As the world looks for climate change action, Alberta is getting praise for its carbon tax but also criticism for its growing oil sands emissions. In an interview on Nov. 28, 2016 with reporter Laura Stewart, University of Calgary economist Trevor Tombe explained what the carbon tax will or won’t do to our economy and our emissions.
Why are exported fuels exempt from carbon pricing?
We want to only charge for emissions in Alberta. And so if fuel is exported, then those emissions are happening somewhere else. We’re going to leave that to the other jurisdiction to deal with. And I think that’s sensible. Alberta should only deal with what it can control. And if we were to tax exports then there would be some significant competitiveness concerns too, where people would just get their fuel from somewhere else.
How will carbon pricing work to reduce oil sands emissions?
Every tonne that you don’t emit, you’ll save $30.
So it will be in the processes?
The emissions from oil sands are for the most part associated with, yes, the vehicles and stuff on site, but importantly, making steam. So you shoot steam down, and oil comes up. That’s about the extent of my engineering knowledge, but to make that steam, you need to burn a lot of natural gas. There are different technologies to use. There are more efficient ways to do it, and less efficient ways to do it. And now the existence of the carbon price makes the incentive to install efficient processes and steam generation technologies all that much more higher.
So overall, what is the expected impact of the carbon pricing on the oil industry?
Oh, very minor. The large emitters will face a carbon price, and most of that revenue will be returned to large emitters in the form of a subsidy on their output. So we’ve made it more expensive to emit, but we haven’t really changed overall average cost because of the subsidy. Overall, for oil sands in Alberta, the all-in cost is less than 50 cents a barrel, so it’s nothing — I mean, you see movements of that amount every day. That’s one of the neat ways in which they’ve designed the system, to really prevent there being some serious competitiveness concerns.
Unlike BC’s revenue-neutral carbon tax, which funds existing government programs, Alberta’s will fund some new programs to reduce emissions further.
Is this a blended approach, where there’s a carbon price, [and] some of it just works through the market, but some of it works through targeting spending? Are there some advantages to that more blended approach?
There are two separate issues. One is carbon pricing, and one is, “What do we do with the revenue?” And there’s two broad ways in which you can think about approaching that question. One would be to take BC’s route, and lower other taxes—so, to not increase government spending, but lower government revenue by an exactly equal amount as what you bring in with carbon taxes. The government has not really chosen a blended route. They’ve chosen to spend the bulk of the carbon revenue. They have cut the small business tax rate from three to two [per cent], out of the carbon revenue, but that doesn’t add up to much. That’s about $200 million. But the bulk of the carbon revenue, they are going to spend.
And you would have advocated a reduction in taxes instead?
Yes, no question. If we want to increase government spending, that’s a discussion to be had. How do you pay for it? An economist would say: pay for it with efficient sources of revenue. That’s a sales tax.
Do you have a sense of how much difference the [carbon tax] will make in the global fight against climate change?
Every tonne that we emit has consequences. And that’s what we should focus on. Nothing Canada does will affect the global outcomes here. We’re not China. We’re not the United States. But that doesn’t mean that each tonne doesn’t itself have a consequence. And so we shouldn’t think that Canada can solve the world’s problems, but that doesn’t mean Canada should then feel free to dump our pollution onto others. And roughly speaking how much each tonne has in terms of dollar-equivalent environmental costs is a tricky thing to estimate. The range is huge, but Environment Canada surveys a bunch of the estimates, and around $50 or so is probably a good thing to have in mind, with a big margin of error. But if we make sure we are only emitting in situations where the benefits exceed that $50, then great, then I’d say we are good to go. And that’s precisely what carbon pricing is meant to do.
And the cost of a carbon pricing approach on a per tonne basis?
Yeah that’s a good question. So the Alberta plan—the government has a rough estimate of how much they anticipate this will affect overall economic activity, and [there is] an estimate from Andrew Leach of how much it would affect emissions, and so if you divide the two, then Alberta’s plan is roughly $50 a tonne. And that’s higher than the $30-a-tonne price itself, because there are other costs associated with the plan and other distortions. Now for perspective, some would prefer to block pipelines, which is a debate we’re seeing quite a bit of, recently. Those costs have dramatically higher costs per tonne. Back of the envelope, if we block every future pipeline, we’re looking at between $1500 and $2000 a tonne.
Is there an argument that, if the carbon price was successful, those pipelines wouldn’t be needed?
Yeah, maybe…if there was a global price on carbon.
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