With apologies to Stephen Stills, we introduce our initial bulletin on the Alberta Climate Leadership Policy announced by the Provincial Government on November 22, 2015. As is the case with most broad policy announcements, this much-anticipated statement of Alberta's intent to take a new approach to the regulation of greenhouse gas emissions did not contain all the details necessary to comprehensively assess its potential impacts and effectiveness. All will be revealed in due course as the regulatory changes necessary to implement the Policy are rolled out, including a new Carbon Competitiveness Regulation intended to replace the existing Specified Gas Emitters Regulation.

The Policy is the result of the report and recommendations of the Climate Leadership Panel appointed by the Government last spring and given a mandate to review Alberta's existing climate change policies, engage in public consultation with the public, technical stakeholders and Aboriginal Peoples and provide the Minister with advice on a comprehensive set of policy measures to reduce Alberta's GHG emissions. The Panel's report was released to the public on November 22, 2015 in conjunction with the Government's announcement of the Policy. It forms the basis for the five key elements of the Policy. Effective January 1, 2017, there will be an economy-wide price on carbon initially set at $20/tonne and increasing to $30/tonne in January, 2018. Thereafter, the price will increase in real terms (e.g. inflation plus 2%) as long as emissions prices in Alberta do not significantly exceed those in comparable/competitor jurisdictions, and as long as they are not above the social cost of carbon or an applicable national carbon pricing standard, whichever is greater. The carbon price will be applied to large industrial emitters (currently regulated under the Specified Gas Emitters Regulation), as well as to previously unregulated sectors of the economy including end-use emissions from transportation and heating fuels and flaring of gases associated with oil and gas production and processing. The Panel predicted that this could raise per- litre-gasoline prices by $0.05 in 2017 and $0.07 in 2018.

The Policy will require an accelerated phase-out of all coal emissions by 2030 and the replacement of two-thirds of existing coal-fired electricity generation with renewable energy. The Government says it is committed to working with the electricity industry to effect the phase-out in a manner that will not unnecessarily strand capital.

The Policy will result in a legislated cap on GHG emissions from the oil sands sector. The cap will be set at 100 MT/year (current emissions are approximately 70 MT/year), and provisions will be made for cogeneration and new upgrading capacity.

The Policy introduces a "methane management program" as a "complementary policy" to the proposed carbon pricing regime. Under this program, methane emissions from oil and gas activities are expected to decline by 45 percent by 2025 from 2014 levels.

The Government appears to have adopted many of the recommendations of the Panel in principle, but it remains to be seen exactly how the recommendations and objectives announced will be implemented. Until further specifics are released, we have to look to the Panel’s report and recommendations to glean how the new strategy may actually be implemented. Although the Government’s announcement and the Panel’s recommendations appear largely aligned, not all recommendations will be adopted as written.

Much of the content below is taken directly from the Report and presented in an abbreviated or summarized form.

Alberta’s Climate Change Advisory Panel’s proposed approach:

The Panel’s proposed approach is to create a framework that accelerates emission reductions in the short-term and sets the stage for creating a competitive and diversified lower-carbon economy in the longer term. The proposed policy architecture is intended to account for Alberta’s unique economy and specific emissions profile, while comparing favourably with programs in other leading jurisdictions.

Generally, the Panel recommends expanding and replacing the existing carbon pricing regime to cover more of the economy and introduce additional complementary policies to reduce the emissions intensity of Alberta’s electricity supply and oil and gas production. It also aims to promote energy efficiency and add value to Alberta resources through investments in technological innovation. The Panel states that the architecture should (i) incorporate consumer credits to soften the impact on households and small businesses and (ii) allocate emission credits (allowances) for industrial emitters to protect competitiveness of Alberta’s core industries.

The Panel has recommended that periodic reviews be undertaken to assess and adjust to changing global commodity markets and climate policies of other jurisdictions to ensure that the policies remain competitive. The Panel suggests Alberta’s policies should be positioned to increase in stringency, along with those of its peer and competitor jurisdictions, but should not increase stringency in the absence of parallel policies elsewhere, since to do so would unnecessarily hurt the province.

