Co-Authors: Michael Ervin, Senior Vice-President and Jason Parent, Vice-President Consulting.
The recent announcement of a federally imposed carbon price requirement was a meaningful step towards Canada’s efforts to reduce greenhouse gas emissions, as part of the yet to be ratified Paris accord. While there are few details as to how this eventual legislation will be administered, it does raise important questions as to the cost and competitiveness impact on the Canadian petroleum industry, the price impact on petroleum consumers, and the validity of existing biofuels policies in a carbon-priced environment.
The general intent of carbon pricing is to affect demand, and is usually designed to be revenue-neutral. Attaching a price to carbon (more accurately carbon dioxide) raises the price for carbon-intensive sources of energy, providing an incentive to reduce consumption, and to improve the efficiency of energy-intensive processes like refining. Conversely, it encourages the use of “cleaner” sources of energy, making them more competitive with carbon-intensive energy sources.
Once enacted, the federal government will essentially have established a floor price for carbon that would only be imposed upon provinces if they have not adopted a carbon pricing system by 2018, or if their chosen system’s carbon price falls below the federally mandated minimum. While some provinces already have carbon pricing schemes planned or in effect, all provinces will have to ensure that they meet or exceed the mandated federal price of $10 per tonne by 2018, and $50 per tonne by 2022. Provinces will have the latitude to determine how their pricing scheme will work, either under a cap-and-trade scheme, or in the form of an established carbon tax.
It also appears that provinces will have the freedom to decide how the revenues generated from their eventual regimes will be spent. Most existing carbon tax or cap-and-trade jurisdictions return some or all of the funds generated back to those who have been saddled with increased costs. This generally takes the form of tax rebates or other offsets for lower-income individuals and small businesses, as well as targeted offsets or exemptions for carbon-intensive industries to ensure their viability.
The degree to which carbon tax revenues are returned to the oil industry in some manner or another is of critical importance not only to industry competitiveness, but to the economies of energy-producing provinces, and to petroleum consumers.
The United States will represent the greatest competitive challenge to Canada’s petroleum industry in a carbon-priced environment. Under the Free Trade Agreement between Canada, the U.S. and Mexico, products such as gasoline can move freely across borders. This creates a necessity for Canadian wholesale gasoline prices to be roughly the same as those in a nearby U.S. market on an exchange adjusted basis. Assuming the U.S. continues without a carbon tax or equivalent cap and trade system, U.S. wholesalers’ underlying costs would be significantly less than those of their Canadian counterparts. If this competitive disadvantage were to be left unaddressed by federal or provincial governments, Canadian crude production and refining operations would be jeopardized.
Determining the effect on consumers is not as straightforward as it first appears. The direct price impact for various types of carbon-emitting fuels and energy sources can easily be calculated; for example, gasoline at $10 per tonne would result in a 2.25 cents per litre (cpl) rise in prices, and an 11.25 cpl rise at $50 per tonne. Similarly, diesel could see direct price increases of 2.7 cpl and 13.4 cpl at $10 and $50 per tonne respectively.
However, this only reflects the cost associated with the tailpipe emissions created by burning these fuels, ignoring potential costs incurred further upstream in their production, including refinery emissions and crude production emissions. The additional costs created by these upstream emissions are also likely to be passed along to consumers in some form, and recent estimates from the Canadian Taxpayers Federation suggest that the total cost impact of federal carbon pricing for a typical Canadian family would be $524 in 2018 and $2,569 by 2022.
Canada’s move towards a minimum carbon price also raises questions about existing federal and provincial biofuels regulations and incentives. Both carbon pricing and the subsidization of biofuels have similar aims, but the former achieves its primary goal at a significantly reduced cost. There is little to suggest that the government gets added benefit from continuing to support both initiatives.
Christopher Ragan, chairman of Canada’s Ecofiscal Commission, recently suggested that a logical corollary to a move towards carbon pricing would be to move away from the subsidization of biofuels. According to research conducted by the Ecofiscal Commission, the cost of taxpayer funded support for biofuels, as measured by dollar per tonne of greenhouse gas reductions is estimated at $180 per tonne for Ethanol – more than six times what BC’s current carbon tax is estimated to cost taxpayers to net the same result.
Many in the petroleum industry have publicly supported carbon pricing as long as provinces enact legislation that doesn’t hurt their competitiveness and long-term viability. Their support is partly due to the belief that established carbon pricing systems are inherently stable, allowing industry to plan operations and investments around transparent and predictable costs. Achieving the goal of greenhouse gas emission reduction at the lowest possible cost, minimizing the impact on Canadian industries, consumers and the economy, should be a guiding principle as federal and provincial governments work out the details of their carbon policies.
About the Authors:
Michael Ervin is the Senior Vice-President at Kent Group Ltd, a Canadian-based firm that provides world-class excellence in data, analytics and consulting services relating to the downstream (refining and fuels marketing/retailing) petroleum industry. Mr. Ervin has had a successful and varied career in the downstream petroleum industry spanning over thirty-five years. Mr. Ervin is a well-known media commentator on matters relating to the petroleum industry, especially on the subject of retail fuel prices.
Jason Parent is the Vice President, Consulting of Kent Group Ltd. His career in the downstream petroleum industry has spanned nearly 15 years, and he has worked with wide range industry and government clients from across North America. Mr. Parent’s functional expertise includes petroleum marketing economics, downstream operations, as well as petroleum markets and pricing.
© 2016 Kent Group Ltd.