Newfoundland and Labrador system for the Management of GHGs

Newfoundland and Labrador (NL) has proposed a carbon pricing system that would cover GHG emissions in the province from large industrial facilities (>25kt CO2e). While the Holyrood Thermal Generating Station (Holyrood or Holyrood TGS) and the offshore oil and gas can be considered large industrial emitters those facilities are exempt from the currently proposed regulations. Holyrood is exempt through government carve-out and the offshore is exempt as they are regulated through the Atlantic Accord. This leaves coverage in NL on only 3 entities and 18% of emissions [1]. And, each of these large industrial emitters exposed to carbon taxes (sorry, “carbon pricing”) rely upon exports; the companies exposed are Iron Ore Company of Canada (IOC), Vale, and NARL Refining (NARL). This has already been confirmed by the government and they are attempting to set up more regulations for compliance with GHG standards that will also be laid out in the future.

The actual set-up for compliance with GHG reductions in the province is supposed to be met through one of three options for those companies that are affected; the three options are:

  • To reduce emissions to be within compliance (emissions performance standard)
  • Pay in to a technology fund with a defined cost per tonne of CO2e
  • Purchase offsets credits from a registry of approved and confirmed carbon reduction projects

These three options all have problems associated with their implementation. The largest problem is that none of these options offer a way for a company to recover the costs of its investments if it is export-oriented, unless all other countries to which goods are exported have similar costs imposed upon domestic producers and other international importers. Furthermore, because NL also imports products from competitors of NARL, NARL is unable to recover any costs in the domestic market as those with which it is competing do not face the same system.

Emissions performance

This is the most straightforward of all the options with which industrial emitters can comply to the government regulations. The government is following the lead of the Alberta (AB) government in creating a system built around emissions intensity (the tonnage of GHG emissions per unit of output from the industrial process t CO2e/bbl). This means that for compliance NARL has three options in meeting this type of goal:

  • Reduction in emissions
  • Increase in output without an equivalent increase in emissions
  • Combination of the two above

The goal in providing this type of system is to allow businesses to continue to grow without being punished for that growth. Otherwise, if there is a hard cap on emissions or if a company is taxed directly, any emissions system will increase the bill for emissions as a company grows, unless it can reduce emissions and grow at the same time. Basing the system on emissions performance can actually reduce a company’s tax bill as it increases output, as long as the company does not increase emissions as quickly as output.

Using intensity based metrics does not actually limit the emissions which may be generated by any one facility. Overall emissions may rise if companies find ways to increase production at a faster rate than emissions, as mentioned above. But, this means there must be a reference year with which to compare, availability to reduce emissions through investing in new technologies or operational units, and capacity for expansion of operations.

NARL is limited on two of the requirements in an emissions performance standard. NARL works within an industry for which the options for reducing emissions are extremely limited and has very little technological options, and NARL can only make incremental improvements in capacity. Much of the work to reduce emissions with any operational improvement and increase capacity has been completed at NARL. This creates a major challenge with respect to a performance emission standard (or any GHG regulation) if this early action is not recognized. The reference year must recognize all of the work that has gone into these operational improvements and the limitations for future improvement.

The currently proposed baseline years for the NL government are 2016/17. These years create an issue for all 3 of the companies involved in the regulations in NL. Both NARL and IOC are companies with long operating histories that have made significant investments over the last decade in improving performance.  Vale, conversely, is not supposed to hit peak emissions over this timeframe but afterwards. Therefore, this limits the ability to impose this baseline on all the regulated facilities.

Technology fund

The technology fund is the taxation scheme that will be imposed upon the regulated facilities. This is a compliance option for companies which are unable to meet their required emissions performance standard. The fund allows companies to buy credits with the purpose of using the money collected into investing in industrial technologies which will reduce emissions. Those that pay into the fund may be able to access some of the collected money to invest in capital projects that reduce emissions and otherwise offer no return. Others that do not pay into the fund may also be able to access it for the same purpose and the fund becomes a capital flow through mechanism from larger companies to smaller.

A problem arises as the capital investment necessary for large industrial facilities becomes enormous as the early low capital projects have already been completed. The next steps become extremely capital intensive with long lead times. The fund, though, is set up to make investments as early as possible for emissions reductions and quick payoffs. This makes the fund more appealing to small emitters and small projects, which limits the capital availability for the large industrial emitters. The money flows through the program whereby the large industrial emitters continually pay into the emissions reductions of small players and gives them easy and free capital.