Carbon pricing and the Carbon Competitiveness Regulation (CCR)

The Panel recommends that the current regulation governing GHG emissions, the Specified Gas Emitters Regulation (SGER) be replaced by a new Carbon Competitiveness Regulation (CCR). It cites carbon pricing as the backbone of the proposed architecture and suggests that putting a price on emissions leverages the power of markets to deploy both technologies and behavioural changes to reduce emissions. It also suggests that carbon pricing is the most flexible and economical way to reduce emissions on the basis that it encourages reductions using whatever approach best suits individual processes, abilities and circumstances, rather than forcing specific technologies, actions or outcomes.

The Panel’s proposed CCR would:

  • Broaden the application of carbon pricing to cover most of the province’s emissions (up to 90percent), vs. less than 50 percent covered today
  • Provide a consumer rebate to mitigate the impacts of carbon pricing on low and middle-income Albertans
  • Fund complementary emissions-abatement programs
  • Support a transition for labour and communities and strategies to protect small- and medium-sized businesses
  • Improve the mechanism by which trade-exposed industries are protected to ensure their competitiveness while encouraging/rewarding top performance
  • Increase stringency at the same pace as peer and competing jurisdictions
  • Avoid the transfer of wealth outside of Alberta

The Government has indicated that although the economy-wide price for end combustion emissions will be set at $20 per tonne in 2017 and increasing to $30 in 2018, the price per tonne for regulated emitters under the SGER will remain at $30 in 2017.

The Panel’s specific recommendations include:

The Panel recommends that this revenue be used for four purposes.

  1. Replacing the Specified Gas Emitters Regulation (SGER) governing large industrial facilities, with a new Carbon Competitiveness Regulation (CCR), beginning in 2018. Under the proposed CCR, a carbon price would be applied to all industrial emissions. Sector-specific, output-based allocations of emissions rights (allowances) would be allocated to mitigate competitiveness and employment impacts in trade-exposed sectors and to protect electricity consumers from significant and unnecessary rate increases. After 2017, CCR would apply to the same group of large emitters (>100,000 tonne/year) with facilities being allocated emissions rights (presumably akin to allowances) in proportion to output or value added. It is not yet clear how “value added” would be determined, but the Government has indicated that it will be using a sector-performance standard emission threshold to determine the free credit/allowance allocations, beyond which emitters will need to obtain additional permits/credits. The compliance options under SGER would be maintained (i.e. emissions permits could be acquired either through: (i) the purchase of credits from other emitters, (ii) the use of Alberta-based offsets, or (iii) the payment of a carbon levy). It appears from discussions with the Government that the purchase of credits from other emitters contemplates something similar to the use of Emission Performance Credits (EPCs) as defined in the SGER, which will be credits from allocations of credits/permits/allowances that are not used or needed by an emitter due to exceeding the performance standard. The output-based allocations (akin to allowances) would be determined based on top-quartile performance or better, and would decrease over time at 1-2% per year, to reflect expected energy efficiency improvements. Similar facilities which fall below the 100,000-tonne/year threshold would be permitted to opt-in to the large final emitter treatment, rather than the end-use emissions price (explained below), if it is advantageous for them to do so. This is one of the key changes from the current SGER which is based on a historical emissions baseline for each facility. The new CCR would use a sector-specific performance standard, based on the top quartile or higher sector emissions performance. So rather than facilities having to achieve emission intensity reductions of 12 percent based on their historical emissions baseline, or purchase credits/offsets/EPCs, they will have to purchase credits/offsets for any emissions over and above the new performance standard, which may become more stringent (1-2 percent) each year.
  2. For end-use emissions, a broad-based (economy-wide) carbon price should be applied under the CCR, requiring distributors of transportation and heating fuels to acquire emissions permits in recognition of the emissions their products will create when combusted. This proposed treatment is similar to the systems now in place in Québec and California, and soon to be in place in Ontario. Compliance options for distributors for end-use emissions would be the same as under the SGER (explained above). Large final emitters would be able to adjust their calculation of required emissions permits so they are not covered twice (i.e. regulated emitters would not require permits for their emissions from combusting these covered fuels.) For this type of end user/combustion emission, it appears that all distributors would be covered, regardless of the volume of emissions their fuel would emit when combusted. This is similar to Québec and Ontario’s proposed program and provides very broad coverage.
  3. The carbon price will have a ceiling, determined by the price at which emissions permits can be acquired from the Government through the payment of a levy. All emissions in the economy should face a $30/tonne ceiling price by 2018. The price should increase over time in real terms (e.g. inflation plus 2%), as long as similar prices exist in peer and competitor jurisdictions. This ceiling would operate in the same way that the Technology Fund price currently operates under the SGER to set a ceiling price – currently $15 and rising to $20 in 2016 and $30 in 2017, except with an adjustment for inflation plus 2%), subject to competitiveness considerations.
  4. Revenues from the carbon price should be used for defined purposes. The Panel report states that the program, as suggested, would lead to net revenues reaching approximately $3 billion by 2018 once the end-use emissions pricing has been fully phased-in, and potentially rising to more than $5 billion by 2030. Compared to the approximately $85 million in revenues received by the province in the form of Technology Fund Credit contributions for the 2014 compliance year, this represents an increase of 33 times in emissions compliance revenues for the province by 2018 and an increase of 55 times by 2030.

