Calgary·In Depth

Jason Kenney's relationship with carbon taxes: It's complicated

The United Conservative Party is talking about scrapping the NDP's Climate Leadership Plan while bringing back a PC-era price on carbon for large emitters. What would that mean for Alberta? We delve into the details.

The UCP leader wants to bring back a PC-era law charging large emitters: What would that look like?

UCP Leader Jason Kenney says carbon pricing shouldn't apply to individual Albertans filling up at the pump but he sees merit in the government charging large emitters for the greenhouse gases they put out. (Jason Kenney/Twitter, Darryl Dyck/The Canadian Press)

It's the fiercest political debate in the province.

In tweets, news releases, speeches and advertising, the United Conservative Party hammers away at the governing NDP over what they describe as the "job-killing carbon tax."

The UCP launched a new ad campaign in early January targeting Alberta's Climate Leadership Plan and promising to scrap the carbon tax it imposed. The party also aims to "vigorously oppose the imposition of any federal carbon tax," according to its proposed policies.

And in the last few days, UCP Leader Jason Kenney has called for a carbon tax referendum.

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But — and this is a big but — Kenney says he actually does support a price on carbon. He would just do it differently than the NDP.

Here's the deal.

Kenney wants to get rid of the carbon tax — the thing we all pay at the pumps and on our gas bills. In addition, he wants to get rid of the Carbon Competitiveness Incentives (CCI). That's a new NDP government program that applies only to large, industrial emitters.

And that's what this article is going to look at.

Kenney doesn't just want the CCI gone; he's also talking about bringing back the old program that ran before it.

"I'm not opposed, in principle, to the charge on major emitters adopted by the previous PC government," he told CBC News.

"Some of the ideas that I'm certainly open to would include coming back to the Specified Gas Emitters Regulation," he later reiterated on Alberta at Noon.

Yes, the Specified Gas Emitters Regulation. Or SGER, for short.

A program whereby industry had to pay for its carbon emissions.

Everything old is new again

It was a long-running — but, outside of oil and gas circles, perhaps little known — program that lasted for more than a decade.

Alberta became the first province in the country to put a price on carbon when premier Ed Stelmach's government adopted SGER in 2007.

Alberta Premier Ed Stelmach reacts to winning his leadership review with 77.4% at the Alberta PC party's annual meeting in Red Deer, Saturday, Nov. 7, 2009. (Jeff McIntosh/The Canadian Press)

SGER was actually in effect until Jan.1 of this year, when it was replaced by the new regulation, which is favoured by the NDP government and some — but not all — of the biggest players in the oil industry.

But just as SGER was riding off into the sunset, Kenney has resurrected the idea and injected it in the middle of the broader carbon tax debate. That debate promises to be a major issue in our province's next election, and will likely feature heavily into in the upcoming UCP policy convention.

The question facing voters then becomes: Is the new CCI regulation better? Or was the old SGER system preferable?

The problem is that both regulations are complicated. Very complicated.

But it's worth trying to understand them, because this debate gets at the heart of how Alberta deals with its greenhouse gas emissions.

Just who should pay — and how much should they pay — for releasing carbon dioxide into the atmosphere? Should it be all of us? Or just the largest emitters? And, if so, which of those emitters should pay the most?

Scrapping Alberta's current climate plan and reinstating SGER would be a complicated process. The federal government, much of the world, and the energy industry (with various degrees of willingness) have already moved in a different direction. Environmentalists say SGER never worked that well in the first place. And economists warn switching back to it could cause even more upheaval for the oil patch.

But Kenney is on board. And he's been making his case for it. So let's look at how SGER worked, why he liked it, and what replaced it.

Settle in. This is going to take a while.

A carbon tax by another name?

For a decade, SGER required large emitters that exceeded a certain emissions threshold to pay into a government fund. The rate was set at $15 per tonne, but it didn't apply to all emissions. (More on the details of all this in a moment.)

The UCP draft policy calls on Alberta to "re-establish" that regulation.

Kenney stresses that a return to SGER is only a proposal at this point, and the party membership would still have to formalize it as part of its platform. But he, himself, is open to the idea of bringing back "the charge on major emitters."

You'll note the use of the word "charge," not "tax." Similarly, the T-word doesn't appear anywhere in SGER's name.

But University of Calgary economist Trevor Tombe sees that as a distinction without a difference.

"The UCP supports a carbon tax," he said.

"They just differ over who is going to be covered by the carbon tax."

Who pays and where the money goes

Right now, under the NDP's climate plan, all Albertans pay a levy on fossil fuels based on how much carbon dioxide those fuels emit when burned.

