The Problem With Carbon Taxes and Why Alberta’s Timing on $3 Billion in New Carbon Taxes is Terrible – David Yager – Yager Management
By David Yager, November 2, 2016
Entrepreneur. Consultant. Journalist. Political Activist.
Intellectually I support carbon taxes. If all OECD countries were to introduce revenue-neutral carbon taxes on hydrocarbon production and consumption I would happily participate. Developing, non-democratic and internal-strife cursed countries (China, India, Saudi Arabia, Iran, Venezuela, Libya to name a few) will not comply nor participate in the short term, if ever. That’s fine. The developed world will bear the major financial burden as it should. Real levies, real reporting, real enforcement, real penalties. So many voters apparently want this that opposition is futile. Whether it will or won’t change future temperatures no longer matters.
I also buy into the concept carbon taxes may help get new oil and LNG export pipelines approved. While there is no evidence thus far that they will make a difference, Ottawa’s October 5 announcement of a national carbon tax effective January 1, 2018 and its December commitment to a final decision on Kinder Morgan are probably linked. If Prime Minister Trudeau approves the Trans Mountain expansion with few enough conditions so it might actually be built sometime soon, the national carbon tax should help deflect the inevitable opposition and court challenges.
Unfortunately, as the January 1 implementation of Alberta’s broad-based carbon levy approaches (large emitter carbon tax in place since 2007), the program I support does not exist. All pleas for true revenue-neutrality like B.C. have been ignored in Alberta’s Climate Leadership Plan. Ottawa’s program is so vague it is impossible to pass judgement today. It won’t matter in Alberta since we’re stuck with one anyway. But if Trudeau’s carbon tax results in a Kinder Morgan approval with more certainty regarding construction than the inevitable court challenges, perhaps it makes sense.
But the way Alberta is proceeding is astonishing and regrettable. If Kinder Morgan is approved the NDP will surely take credit. But this is not going to help anybody in Alberta in the short term which for too many is all that matters.
Alberta – Kick Us When We’re Down
The good news for Alberta’s battered oilpatch is rising oil and gas prices have put recovery in sight. The bad news is we must swim across a lake with one arm tied behind our back wearing ski boots and insulated coveralls.
2016 upstream cash flow from production will be the lowest in 17 years. Only OPEC production cuts creating higher oil prices will create material improvements in the short term. According to ARC Financial Corp. free cash from production this year will only be $17.1 billion, a number not seen since 1999 when it was $16.8 billion and production was 1.5 million boe/d lower.
Primarily because of producing and service company head offices downsizing, Calgary’s unemployment rate is the highest among Canada among major cities. Estimates are over 100,000 oil workers have lost their jobs, mostly in Alberta. At 8.5% Alberta’s unemployment rate in September was only lower than New Brunswick, Prince Edward Island and Newfoundland-Labrador. Regardless, since the election in May, 2015, the NDP have raised taxes for corporations (except small business) and higher income earners. The first of several increases to the minimum wage is squeezing small business. Since oil prices collapsed significant user fees for government services have been raised as have gasoline and diesel taxes. Because Alberta’s carbon tax is not truly revenue neutral it will remove more free cash from a challenged and shrinking economy.
Never since the dark days of the 1980s has the province or its major industry been less financially capable of absorbing the pending $3 billion grab. Promised low income rebates will arrive well after costs rise. Administration costs will be significant. Alberta must adapt to increased carbon costs and develop and implement new technologies to stay competitive with less discretionary capital that it has had in a generation. In business and life timing is everything. Alberta’s timing on $3 billion in new carbon taxes collected and spent this way is terrible.
Canada Alone Will Change Nothing
Canada accounts for 1.6% of the world’s carbon emissions. Oil sands are 9.3% of Canada’s total and 0.13% globally. Success in combatting climate change agreed upon in Paris last year and signed by 192 countries is capping the increase in the earth’s temperature to 2 degrees C by 2100. To achieve this carbon emissions must peak no later than 2020. Thereafter, a 50% reduction will be required by 2050. This means a 3 to 4% annual reduction in emissions for the next 34 years.