The Panel recommends that this revenue be used for four purposes.

  1. To offset impacts on low and middle income households by providing them with a bi-annual consumer rebate, equal to the expected annual cost of the carbon price for an average Albertan as well as through measures to protect adversely affected small- and medium-sized businesses;
  2. To double-down on additional carbon emissions reductions by investing in the complementary policies listed below to reduce emissions intensity of Alberta electricity and oil and gas production, to increase the pace of technological innovation and thus add value to Alberta's resources, and to improve the energy efficiency and resilience of homes, businesses, and communities;
  3. To support transition needs of workers and communities and to enable full inclusion of Aboriginal communities in climate change mitigation and adaptation; and
  4. To provide incremental fiscal capacity for other government priorities including infrastructure.

According to the Government’s announcement, capital spent on emission reductions/carbon levies will remain in Alberta. This indicates that Alberta will not be linking to emission trading programs in other jurisdictions, at least in the immediate future.

Complementary policies – Four key initiatives

It is worth noting that the Government did not place the same emphasis on the four key initiatives proposed by the Panel, but took a slightly different approach, focusing on phasing out coal, putting a cap on oil sands emissions and introducing a methane reduction initiative. The Panel Report recommends that the CCR pricing scheme be complemented by four key policy initiatives. The four initiatives and the initiatives for full Aboriginal participation would be financed through revenues from carbon pricing, while still leaving revenues available for other government priorities, including infrastructure and deficit reduction. The Government has announced that carbon pricing revenue will be fully reinvested into measures that reduce pollution—including clean technology, renewable energy and energy efficiency—and also to provide transition help to individuals and families, small businesses, Indigenous communities and people working in the coal industry. The Government does not appear to have adopted the recommendation that portions of the revenues could be used for non-climate-change-related infrastructure or deficit reduction. The Government is currently analyzing the tax treatment of different uses of the revenue.

The Panel expects the combined approach to carbon pricing and methane management in oil and gas to yield approximately 12 Mt of emissions reductions below what would be expected under the status quo by 2020 and 20 Mt below status quo policies by 2030.

  1. Electricity – Phasing out coal, phasing in renewables   

    Although the Panel Report recommended phasing out coal-fired power in Alberta by 2030 and replacing at least 50-75 percent of retired coal generation with renewable power, the Government pledged to replace two-thirds of coal-fired power with renewable power. The Panel Report suggested increasing the overall share of renewables to 30 percent while retaining Alberta’s competitive electricity market structure. The Government's announcement alluded to keeping the cost of renewable energy as low as possible “by using market mechanisms, such as auctioning”. It is not yet clear how these market mechanisms will function.

