Alberta’s Carbon Tax: Certainty, Served With a Side of Uncertainty

On November 22, 2015, the Alberta government announced plans for an expanded carbon-pricing scheme – labelled by pundits as a carbon tax. In the April 14, 2016 release of the provincial budget (Budget 2016), further information on the carbon tax was revealed. Calgary’s Energy Profiles Limited (EPL) prepared this summary to help you understand the impact this could have on your commercial building utility costs.

But First: Key Facts About the Carbon Tax

  1. The carbon tax is not yet law, and many questions remain about the specifics. At this time, regulations and performance standards are still under development by the Government of Alberta. There is no firm deadline for these details to be released.
  2. Alberta has had a carbon-pricing policy in place since 2007. It applies to large emitters and requires them to buy emissions permits from other emitters, buy Alberta-based offsets or pay a carbon tax of $15 per tonne. The provincial government estimates that it applies to about 50% of Alberta’s emissions.
  3. On November 22, Premier Rachel Notley and Environment Minister Shannon Phillips announced plans for a new “climate leadership” policy, outlined in a report from the Climate Leadership Panel. The report recommends replacing the current regulation with an expanded carbon-pricing scheme covering all carbon emissions in the province, and certain parts are put into motion through Budget 2016. As a start, emissions will be priced at $20 per tonne of CO2in 2017, rising to $30/tonne by 2018, with no committed annual increases after that, largely due to the province’s current economic downturn.
  4. The carbon tax would apply directly to transportation fuels and natural gas. For natural gas contracts, the government anticipates that the levy will be shown as a separate line item on customer bills, though this is not yet set in stone. Per Budget 2016, a levy of $1.011/GJ will be applied to natural gas rates as of January 1, 2017. The levy rises to $1.517/GJ by January 1, 2018.
  5. The effect on electricity generation is more complicated, since the Climate Leadership Panel also recommends the phase-out of coal-fired generation facilities over the medium term, an increase in renewable power and offsetting subsidies for large industrial emitters (including electricity generators).

Heads Up: The Short-term Impact on Utility Prices

The impact on natural gas prices from a carbon tax is straightforward to evaluate. All else being equal, a $30/tonne carbon tax would lead to an increase of around $0.06/sqft for an average office building.

The levy will not be directly applied to consumer electricity purchases yet few other details are available regarding the carbon tax on electricity sales. However, the immediate impact on electricity costs can be reasonably calculated, as the introduction of a carbon tax adds cost to fossil-fueled electricity generation. Based on the current emissions associated with electricity generation in Alberta, a $30/tonne carbon tax would increase the cost of electricity by approximately 2.5 cents/kWh.

So, a 250,000 sqft office building that spends $350,000 annually on electricity now would see its costs rise in 2018 by $87,500 (around $0.35/sqft).

Going… Going…. Gone: Long-Term Impact of Phase-out of Coal on Electricity Prices

Since Alberta has an open electricity market, there are many factors at play.

Coal-fired generation currently provides base load electricity at low cost. Phasing it out will require new sources of electricity to be added to the Alberta electricity supply mix. The government intends that two thirds of this generation be from renewable sources (wind and solar), but other forms of generation – natural gas, or even nuclear – will be required to fill the gap. While this will reduce the impact of the carbon tax on Alberta consumers of electricity, all of these sources have higher costs than coal.

At the same time, with the current economic slowdown, Alberta electricity prices are at historic lows, and forward electricity prices are similarly depressed. Prospective electricity suppliers to Alberta will be reluctant to invest in 30-40 year assets without guaranteed revenue streams that provide an adequate return. If the government steps in with long-term fixed-price contracts to address this, electricity rates could increase considerably, as they have in Ontario since coal was phased out there.

The government says the most likely outcome is a negligible impact on electricity prices compared to business as usual, and in the worst case, they predict an increase of about 20% by 2030. The reality is that there is a huge range of potential outcomes with respect to Alberta electricity costs. The carbon tax itself is a reasonable measure that the market can be expected to rationally adjust to, as the relative cost of fossil-fueled generation will increase, leading to lower emissions as it is displaced by less carbon-intensive generation. However, the mandated phasing-out of coal-fired generation, while desirable, will require considerable investment in a limited timeframe.

The price of oil, whether influenced by normal supply and demand or by geopolitical factors, will be a huge factor and will influence economic activity and thus the demand for electricity. Further government intervention is within the realm of possibility, and normal electricity market fluctuations will continue to exist. For these and other reasons, it is not possible to predict the impact of phasing-out of coal-fired generation on electricity rates with any precision, other than to expect at a basic level that long-term electricity rates will increase.

The 3 P’s: Projected & Potential Policies

The Climate Leadership Panel suggests that revenues from the carbon tax are intended to be reinvested in Alberta’s economy. The complementary policies outlined by the Climate Leadership Panel that may eventually affect you include:

  • Investment in energy-efficiency initiatives, through a new government agency, Energy Efficiency Alberta. Budget 2016 indicates that $45M will be available to provide “outreach, energy audits and incentives” for buildings and community energy systems, by 2016-2017. Environment Minister Shannon Phillips further noted that specific program details will be revealed later in the year. Of interest, Alberta’s government has not provided a provincial energy efficiency program since 2012.
  • Introduction of building energy performance reporting and disclosure regulations. This might require public disclosure of building energy performance (as currently required in many jurisdictions in the US), but was not mentioned in Budget 2016.
  • Updates to the energy efficiency requirements of building codes and standards. This might require increased investments in new building development, but again, was not mentioned in Budget 2016.

Graham Halsall, EPL

Image credit; Law & The Environment

Aydan Aslan