There are a few exceptions — such as "purple gas," the marked fuel reserved for agricultural use — but, in general, the idea of the carbon tax is that it applies across the board. Hence the increase to your gas bill, and filling up at the pump.

What the UCP is proposing would be a return to how things worked from 2007 to 2016.

At that time, individual Albertans didn't pay for their carbon footprints, while large emitters paid for some of their greenhouse gas emissions. What they paid, they paid into a fund.

So, nomenclature aside, returning to SGER would still involve making big emitters pay a price for producing carbon dioxide.

This, Kenney supports.

"It makes a whole lot more sense to impose certain costs on the producers rather than on the consumers," he said.

And this is key: who pays and where the money goes.

Kenney says what he liked about SGER was the fact that the revenues were directed into a technology fund that supports research and innovation aimed at reducing Alberta's greenhouse gas emissions.

Now, this is still the case under the new NDP regulation, which continues to make large emitters pay into that same fund. The difference is found in how much each emitter pays, and how they pay.

Under both the former system and the new one, a government agency doles out money from the technology fund on a project-by-project basis. Recipients have included universities, municipalities and major players in the oil and gas industry.

Since 2009, the fund distributed a total of $327 million to 122 different projects.

Recent grants include $10 million to Imperial Oil for testing a new solvent that could reduce the use of steam in oil sands operations, and $15 million to Cenovus for a pilot project involving fuel cells that both generate electricity and capture carbon dioxide.

I think the solution to the challenge of climate change will be found in research, development,science and technology.- UCP Leader Jason Kenney

Kenney supports putting the money into innovation.

"I think the solution to the challenge of climate change will be found in research, development, science and technology," he said.

This is something the NDP government is actually on board with, too, but investing in technology is just one part of its broader climate change strategy.

In fact, it's expected that contributions to the technology fund through the new CCI system will be higher than they were under SGER.

To understand why, we'll have to look at how SGER worked — and how it didn't.

It's nerdy stuff, but let's go down the rabbit hole.

How SGER worked

It was often said SGER priced carbon at $15 per tonne — but that came with a lot of caveats.

This first is that each facility was given a threshold for its own emissions and only had to pay if it went above that threshold.

And even if they did go above, there were other ways for large emitters to comply with SGER without having to pay the $15-per-tonne charge.

Another caveat: those thresholds weren't based on actual emissions, but rather emissions "intensity" — the amount of greenhouse gases released per unit of production.

Sound complicated? It is.

So let's look at it through a hypothetical company.

Let's say you run an oil sands operation that emits 200,000 tonnes of carbon dioxide in a given year in order to produce a certain amount of oil. Then you ramp up production and put out twice as much oil the next year. To do this you now emit 400,000 tonnes of CO2.

In this scenario, your emissions "intensity" didn't change.

A dump truck works near the Syncrude oil sands extraction facility near Fort McMurray, Alta. (Jason Franson/Canadian Press)

Now, let's say your company's target threshold called for a 12-per-cent reduction in your emissions intensity.

You need to lower your rate, and this rate would be measured against a typical ("baseline") year's worth of emissions for your specific facility.

But say you don't make the target, and you do exceed your limit this year.

Under SGER, you then had three options.

Firstly, you could purchase emission "credits" from other facilities that came in below their own thresholds. And, if you had come in under your own threshold in the past, you could also apply your own credits that you had "saved" up from those previous years.

A second option — you could have a third party "offset" your own carbon emissions. This means paying someone else to do something that reduces emissions by an equivalent amount. These offsets are listed on a registry that is still active today.

Or, thirdly, you could just pay the $15-per-tonne charge.

It's estimated that emitters chose to pay the $15 charge about half the time.

Between 2007 and 2015, those charges totalled about $740 million that was paid into the technology fund mentioned earlier.

Emissions "credits" were used only about 10 percent of the time, by contrast.

The remaining 40 per cent of the time, facilities chose to purchase carbon offsets. So let's key in on these offsets because they were such a big part of SGER, and why it was replaced.

Whether these offsets actually reduced greenhouse gas emissions was often called into question.

Jennifer Winter, an economist with the University of Calgary's School of Public Policy, co-authored a 2015 report on the effectiveness of SGER. (Evelyne Asselin/CBC)

A report from the University of Calgary's School of Public Policy found Alberta's total emissions actually grew by 11 per cent between 2007 and 2014.

The report estimates SGER had a "very small" impact on overall emissions — curbing that growth by "only one percentage point" — in part because large emitters were "purchasing amnesty at a lower cost through carbon offsets."

And outside examinations of the offset program turned up numerous problems with the system — part of what critics saw as larger problems with SGER, itself.

How SGER didn't work

The whole idea behind the offsets is to make up for your excess emissions by paying someone else to reduce emissions by an equivalent amount.

