In her first major policy announcement since taking office five weeks ago, Alberta’s Environment and Parks Minister Shannon Phillips announced today that Alberta’s primary GHG regulation will be renewed and updated. The Specified Gas Emitters Regulation (SGER), enacted in 2007 as North America’s first legislation to put a price on carbon, was set to expire on June 30, 2015.

The Minister said emission intensity reduction requirements in the SGER will be increased in a phased-in manner from 12 percent to 15 percent in 2016, and to 20 percent in 2017. An increase in the price of Technology Fund credits, which large emitters (>100,000 tonnes per year) can purchase to achieve their compliance targets and commonly known as the “carbon levy”, will also be phased-in. The price will rise from CA$15 to CA$20 per credit in 2016 and escalate to CA$30 per credit by 2017. Large emitters may purchase one credit for each tonne of GHG emission reductions required to meet their intensity reduction target.

Minister Phillips stated that the current regulations were a “significant step” in their day but are now “obsolete,” doing little to either address the climate change issue or earn Alberta greater market access for its energy products, by being seen to be serious about addressing climate change. The previous Progressive Conservative government was in the process of reviewing the SGER but had indicated it was reluctant to make the regulations more stringent in the current low oil and gas price environment. Minister Phillips said that her Government will be updating the SGER in a way that will demonstrate that Alberta is “beginning to get serious about this issue.” She said “we need to do better”, with a policy that is achievable, effective and strikes the right balance between environment and social factors, while being mindful of the reality that Alberta is an energy producing province that relies on the energy industry for much of its employment and prosperity. The update to the SGER is considered an interim measure leading to a more comprehensive climate change plan that will feature responsible energy development and environmental sustainability, addressing emissions from all sectors, not just the petroleum industry.

To further develop that plan, in the second part of her announcement, Minister Phillips advised that the Government will be convening an expert review panel led by Dr. Andrew Leach, Associate Professor and Academic Director of Energy Programs at the University of Alberta School of Business. The panel is being asked to consult with industry, municipalities, business leaders, aboriginal groups, climate change experts and citizens, and provide advice on the development of a comprehensive plan to address climate change in Alberta. The panel is expected to release a discussion guide this summer, setting out the issues and goals Alberta will pursue, including a shift to a greener economy, more effective energy use, a stronger reputation on a national and international scale, and accelerated innovation and technology. This strategy will be reflected in a preliminary proposal that Alberta can showcase prior to COP 21 in Paris in December 2015.

The Minister also announced that the advice received from the panel will be considered alongside advice from a separate panel to be struck to review Alberta’s existing regime governing the payment of royalties to the Province for the extraction hydrocarbon resources.

Brian Vaasjo, President and CEO of Capital Power, one of Alberta’s largest electricity utilities, participated in the news conference and stated that the utility supports the new SGER policy and additional action to reduce Alberta’s GHG emissions. Capital Power is a leader in new power generation and utilizes a combination of coal-fire, natural gas and wind energy generation facilities to produce electricity. Capital Power has supported the federal government in developing a fixed retirement schedule for coal plants and has brought new sources of renewable power to market, including its recently opened 150 megawatt Halkirk wind farm, the largest single wind project in Alberta at the time it was completed.

Ed Whittingham, executive director of the Pembina Institute, one of Canada’s leading clean energy think tanks, also participated in the press conference and stated that the new program and commitment of the Alberta Government is “a step in the right direction”, noting that today’s announcement is the first step toward establishing a more credible climate strategy in Alberta using the tools in place now. Whittingham noted that the Government’s commitment to set a higher price and emission reduction target on a set schedule is encouraging, but that even more encouraging was its commitment to take further action following broad based consultation.

It appears from today’s announcement, that as significant as the changes to the SGER are, there is more change to come in Alberta to broaden the approach it is taking on reducing GHG emissions.

Carbon price increase

The Technology Fund credit price effectively sets a price ceiling for GHG emission credits and offsets in Alberta. Alberta’s program allows for the use of emission offsets (Offsets) and emission performance credits (EPCs) to meet compliance targets. Offsets are generated by GHG emission reductions occurring at non-regulated facilities. Projects such as landfill methane gas capture, carbon capture and sequestration, energy efficiency and renewable energy projects generate Offsets, provided they meet the regulatory and protocol requirements. EPCs can also be generated by regulated emitters who exceed their emission intensity reduction targets. A regulated facility can use its EPCs in future years or sell them to other emitters that need them to meet their targets. EPCs and Offsets typically sell at a discount to the Technology Fund credit price, since there is some risk of reversal associated with them.

Minister Phillips stated that the existing carbon price per tonne, when all emissions from large emitters are taken into account, was effectively less than CA$2 per tonne. The current CA$15 per credit price ceiling has historically been viewed as too low to incentivize widespread emission reduction projects and initiatives. Increasing the price to CA$30 per tonne may improve the economics for these initiatives and projects to the point where they will become more attractive for emitters and project developers to implement. It may also be a stronger incentive for regulated facilities to reduce their emissions at site in order to manage their costs. Dentons will analyze the impacts in more detail in subsequent bulletins.

Emission intensity target increase

In the past, Alberta has been criticized that its intensity-based system does not do enough to actually reduce overall emissions, since emitters can continue to increase their aggregate emissions as long as their emissions per unit of production are decreasing to meet the intensity requirement. Although the Government did not announce a change to the intensity-based approach, the increase in the reduction requirement from 12 percent to 20 percent should have a material effect on reducing GHG emissions compared to a business as usual scenario. Minister Phillips estimated that it will reduce total Alberta GHG emissions by 13 MT by 2017. It will also have a significant impact on the contributions to the Climate Change and Emissions Management Fund and the volume of Offset projects being undertaken in Alberta. In conjunction with a 100 percent increase in the carbon price, the additional 66 percent of emission reductions being required for compliance will increase the demand for an already short supply of offsets. The CA$30 per tonne carbon price should attract more investment in Offset projects and emission reduction technologies to meet this demand.

Cost to industry

In response to a question at the news conference, the Minister was asked if any determinations had been made as to the cost to industry of the changes to the SGER. She stated that, by the time the changes are fully phased-in, they are expected to cost “between 30 to 45 cents per barrel of bitumen and CA$3.60 per megawatt hour of electricity generation.”

Linkage with other jurisdictions

Minister Phillips did not say whether the updated SGER would allow for emissions trading with other jurisdictions, but indicated that this would be part of the review that the expert panel would be considering in the coming months. If linking with other provinces or international jurisdictions was allowed in the future, this could further increase the demand for Offset projects in Alberta.