Alberta’s new premier, Jason Kenney, has vowed to repeal the provincial carbon levy implemented by the previous NDP government, which began in 2017 at $20 a tonne, and rose to $30 a tonne before the NDP froze it in a form of protest to delays over the Trans Mountain pipeline expansion.
The federal Liberal government has said that if Kenney makes good on his promise, the federal “backstop” carbon-tax will kick in on Alberta consumers, with the federal rate scheduled to rise to $30 a tonne next year.
But a $30-per-tonne carbon tax rate in Alberta, whether imposed provincially or federally, is around 50-per-cent higher than the rate currently in place in Quebec as a result of its cap-and-trade system. Is there any world in which this makes sense?
To be blunt, there is no reason that justifies such a gap. One province should not pay an effective rate that’s higher than another. Even worse, in those provinces where the federal carbon tax “backstop” is imposed — Saskatchewan, Manitoba, Ontario, New Brunswick and likely soon Alberta — the tax will be twice as high, if it reaches $50 tonne in 2022 as scheduled, than the de facto rate in Quebec, which is expected to reach around $25. This is because the price of Quebec’s cap-and-trade plan is linked to the price of permits sold on a market it shares with California, and where the California government deliberately oversupplies permits to keep prices low. Projections for prices on that market show permit prices rising to remain below $25 by 2022. Still, the federal government approved Quebec’s cheaper plan as sufficient to avoid the more expensive federal “backstop” carbon tax. We are therefore punishing certain producers more than others, which will certainly hurt an industry already faced with many problems.
Indeed, the Canadian oil and gas sector is dealing with several challenges; a higher carbon tax just adds insult to injury.
First and foremost, the lack of pipelines in Canada is keeping our resources from reaching foreign markets, forcing exporters to take discounts for serving just one market — the U.S. — using limited transportation options. A crisis point was reached last year when the discount rate between Western Canada Select and West Texas Intermediate — essentially, the gap between the price of Canadian and U.S. oil — peaked at $50 per barrel, far above its historic level. This led the Alberta government to impose production cutbacks of 325,000 barrels per day, temporarily easing the pain, but not solving the underlying problem.
Pipelines that access to tidewater would allow Canadian producers to service Asia, which is the market of tomorrow. While the International Energy Agency (IEA) expects North American and European demand for petroleum products to decrease between 2017 and 2040, Asia’s demand is expected to increase by 9 million barrels per day. The IEA also forecasts major increases in natural gas demand by the same countries during the period.
A lack of sufficient pipelines transporting oil across Canada also increases the cost of crude oil for Eastern Canadian refineries. In 2017, Canada imported approximately 670,000 barrels of crude oil per day, with approximately 350,000 barrels per day coming from the U.S. The rest came from countries including Saudi Arabia, Algeria, Norway, Nigeria, Angola, Azerbaijan, Kazakhstan, and the United Kingdom.
The lack of market access, due to the difficulty of building pipelines, and the numerous delays surrounding energy projects are the challenges that currently have the biggest financial impact on this sector. This hurts not only provincial public finances, but also the Canadian economy as a whole — at an economic cost of some $4 billion annually in recent years. That cost has certainly grown far higher now that oil production exceeds pipeline capacity.
To this must be added new regulations that make the process of developing projects more burdensome. In Alberta, for example, permitting delays are much longer than in the United States, our main competitor.
Ottawa is also planning to impose another policy, the Clean Fuel Standard, which will add yet another layer of regulation, and is in fact no more and no less than another carbon tax under a different name.
The cumulative effect of all of these measures, often adopted piecemeal, will end up stifling the Canadian oil industry, which has already been hit quite hard. Investment in Alberta’s oil and gas sector has fallen by half, from $81 billion in 2014 to $40 billion in 2018. The oilsands sector, requiring longer lead-times, has experienced an even sharper drop in investment, from $34 billion to $11 billion over the same period.
Experts project that the global demand for oil will continue to grow until at least 2040, especially in Asia. That’s why Canada must continue to supply some of that demand in a responsible manner, as it already does, rather than leave its resources in the ground unused in favour of other producing countries — some of which have environmental and human rights records that are far less exemplary than Canada’s.
Instead of overtaxing and overregulating the vital part of our economy that is Alberta’s oil and gas sector, we should strive to eliminate unnecessary hurdles and misguided policies that reduce the well-being of Canadians while providing little to no benefit for the natural environment.
Jean Michaud et Germain Belzile sont respectivement chercheur associé et chercheur associé senior à l'IEDM. Ils sont les auteurs de The Cumulative Impact of Harmful Policies – The Case of Oil and Gas in Alberta et signent ce texte à titre personnel.