Alberta's Carbon Disappointment

Alberta Premier Rachel Notley announced Sunday that the province will adopt a climate policy that will replace its existing Specified Gas Emitters Regulation. Unfortunately, the new policy really does not do much more than the SGER. It appears to be a cap-and-trade program that replaces the intensity-based SGER trading program. Whereas SGER would give more permits to specified emitters (large ones) as long as they got more efficient, the new policy allocates emissions permits on the basis of output, but seems to institute a cap for each sector. (I will frequently use the words "seems" and "appears" because the plan does not completely spell out some implementation details) So the possibility of indefinitely rising emissions allowances disappears, but the initial allocation (which appears to re-set each year) is still based on productive and/or value-based efficiency (which one and when is not clear). The cap on Alberta's oil sands sector is 100 Mt, which is not a binding cap at all because current emissions are about 70 Mt. The plan does expand carbon pricing into consumer sectors, so that distributors of gasoline and heating fuels will have to have permits, too, and pass them down to end-consumers. That is a sensible step, making the carbon price as economy-wide as possible.

What is mysterious about the plan is what exactly the role of pricing is. The report refers to a ceiling price of $30 per tonne, which is consistent with a cap-and-trade program, but it also refers to price increases of 2% above inflation, "as long as emissions prices in Alberta do not significantly exceed those in comparable/competitor jurisdictions and as long as they are not above current estimates of the social cost of carbon." (p. 32 of the report). How do you increase the price if the price is determined by market trading? The mechanism seems to be that the province will reduce allocations "1-2% per year to reflect expected energy efficiency improvements." (p. 31 of the report OK, but that still seems like the province still just adjusting the cap.

In sum, this plan is a disappointment for those like myself, who were hoping for a bolder policy, especially in light of the Premier's remarks earlier this year expressing unhappiness with the SGER, and rejecting the National NDP Party's call for cap-and-trade. The plan still grandfathers a certain amount of emissions, and that is disappointing because the income effects of those freely-allocated permits will reduce the incentives to innovate. Worse still, the sector-specific caps will eliminate any market signals to re-order Alberta's economy in less carbon-intensive ways. In particular, if the oil sands sector still has 30 Mt to grow, there is no bite at all to this climate policy in terms of curbing oil sands emissions. Some of the money raised from the plan (how the plan raises the claimed $3 billion in revenue is unclear) will go towards reducing coal-fired generation and increasing renewable energy generation, but how it does it is ... you guessed it: unclear.