A UK website reports the world’s population will grow by 50% to 9 billion by 2050. After factoring in population growth, it is estimated per capital carbon consumption in that country alone must fall by 80% in 2050 from 1990 levels to meet the Paris commitment. Compared to Canada the UK is small, dense and comparatively warm. Got your head around your personal carbon consumption being 20% of what it is today when its -30? It may not be safe to wait 84 years for only a 2-degree temperature increase.
The only countries likely to get with the program in the short term are OECD members. They currently produce 23.5 million b/d of oil and liquids – nearly 25% of the world’s total – but consume 46.5 million b/d or almost half of global demand. Even if OECD countries introduced my dream carbon tax tomorrow they would not be able to meet the 50% reduction required globally without reducing carbon emissions to zero.
The International Energy Agency forecasts world oil demand will increase 1.2 million b/d in 2017 and continue to grow thereafter. OPEC believes world oil demand will be 14 million b/d higher or 110 million b/d by 2040. In June, Bank of America Merrill Lynch wrote it didn’t see oil demand peaking until after 2050 if prices stay below $100 a barrel and without some currently unknown major technological breakthrough. This does not look promising compared to what was deemed necessary by 192 countries in Paris last year.
Demand growth will come from countries not likely to commit to Alberta/Canada carbon taxes anytime soon. Growth in oil consumption grew steadily when prices were high, from 2007 to 2014 (except 2009), in developing countries because when people buy their first vehicle the decision has nothing to do with the cost of fuel. The major breakthroughs in reducing OECD transportation fuel demand have come not from cost or taxes but more fuel-efficient engines and lighter vehicles. While the U.S. has more vehicles on the road than ever refiner gasoline sales is well below half of what it was from 1985 to 2005. The most meaningful decline in U.S. emissions ever was caused not by carbon taxes but hydraulic fracturing making natural gas cheap enough to replace coal. The greens also hate fracking.
In May, 2016 the U.S. Energy Information Administration (EIA) forecast world carbon emissions to rise by nearly one-third from 2015 to 2040. OECD emission volumes will rise about 8% during this period while non-OECD countries will increase about 40%. Referencing last year’s conference in Paris the EIA wrote, “In conjunction with the 21st Conference of Parties (COP21) in Paris many countries submitted emissions reduction goals… EIA has tried to incorporate some of the specific details, such as renewable energy goals…The wide array of approaches generated by the COP21 participants includes absolute reductions, reductions from business-as-usual cases, reductions in intensity, peaking targets, and specific policy actions, making quantification of these goals difficult.”
The world’s largest source of carbon emissions is electricity generated from burning hydrocarbons. The largest heat source is coal. Number two is agriculture (carbon from sources other than energy). The two total 49% or almost half. Number three is transportation at only 14%. While there are growing options for electricity – particularly solar as the price comes down and efficiency rises – nobody talks about how the world can reduce emissions by eating less or surviving with fewer electronic appliances. When folks communicate about food on their smart phones the issue is malnutrition for the starving and where to dine out next for everyone else.
It is impossible for Alberta’s pending carbon taxes alone – regularly justified because we are morally obligated to combat climate change – to have any measurable impact on the temperature of the earth. Nor will Ottawa’s tax in 2018 no matter how it is implemented.
Are Big Companies Really On Side?
The appearance on TV last year of the CEOs of big oil sands producers Cenovus, Shell, Suncor and CNRL with Premier Notley as she announced Alberta’s Climate Leadership Plan was, at minimum, an eye-opener. Big business has been doing a lot of that lately. Those late to the party, like Exxon-Mobil, are being investigated by U.S. government agencies claiming it knew carbon fuels caused climate change years ago but withheld it from shareholders and the public. Around boardroom tables most feel if you can’t beat ‘em join ‘em. Resistance is futile.
Somewhere along the way these four big oil sands producers agreed to a 100 million megatonne cap on oilsands emissions for everyone which was passed into law November 1. While that’s 50% higher than current levels, it is unprecedented in the global oil industry particularly when it applies to the second largest crude deposit in the world. Combined with carbon taxes, this voluntary self-immolation is supposed to help get Alberta pipe. Wow!! This had better work.