Besides being an investment program which is capital inefficient for the large facilities, the small facilities will also become complacent with cheap and easy capital. This creates an uncompetitive market in the short and the long term. The large players will become limited in their competitive position in the short-term as capital is unavailable to them and they will not be able to invest in those projects which are necessary to reliable operations; the long-term will also be limited as the costs continue to accumulate and these companies are a step behind competitors who have been making continual investment in the short-term. The small players will be helped in the short-term with capital but in the long-term the complacency of the companies will ensure that they are not able to compete as they become capital inefficient and wasteful.

All of this promotes a system which has long-term negative consequences on the NL economy. The large industrial players will eventually be forced into a situation whereby operations will become unsustainable. And, when no longer able to access the money passed through from the large players, the small players will also collapse. This flow through has drastic consequences for the NL economy and is in dire need of reform.

Offsets credits

Offsets credits differ from the technology fund in that they are meant to invest in approved and confirmed emissions reduction projects. This means that communities in NL can invest in changing from diesel generation into wind generation and by demonstrating the reduced emissions, companies can recompense them for some of the capital investment and receive the emissions credits as though they had reduced their own emissions. But, an added wrinkle is that the emissions credits will expire in a pre-determined amount of time. The expiration of the credits is due to the fact that over time the change from diesel to wind may occur naturally and the investment from a company only accelerates the timeline. This is a direct transfer from the balances of large industrial emitters in the province to small emissions sources and could even be a direct investment in electric cars without a commensurate return on investment.

This process gives companies the option to pay directly for the adoption of green projects in the province. This is meant to be a cheaper compliance option than the technology fund. But, there are limited options for compliance as the only options currently proposed are associated with fuel switching (eg. using propane instead of diesel), energy efficiency (reducing the heat in one’s home if on home heating oil through better insulation), or renewable fuels generation (creating ethanol or bio-diesel). Besides having these limited options for offsets credits generating projects, all emissions which are reduced need to be confirmed. Confirmation of any project may take a number of years. So, the options for emissions credits will take years to complete the projects and years to confirm the emissions; after this lengthy process, credits will only last for a limited amount of time.

Unless companies will be able to generate savings for the number of years for which offsets credits last relative to investing in their own emissions or the technology fund, then the entire system is limited. It is a very specialized investment that is necessary to receive any interest from companies and offers very limited value. Furthermore, the benefit to society from an offsets system is questionable. As the technologies for which the projects are being undertaken become cheaper, it is not clear that the investment wouldn’t naturally occur. This is a poor use of resources within an economy and is again capital inefficient.

As can be seen with all of the information above, the NL system for taxation is deeply flawed. There are many points in which the system creates disadvantages and can seriously harm the future of the economy. It creates an untenable situation for the large industrial companies which are currently operating in NL and will lead to long-term challenges. While there are advantages to the emissions performance standard, unless it is designed properly, even that may create a burden on commercial activities in the province. There is little to be gained from the technology fund and offsets system. These 2 portions of environmental regulations require deep reforms to ensure sustainability of large economic drivers in the province.

  (1) Environment and Climate Change Canada, “Facility Reported Data,” Government of Canada, 02 October 2015. [Online]. Available: http://www.ec.gc.ca/ges-ghg/donnees-data/index.cfm?do=results&lang=en&year=2014&prov=NL&submit=Send. [Accessed 13 February 2017].
  (2) M. Boone, “Gas tax could morph in carbon tax, says N.L. environment minister,” 06 January 2017. [Online]. Available: http://www.cbc.ca/news/canada/newfoundland-labrador/perry-trimper-gas-tax-carbon-tax-1.3923218. [Accessed 02 February 2017].

Backgrounder on Carbon Taxes within the Canadian Context

There is a lot of talk in Canada about carbon taxes recently as new regulations have been implemented in Alberta and Ontario at the beginning of 2017. The federal government, after the Prime Minister’s announcement on Oct. 3 of 2016, has also mandated that all the remaining provinces in Canada put a price on their greenhouse gas (GHG) emissions by 2018 [1]. All Canadians would then be under a carbon price or tax which is administered by the provincial governments. But the carbon tax is not just applied to carbon dioxide (CO2) as is mostly assumed. It is applied to a variety of GHGs that include methane, nitrous oxide, and various other gases.

Why do we call it a carbon tax?

As talked about above, there are more GHGs than just CO2, these GHGs use a system called global warming potential (GWP) to determine how much equivalent CO2 would carry the same effects. CO2 then is assigned a GWP of 1 to create a reference point for comparison. Methane, because it has a larger impact than CO2, is assigned a GWP of 25. This means that 1 tonne of methane released into the atmosphere has the same impact as 25 tonnes of CO2. The term then becomes CO2e, or CO2 equivalent.