So, let's say you exceeded your limit by 10,000 tonnes this year. In theory, you'd then give someone else money to take on a project that reduces greenhouse gases by 10,000 tonnes at some point in the future. And so, on paper, you come out on target.

But that's not how it worked in the early years of the program.

For years, emitters were routinely allowed to buy "offsets" from projects that had already started. In many cases, these projects had begun even before SGER, itself, had come into effect. In other words, paying people to do something they were already doing.

"Clearly these [offsets] do not represent emission reductions attributable to the SGER," policy analyst Andrew Read wrote in a report for the Pembina Institute, an environmental think tank.

The report found more than 82 per cent of offsets submitted between 2008 and 2010 came from projects that started before SGER had launched, which it described a major "loophole" in the system.

The provincial government changed the rules in 2012 to close this loophole. From that point on, offsets could only be claimed on a "go forward" basis.

Alberta Auditor General Merwin Saher examined SGER numerous times and found a variety of problems with the policy. (CBC)

Still, Alberta's auditor general found many more problems in routine examinations of SGER.

One of the biggest centred around "tillage offsets."

In essence, large emitters would pay farmers to not till their soil, or till their soil less than they normally would. Less tilling ostensibly kept more carbon dioxide in the soil. This also meant fewer emissions from the use of farm equipment that would otherwise be driving up and down the fields, opening the ground ahead of fertilizing and seeding.

For years, these tillage programs made up more than a third of carbon-offsetting projects that were claimed.

But in many cases, the auditor general found it impossible to verify farmers had actually tilled their soil any less. Recommendations to improve evidence gathering and accounting of this practice went unheeded for years.

The auditor general's office also raised concerns that some no-till claims may have been submitted multiple times. And then, in 2014, it recommended abandoning the practice altogether as a valid offset, "because no till has been a standard practice in Alberta since 2006."

So, in other words, large emitters were paying farmers to stop tilling, but those farmers may already have stopped tilling anyway. So where is the emissions reduction? Again, the math didn't add up.

Is your head spinning?

You aren't alone. The SGER program was a complex system, which caused a lot of debate. There were a lot of questions and concerns about it in both theory and practice.

"We saw that SGER was not really effective at really reducing emissions," said Sara Hastings-Simon with the Pembina Institute.

And so when the NDP took power, they came up with their own plan. The one we have today.

It's also been controversial, in its own right.

Changing regulations and business uncertainty

The new NDP government announced it would replace SGER when it introduced its broader climate action plan in 2015.

The old regulation was officially scrapped as of Jan. 1 this year.

In came the new regulation we mentioned earlier — the Carbon Competitiveness Incentives (CCI).

And just a reminder, this is not the much discussed "carbon tax" on your heating bill or at the gas station. This is a program specific to industry.

Like SGER, the current system applies to facilities that emit more than 100,000 tonnes of carbon dioxide a year. The new CCI regulations also set an emissions threshold and charge companies that exceed that threshold at a new price of $30 per tonne — a notable increase over the previous $15 price.

Another big difference — a key difference — from SGER, is that the threshold doesn't vary from emitter to emitter.

The new regulation, in effect, rewards the companies that are most efficient in producing a particular commodity and penalizes those that are the least efficient.

This created clear winners and losers, particularly in the oil industry.

Some oil deposits are simply harder to get at than others, so the CCI was a bitter pill to swallow for companies that had already committed to more challenging projects, particularly in the oil sands. These, by their very nature, came with a higher emissions intensity.

On the flip side, companies with the least carbon-intensive operations stand to profit. As they come in consistently under the emissions threshold, they not only avoid paying any price, they amass credits that they can then sell to their higher-emitting competitors.

As well, for those emitters that do exceed their thresholds, CCI also limits the amount of credits and offsets than can be used — forcing some facilities to pay more into the technology fund than they did in the past.

Some in the industry have grumbled that changing the rules has introduced uncertainty into the market, which investors never like.

And while the program has only been up and running for a few months, Jason Kenney is now talking about chucking it, and returning to SGER.

"I think the previous [PC] government's policy … made a lot of sense," he said.

Others, however, say changing the regulation again would create even more uncertainty, now.

And then there are those who would like to do away with regulations, in general, as a means for curbing climate change — whether it's SGER or CCI or some other set of future government rules.

A lot of economists, in particular, say it would better to price carbon in a simple way and leave it up to the market to sort things out.

Which brings us back to the broader carbon tax question.

Let the market figure it out

Jack Mintz with the University of Calgary's School of Public Policy is not a fan of bringing SGER back.

"I don't really like the UCP stance," he said.

