant) will end up paying, while those that emit less will receive credits. Critically, this maintains the proper relative-price signal between different sources of generation, encouraging more investment in market-based renewables, hydro and even nuclear, and a shift from coal to gas and cleaner sources of power.
The federal plan cannot be equally lauded. Instead, it creates different benchmarks for different fuels, providing more relief for coal generators. As a result, coal will run more often, emitting more in the process, until its eventual regulated phase-out in the coming decades.
It’s not all good, though. While plans to efficiently price emissions for the power sector are laudable, there are some questionable choices being made around what to do with the rest of Alberta’s large emitters.
Outside the electricity sector, the UCP plan reverts from the NDP’s product-specific benchmarks to facility-specific ones, in a nod to Alberta’s original carbon-pricing policy, the Specified Gas Emitters Regulation (SGER). This will mean more protection for dirtier facilities and, ultimately, more emissions.
Product-specific benchmarks favour cleaner firms within a sector, encouraging a shift in production from dirty facilities to cleaner ones. Facility-specific benchmarks, on the other hand, are based on historical emissions from a given company’s own facility, requiring firms to pay on emissions above a certain threshold, which the UCP will set at 90 per cent of 2013 to 2015 levels. This provides more protection to historically dirtier firms, discouraging the valuable shift in production mentioned above.
The main argument in favour of facility-specific benchmarks is that when emission intensities vary greatly within a sector, as they do in the oil sands, having a single benchmark for all firms can impose challenging costs on some. That’s why the NDP plan had a secondary “cost containment” policy to limit this problem on an ad hoc basis. Facility-specific benchmarks, instead, limit policy cost outliers by design.
But in doing so, TIER provides windfall benefits to many dirtier firms. The recent budget puts a fine point on this, predicting a reduction in government revenue (or, conversely, savings to industry) of $700-million over three years because of the shift.
While the merits of applying facility-specific benchmarks on existing emitters are debatable at best, the argument for using them for new facilities is illogical. Facility-specific benchmarks will lead to new investments that are higher-emitting than what a product benchmark would provide, by granting more cost protection for dirtier investments. This is a huge miss for effective carbon policy, as encouraging cleaner investment is critical for decarbonization.
So the UCP’s policy is not perfect. Critics will rightly note that it does not put Canada on the path to meeting its Paris commitments. But then again, the Alberta NDP’s policy didn’t either, and nor does the federal Liberals’. Over all, it’s a reasonable plan in many respects, far exceeding the low expectations set by Mr. Kenney’s previous rhetoric. It signals that the government has come to terms with the inevitable demise of coal power and won’t get in the way of market-based renewables and clean power in Alberta – even if the elephant in the room of expanding oil sands emissions remains.
The ball is now in Justin Trudeau’s court, as his cabinet must decide if the UCP plan meets the standards of the pan-Canadian framework, or if Ottawa will impose the federal backstop. The UCP has upped its chances of acceptance by moving from the $20-a-tonne price in their election platform to the $30 required by the federal government, even as Alberta weakens its bite by shifting the benchmarks.
The federal government, though, should accept this plan. Not least because of the political repercussions of not doing so, but because the UCP plan will continue the trend started by their predecessor of dramatically reducing emissions from Alberta’s power sector – indeed, far more so than if Ottawa instituted its plan.
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