The key elements of this policy set out in the Panel Report are:

  1. Carbon prices with output-based allocations provided based on good as best gas performance. This implies that a coal-fired generating facility would be given emission permits or allowances based on its output that would be sufficient to cover emissions from a top performing gas-fired facility. In its announcement, the Government stated that starting in 2018, coal-fired generators will pay $30 per tonne of CO2 on emissions above what Alberta’s cleanest natural gas-fired plant would [emit to] create the same amount of electricity. Presumably, emissions exceeding that limit could also be covered by purchasing offsets or EPCs/unused credits purchased from other facilities.
  2. A commitment to a phase out of coal by 2030

This initiative would be implemented in collaboration with federal government regulations and in consultation with the Alberta Electrical System Operator (AESO) and affected firms. The Government’s announcement indicates that it will be consulting with workers, communities and affected companies to ensure they are treated fairly through the process. The Government has stated that two-thirds of coal generating capacity will be replaced by renewable energy and one-third by natural gas generation and that by 2030, renewable energy such as wind and solar will account for 30 percent of electricity generation. The Government has stated there will be no pollution from coal-fired generation by 2030. This goes beyond GHG emissions and includes other pollutants such as NOx and SO2.

  1. Increased renewable generation capacity, with expansion linked to the phase-out of coal. This initiative would be supported by a clean power call through which the government will provide partial, long-term revenue certainty for renewable power at the lowest overall cost to consumers. It is uncertain at this time as to how the incentives will be rolled out and whether clean power calls will be used or function.

 

  1. ​​Oil and gas – Pricing carbon and reducing emissions from methane

The Panel report recognized that methane is a much more potent greenhouse gas than CO2, with an impact 25 times higher per unit of mass. The report noted that the International Energy Agency (IEA) lists reducing methane emissions from the oil and gas sector as one of five urgent ”game-changing” measures that could contribute to achieving the 2°C ambition.

Hybrid regulatory and market-based approach

The Panel report recommends a hybrid regulatory and market-based approach to reduce emissions from oil and gas operations, with a particular focus on methane emissions, as follows:

  1. Application of the CCR to oil and gas with output-based allocations to protect competitiveness and employment in production and processing sectors;
  2. New regulatory measures for management of fugitive methane emissions in design and operation of new facilities and for leak detection and repair in all facilities; and
  3. A time-limited, multi-stakeholder initiative on methane emissions reduction and verification that would provide market-based incentives for equipment upgrades of pneumatic controllers, pneumatic pumps and other sources of vented emissions in existing facilities.

It is not yet clear how the regulatory measures set out in b) above will work in concert with the CCR, but it appears that the regulatory measures may include requiring facilities to use certain standards of equipment for managing fugitive methane emissions, as well as practices for leak detection and repairs in facilities. Once the equipment and operating procedures are required by law, offsets will no longer be generated for resulting emission reductions, which appears to be why the Panel is proposing time-limited market-based incentives. The Government has given oil and gas producers a break on accounting for on-site combustion of fuels related to their operations until 2023 as an incentive to reduce their methane emissions.

Oil sands sector

For the oil sands sector, the Panel report recommends an output-based allocation of emissions that reflects top quartile emission performance standards for in situ and mined production of bitumen, as well as the parallel good as-best gas standard for electricity, (presumably for electricity generated using cogeneration). This emission performance standard would increase over time at 1-2 percent per year to reflect expected energy efficiency improvements, resulting in fewer credits/allowances being allocated annually. The intention is to drive emissions down to equal or better than other sources of oil. Cogeneration of steam and electricity are to be rewarded only if it improves overall emissions efficiency of production, as output-based allocations will be provided both for bitumen and electricity production. The Government has indicated that allocations for emissions from the electricity generated from cogeneration will be treated differently from the emissions generated by steam generation, with the electricity portion subject to the electricity generation performance standard. The Government has also announced a maximum 100 Mt annual emissions limit on the oil sands sector, which was not suggested by the Panel.