Regulations, in general, end up being about governments "trying to pick the right direction" for cutting carbon emissions, he said.

Now, both SGER and the current CCI are regulations. But the complexity and utility of each of the two programs has to be taken into consideration. And both have to be set in the context of the debate over an overarching carbon tax.

Mintz, an expert on tax policy, prefers a universal tax on carbon that everyone pays — including individuals and businesses, large and small.

"The best way is to create the right incentive, which is put a price on carbon and then let the market … figure out how to reduce carbon," he said.

Jack Mintz is the President’s Fellow at the University of Calgary’s School of Public Policy whose research focuses on public economics and tax policy. (Robson Fletcher/CBC)

Regulations on large emitters aside, Mintz also questions if it's a good idea for Alberta to cancel the carbon tax — which applies to all of us — when Ottawa is set to impose one, if provinces don't do it on their own.

In the interest of reducing uncertainty, University of Calgary economist Trevor Tombe also favours a simple carbon tax, rather than a set of specific regulations.

"Having a clear, predictable, transparent price on their emissions is much better than having regulations, which are often opaque, difficult to quantify, and may change dramatically in the future," said Tombe.

Of course, while Kenney has come out against the carbon tax, his support for a return to SGER is only "in principle." The UCP membership has yet to decide on a formal party platform. Even if they were to form government and revert to the old regulation, there's nothing to say they wouldn't change some elements of it.

As for what the companies that will be most affected by all of this think, well, they're not saying much publicly.

Big emitters reluctant to talk

For now, big emitters are staying tight-lipped about the potential of a UCP government bringing back SGER either as it was, or as a revised program.

TransAlta didn't want to comment when contacted by CBC News. In an email, a spokesperson said the power company didn't "have anything to add to the discussion."

The Independent Power Producers' Society of Alberta didn't want to talk about it, either.

Cenovus, a big player in the oil sands, also declined an interview, saying as a matter of policy, the company does not "comment on matters that are speculative in nature or proposals that have not yet been implemented."

Canadian Natural Resources Limited, which owns and operates both the Horizon Oil Sands and the Athabasca Oil Sands projects, also declined to comment.

Devon Canada, another company with a stake in Alberta's oil sands, said it didn't "have anything to add" to the debate.

The Canadian Association of Petroleum Producers (CAPP), meanwhile, says it supports government action to cut carbon emissions that spark innovation and technology.

In an e-mailed statement, Patrick McDonald, director of climate and innovation with CAPP, said "any new regulations, including the reestablishment of the Specified Gas Emitter Regulations (SGER), require an engagement process to work out the details of implementation."

That engagement is starting now, as SGER comes back into the public conversation, and as Alberta enters an election cycle.

It's going to get political

As we've seen, while Kenney is against an economy-wide carbon tax, he believes in having large emitters pay for their emissions and having that money diverted into a technology fund.

"I think the solution to reduction of greenhouse gas emissions will be found in thousands of technological innovations that actually shrink the carbon footprint of oil and gas industry and other industries, and that helps to make renewable forms of energy more affordable," he said.

But Finance Minister Joe Ceci doesn't think that goes far enough. Removing the carbon tax and only applying limited pricing on some large emitters "just doesn't make sense," in his view.

Alberta Finance Minister Joe Ceci says his government's broader carbon-pricing policy is more effective than the previous government's Specified Gas Emitters Regulation (SGER). (Colin Hall/CBC)

"We've got a province focused on reducing emissions at this point in time because they know there's a price on carbon," he said in an interview.

While industry players have been reticent to share their views, Ron Kneebone, another economist with the University of Calgary's School of Public Policy, tends to favour a broad-based carbon price that applies to everyone.

He thinks universal carbon taxes are "the least costly to the economy" if governments are looking to tackle climate change.

"This is the best way of reducing carbon usage and it's the least harmful way for the economy to take this charge," Kneebone said.

But that's economic theory.

Meanwhile, the UCP and NDP are playing in the political arena, where different rules apply. Policies that look good on paper don't always make for good politics in practice.

Kenney is clearly gearing up to make the "job-killing carbon tax" a ballot-box issue, come the 2019 election. He uses that four-word phrase for a reason. The UCP policy convention will no doubt feature a lot of debate. And decisions will need to be made. Will Kenney's support for a return to SGER translate into actual policy?

The NDP's recent rhetoric, meanwhile, suggests a strategy of painting the UCP as regressive climate change deniers, offside with reality and the direction the rest of the world is heading. That said, it will take years to assess the effectiveness of the CCI when it comes to heavy industry and to establish how the broader carbon tax, itself, affects all of Alberta's emissions — and its economy.

In the meantime, the debate over values, responsibility, pricing, the environment, and the future of the province will continue.

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