An early endorsement for carbon taxes came in 2010 from the Canadian Council of Chief Executives (CCCE, now the Business Council of Canada) a respected national corporate lobby group. They wanted to find a way to keep western Canada’s giant resource machine functioning in the face of growing opposition. Everybody who matters including most big oil producers and several of the larger service companies are members. It discussed how Canada could be a leader in energy and environmental innovation. The five key points for CCCE were:
- A national energy strategy
- A bilateral accord with the U.S.
- A national approach to climate policy and carbon pricing
- Coherent technology and innovation strategy
- Meaningful engagement of Canadians
CCCE wrote, “For the upstream oil and gas sector, the approach should be built on the Alberta model of emissions pricing (2007’s large emitter levy) and the federal government should work with relevant provinces to develop a national regulatory model that makes continual progress on emissions management while maintaining the international competitiveness of the upstream sector. For other emissions-intensive and trade-exposed sectors, the apparent inability of the United States to enact a federal climate policy means that further regulation should await sufficient clarity on U.S. policy so as not to put manufacturing industries still in fragile recovery mode at a distinct competitive disadvantage (italics mine, DY). Carbon pricing policy should be developed with the following principles in mind:
- It should be broadly applied across the economy and to consumer end-use
- It will have to start at relatively low levels so as to give time for adjustment and to avoid unnecessary impacts on competitiveness
- Revenue raised should be deployed to fund reductions in other taxes and support the development of new technologies
- Revenue distribution should be designed to avoid an undue cost burden on any region or sector
- Carbon pricing should not merely penalize high carbon industries but ensure the incentive for companies and individuals to adopt cleaner technologies, products and services and to encourage shifts in consumption from high energy-intensive goods to lower intensity goods and services”
What has transpired bears scant resemblance to what big business thoughtfully proposed six years ago. Ontario’s go-it-alone approach to costly renewables resulted in higher electricity costs which have clobbered the manufacturing sector. The only offset (and the only benefit of collapsed oil prices) has been the much lower Canadian dollar. Alberta and Canada have proceeded without concurrent U.S. cooperation despite being advised otherwise. There has been no national cooperation on anything related to carbon taxes or energy. Provinces and municipalities remain at loggerheads on issues as simple as allowing carbon fuels to even pass through their jurisdictions to access global markets.
Lending your name to climate policy carries risk. When Ottawa announced its national carbon tax communications giant Telus conveyed its approval on Twitter. That didn’t last long after customer contract cancellation volume quickly became sufficiently large to force Telus to publicly backtrack.
Take the support of corporate Canada with a grain of salt. Whatever they say companies will do what they must to sustain profits and dividends. Those who can will pass on carbon tax expenses while others will spend less on something else like payroll and capital expenditures. Consumers will pay one way or another because that’s where all business revenue originates.
Some major oil sands producers support carbon taxes and emission caps because they are supposed to assist market access and future growth. Okay. But this is more about business sustainability and growth than environmental altruism because that’s not what companies do. If they were totally convinced carbon fuel was a disaster they’d do something else.
A Social License For Carbon Cannot Be Purchased
There has been much demonization of former Prime Minister Stephen Harper for not moving sooner on carbon taxes. However, Harper’s insistence Canada not do this alone because it will damage the economy is congruent with the 2010 position of the CCCE. As opposition to oil sands and export pipe has grown the thesis emerged that if business embraced Corporate Social Responsibility – enforced by the government if necessary – it would earn a Social License to operate. This will somehow allow industry to produce more of the fuel which allegedly threatens the planet plus build the infrastructure required to get it to market.
As industry lumbered forward doing the only thing it knows how to do – grow – and opposition mounted, politicians took note. There was great voter support for promising something new particularly among millennials. The concept emerged if governments and companies said and did the right things opposition to industrial activity would diminish, possibly disappear.
Carbon taxes or not, nothing has changed. Opposition to all new pipe carrying anything anywhere continues. Pipeline opponents recently began vandalizing facilities attempting to shut down flow. One of the arrested “activists” told the media, “Forget building any new infrastructure, but we need to stop the existing infrastructure that is transporting and extracting”. That’s anarchy, not activism. Protesters in North Dakota who shut down pipeline construction were forcibly removed from private land in late October. This ongoing protest is about water and aboriginal rights, not carbon.
