Lowering the Carbon Tax as a Business Incentive

Posted On 29 Mar 2021
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By Ken White

The Supreme Court of Canada recently ruled that the federal government of Canada has the constitutional authority to levy a carbon tax. This decision allows Ottawa to proceed with its ambitious plan to ensure every province and territory has an adequate price on carbon to curb greenhouse gas emissions.

On the surface, the Supreme Court decision looks to be straightforward and obvious. Climate change is real, CO2e emissions are not limited to provincial boundaries and definitive action is needed.

While true, this recently ratified authority has implications on provincial climate change plans, especially for fossil fuel resource rich provinces. For example, British Columbia has considerable natural gas resources, and the province made a deal with the Shell-based Canada LNG project that provided various incentives for this LNG plant and possibly others to invest here. These incentives include a delayed timing on royalties, favourable electrical power costs as well as putting a cap on carbon taxes at $30/t providing agreed to energy intensity levels are honoured.

British Columbia is faced with a delicate balancing act regarding meeting greenhouse gas targets and realizing jobs and profits for its rich levels of natural gas. The province not only is providing LNG Canada with financial incentives to invest in the province but is providing incentives to gas mining operators through the deep well credit program. In FY 2018, 26 fossil fuel companies earned a combined $703 million in credits.

Limits of Provincial Powers?

To what extent does the newly approved federal role limit British Columbia (or other provinces) from using low or reduced carbon taxes as a business incentive to attract new investments?

The British Columbia agreement with LNG Canada provides exemptions from increases in the BC carbon tax. Any BC carbon tax above $30 per tonne of CO2 will be rebated for approved facilities that meet a greenhouse gas intensity benchmark. At $50 per tonne, this tax break is worth $62 million per year.

When the federal government ramps up its minimum threshold carbon tax to $170/t by 2030, based on the current British Columbia deal with LNG, the plant will only be paying $30/t.

Do the Feds have the authority to overwrite the deal made by British Columbia and to force Canada LNG to respect the scaled-up increments in the carbon tax up to $170/t. Based on the Supreme Court decision, the answer is likely yes. But will they exercise this power?

But if the Feds let this go, other sectors including the oil sands in Alberta and offshore oil and gas in the Atlantic Provinces could get a free ride on the carbon tax beyond $30/t.

A $30/t carbon tax is only moderately effective in reducing CO2e emissions. In order for the carbon tax to seriously reduce the social and economic costs of greenhouse gas emissions, it needs to be in the $170/t range which the United States EPA has estimated is close to the social cost of carbon per tonne.[1]

The full life cycle carbon imprint on the LNG sector runs deep. The upstream emissions not directly connected to the British Columbia LNG plant include methane leaks, fugitive emissions and gas flaring at both the wellhead and through the distribution and storage system before getting to the LNG plant. The emissions are much higher when there are high levels of sour gas that must be cleaned before the methane is cooled and liquified.

The Supreme Court ratifying the constitutionality of the federal carbon tax changes the game. Provinces may no longer have the exclusive power to offer lower carbon taxes as a business incentive. This likely requires the approval of Ottawa if it wishes to exercise its authority.

Time will tell who does what, and who will blink first.

Ken White is a semi-retired economist from Port Coquitlam, British Columbia. Ken has previously worked on energy-related issues both as an economist for the federal government, as an energy consultant for the National Research Council and the Privy Council Office of Canada and on numerous green energy projects.

[1] Technical Support Document: ­Technical Update of the Social Cost of Carbon for Regulatory Impact Analysis ­Under Executive Order 12866 ­Interagency Working Group on Social Cost of Greenhouse Gases, United States Government, August 2016. See link https://19january2017snapshot.epa.gov/sites/production/files/2016-12/documents/sc_co2_tsd_august_2016.pdf
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