Conventional oil and gas emissions

Conventional oil and gas emissions would also be covered by carbon pricing under the CCR. Producers who can aggregate wells or batteries, and gas processing facilities below the 100,000-tonne-per-year-large final emitter threshold could opt-in to the large final emitters’ treatment as an alternative to being subject to the end-use emissions regime to receive the same competitiveness protection as their larger competitors. Where wells are not aggregated and covered under the large emitters’ treatment, carbon pricing will apply to most combustion and process emissions, while fugitive emissions would be covered by a regulatory approach. As mentioned above, conventional oil and gas producers will not have to account for on-site combustion emissions until 2023 as part of an incentive to focus on reducing methane emissions.

Upgrading and refining

For upgrading and refining, the Panel report recommends that each facility’s allocation should be determined according to the methodology used by the European Union and the Western Climate Initiative (the Solomon Complexity-Weighted Barrel), or similar approach. More details will be required to better understand this. This approach is intended to ensure that greenhouse gas policy in Alberta does not encourage shifting processing activity outside the province. The Government did not include upgrading and refining as one of its main areas of focus.

Methane emissions

The Panel report recommends that government encourage this collaboration through a multi-stakeholder initiative using a market-based approach through which offset credits could be provided to facilities that implement new technology to replace pneumatic devices and other sources of fugitive emissions before they are regulated to do so. The Panel also recommends that the government begin phasing-in mandatory replacement regulation without offset credit after five years to reduce emissions from facilities which have not taken early action. The Panel recommends that this multi-stakeholder process be combined with regulatory requirements for new well design and operation, as well as for leak detection and repair for fugitive emissions. The Panel recommends that the government set an initial methane specific target of a 12 Mt CO2 equivalent reduction in methane emissions by 2030 (a 40 percent reduction from 2013 levels), and consult with the proposed multi-stakeholder initiative to confirm this target by the end of 2016. The Panel recommends that if the multi-stakeholder process is unable to deliver on expected reductions, the acceleration of regulatory controls should be considered. The Government included methane emissions as one of the main targets of its CLP focus.

The Panel expects the combined approach to carbon pricing and methane management in oil and gas to yield approximately 12 Mt of emissions reductions below what would be expected under the status quo by 2020 and 20 Mt below status quo policies by 2030.

  1. Energy efficiency and energy-resilient communities

The Panel report states that energy efficiency is a low-cost, underdeveloped energy resource and that the proposed policy is intended to target some of Alberta’s most cost-effective emission reduction opportunities. The Panel recommends a provincial energy efficiency and community-based energy program, complemented with regulations and other partnerships that empower climate action at the local level. The details of the programs are yet to be developed, but are expected to include an integrated energy efficiency and community-scale energy program, a complementary regulatory agenda for building energy performance reporting and disclosure, updated building codes and standards, and potentially new regulations for distributed and small-scale community generation.

  1. Technology and innovation

The Panel report states that investment in technology and innovation is strategically important to accelerating emission reductions and strengthening the province’s position in global energy markets. The Panel report says that Alberta needs to position itself as a preferred, low-cost and low-emissions supplier, and that to achieve this, the Government must work with the private sector and other parties to enable development and deployment of new technologies in the longer term that can limit growth in oil sands emissions beyond 2030 and deliver on the goal of good as conventional emissions intensity as soon as possible. The Panel report states that Alberta’s fossil fuel resources will have lower value if they cannot be developed with lower emissions impact, and if they cannot be developed with processes and technologies that allow their conversion to higher-value products such as carbon fiber, plastics, and other non-combustion supply chains. The Panel report recommends a combination of measures to enhance the impact technology and innovation can have on climate change, including a strategic review and enhancement of spending on energy technology and innovation as it relates to climate change, which should include a re-design of the Climate Change and Emissions Management Corporation (or a successor) allowing it to take more risk. It also recommends allowing currently-approved but not-yet-constructed projects to seek amendments to their approvals to accommodate new technology or improved designs which mitigate greenhouse gas emissions and a requirement for a Climate Mitigation and Adaptation Plan as a condition for new project approvals. Details as to which of the above recommendations will be adopted and how they will be implemented are not yet available; however, changes to the CCEMC are anticipated.