How on earth are Canada and Alberta, signatory and supporter of the 2100 Paris climate change targets, going to help cut emissions by 50% by 2050 and in doing so earn a social license today to expand oil sands production and build pipelines? They are not. We’re going to tax carbon to ensure we create less and by doing so remove obstacles to producing more? That’s what governments in Edmonton and Ottawa are telling us. Confused? I certainly am.
Politics and Pipelines
The tactics of the two politicians leading this charge appear similar but are very different.
Alberta’s Rachel Notley’s mission is to prove an enlightened government can retool hydrocarbon production and consumption behavior to materially reduce carbon emissions without causing long-term economic or suffering. The plans calls to phase-out coal power by 2030 but support the economy by simultaneously expanding renewables.
Premier Notley is urging Albertans to support the plan and stay the course. Trust me. There are great clean-tech jobs coming as the plan unfolds. Just send the government more money through carbon taxes, run it through the NDP’s genius CPU for redeployment, and good things will follow. When confronted, the NDP routinely responds with “the cost of doing nothing” like polluted air and no pipe. To listen to the government Alberta has no choice.
Federally things are different. While Justin Trudeau clearly differentiated Liberals from the Conservatives by promising enhanced environmental protection, his actions are already upsetting green voters convinced a year ago they put their guy in the Prime Minister’s chair. Liberal Prime Ministers have a long history of saying what the public wants to hear and then doing something else. Former Prime Minister Jean Chretien ratified the Kyoto Accord then did nothing. He campaigned against the Free Trade Agreement with the U.S. promising he’d tear it up then instead expanded it to include Mexico. He said he’d remove the GST then didn’t. Justin’s father Pierre campaigned against Wage and Price Controls during the high inflation periods of the 1970s then introduced them once elected.
Unlike the NDP, the Liberals may have 21st century environmental politics figured out. Tell voters what they want to hear to win then do the right thing for the economy to stay. If pipelines are approved and eventually constructed it will be because the federal government exercised and enforced its legal authority to make it happen, not because opponents have dropped their opposition. Hopefully, the Liberals believe the federal carbon tax will provide sufficient political body armor that Ottawa can make a meaningful decision approving Kinder Morgan without suffering long-term damage from its green supporters.
The Problem With Carbon Taxes
There are enough people convinced climate change is real and can be stopped by enlightened government policy without causing massive economic disruption that new governments are creating policy claiming to do just that. But there is no evidence it can be done in the manner promised or pursued, only hope and faith. Politicians and government employees – plus the lobbyists and policy experts who support them – will remain employed even as private sector jobs are lost on the road to climate salvation. Introducing these levies in this manner today in the hope they yield economic benefits tomorrow through expanded oil production and higher prices are the sort of decisions only those with a job are likely to make or support.
For Alberta’s climate leadership plan the government claims it will not materially damage the economy in the medium and long term because of new pipelines and unemployed oil workers will get replacement jobs in the renewable energy sector. Everywhere it has been tried it has failed. Early adopters like Ontario and parts of Europe are going backwards as Alberta charges on.
There has never been a major policy affecting the oil and gas industry that wasn’t noble or well-intentioned, be in the National Energy Program, the New Royalty Framework or the Climate Leadership Plan. But the road to hell is paved with good intentions. Politicians make headlines; workers become road kill. I am sympathetic with all Albertans who wonder why their short term economic well-being has apparently become less important than the future of the world, particularly when everyone else isn’t being asked to make the same sacrifices nor endure the same economic disruption.
The determination to proceed to raise taxes this year and next and have Canada go it alone among major oil producing countries if rife with costs and risks offset by unknown opportunities and benefits. I am not a climate change skeptic. I am a climate policy skeptic. What a mess!! Hope it doesn’t turn as awful as it could. Maybe OPEC will save us at the end of the month.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.
David Yager can be reached at Ph: 403.850.6088 Email: firstname.lastname@example.org