Other gases have GWPs that are much higher than CO2 and methane. Some of these numbers reach the tens of thousands but, we refer to GHGs in terms of carbon as it is the most common form of GHG. Businesses must calculate the tonnes of CO2e that have been emitted so that they may be charged under carbon taxes, which will then be audited. This means that beyond just the CO2 emitted, companies are charged for the other gases which may have a GWP, and also incur all the costs of administration of the system and auditing. But that does not mean that all emissions are taxed, there are some that are exempt.

What emissions are actually taxed and how does it impact export businesses?

Globally 13% of GHG emissions are taxed under some form of carbon pricing, whether that is a direct tax, cap & trade, or a performance-emission standard. The maximum amount of emissions coverage of any system in the world in 2017 is, supposedly, in Alberta with an approximate 90% of emissions covered. In fact, the carbon tax coverage in Canada covers a larger portion of emissions than all but two other jurisdictions, California (which has the same coverage as Quebec in a linked system) and South Africa (which has higher coverage than only BC in Canada) [2].

The governments within Canada have so far chosen to avoid putting a tax on agriculture and waste emissions and on industrial process emissions. The emissions that are priced are those that come from the combustion of fuels (ex. gasoline and coal or natural gas-powered electricity emissions). The industrial process emissions are those that escape intentionally or unintentionally from industry in the normal course of business through methods other than combustion (ex. natural gas leakage in a pipeline).

As can be seen, Canada is pricing carbon emissions more aggressively than any other jurisdiction in the world and, by doing so, will create an unequal competitive playing field for any export-oriented company in Canada. The included emissions are taxed wherever they are generated, regardless of exports or nature of business. This creates enormous risk to those businesses in Canada which are emissions-intensive and trade exposed (EITE). Further compounding the cost is that even if emissions are taxed at some given price, that does not mean that the stated price is all consumers or businesses are paying for carbon.

How carbon is actually priced

Using the above information, governments have chosen a number of ways in which to tackle GHG emissions. Those include the regulations and government controlled actions which reduce carbon emissions or are intended to reduce emissions and carbon pricing mechanisms. All options which the government chooses have an impact on the costs of businesses and consumers in Canada whether implicit (regulations and government-controlled actions) or explicit (carbon pricing mechanisms). Explicit costs of carbon are those which are often much more discussed but they are really only a part of the total cost.

Implicit costs of carbon are not included in the overall calculation of carbon taxes which are being paid in Canada. These are additional costs which must be absorbed by the consumers of services for which they often have no alternative. Most of these implicit costs have been imposed through increases in heating and electricity bills related to changing from a process which is high in emissions to one that has low or zero emissions (ex. Muskrat Falls). These costs will not be broken out to show consumers what is spent on their GHG reductions and, in most jurisdictions, does not come with any consideration to the overall impact on consumer costs.

What does all of this really mean?

Most information is unclear on what exactly is included in carbon pricing. While CO2 is the most common form of gas included in carbon pricing, any gas which is determined to have a GWP is included when calculating the overall cost that emitters have to pay. But not all emissions are created equal in the eyes of the government and some are not taxed. Mostly, emissions from agriculture and waste are not included even though agricultural emissions are the second largest contributor of GHG on a global scale [3]. Lastly, governments have undertaken steps to reduce emissions but these costs are hidden from consumers. By hiding the costs on these emissions they are not included in the overall burden which is faced by businesses and consumers.

All of this adds up to a system that is not easily accessible as people will not be able to truly understand how much they are paying and how much it will cost the economy. It is important for all Canadians to be informed about this issue as it could have extremely large consequences for the future. Everyone must get involved and become informed about the risks associated with poor regulations.

  1. K. Harris, “Justin Trudeau gives provinces until 2018 to adopt carbon price plan,” CBC, 03 October 2016. [Online]. Available: http://www.cbc.ca/news/politics/canada-trudeau-climate-change-1.3788825. [Accessed 13 February 2017].
  2. World Bank Group, Ecofys, and Vivid Economics, “State & Trends of Carbon Pricing 2016,” The World Bank, Washington DC, 2016.
  3. Environmental Protection Agency, “Global Greenhouse Gas Emissions Data,” US Government, [Online]. Available: https://www.epa.gov/ghgemissions/global-greenhouse-gas-emissions-data. [Accessed 13 February 2017].