Canada: Just Like Any Good Recipe, Alberta's Climate Leadership Plan Has A Little Bit Of Everything

On Sunday, November 22, 2015, just days before the United Nations conference on climate change in Paris, Alberta released its Climate Leadership Plan (Plan) together with the Climate Leadership Report (Report) upon which it is based. The Plan represents a dramatic and fundamental shift in Alberta's approach to climate change and greenhouse gas (GHG) issues. Highlights include:

  • Early phase-out of coal-fired power plants
  • Replacement of emissions intensity regime with product-based emissions performance standards
  • Expansion of program from only targeting large emitters to a wide array of small and large emitters as well as consumers through the implementation of broad-based carbon levy
  • Capping oil sands emissions at 100 megatonnes
  • Targeting methane emissions in the oil and gas sector
  • Renewed focus on energy-efficient initiatives

Alberta's existing approach to the regulation of climate change involves a GHG emissions intensity regime that applies to large emitters (facilities that emit equal to or greater than 100,000 tonnes of GHG per year). In contrast, the Plan will apply a variety of carbon pricing mechanisms to both large and small emitters, as well as consumers. In other words, it really does have a little bit of everything in it.

It is still too early to tell who all of the winners or losers will be, but it is probably safe to say that coal-fired electricity generators will be considered amongst the losers and renewable energy producers amongst the winners. Alberta's electricity sector currently accounts for 65 per cent of all coal power production in Canada. Under Canada's existing regulations, coal-fired power plants must meet GHG standards or be phased out after 50 years of operations. Although that would result in 12 of Alberta's 18 coal-fired power plants being retired by 2030, the remainder would not be retired until several years later, with the last one not due to retire until 2061. No longer. Under the Plan, all coal-fired power plants will be phased out by 2030 unless they emit zero pollution. The Plan contemplates that renewable energy will replace two-thirds of that generating capacity, with the remainder generated by natural gas. The Plan further contemplates that the cost of renewables will be as low as possible through market mechanisms, such as auctioning. The government will appoint a facilitator and a negotiator to assist in developing and implementing the integration of low-cost renewables into the Alberta electricity system without endangering the electrical system's reliability.

A key component of the Plan involves the replacement of the current emissions intensity program with product-based emissions performance standards. The current emissions intensity program is predicated upon an individual facility becoming more efficient as compared to its particular baseline. Under an emissions performance standard, facilities will be compared to a product-specific emissions standard. Facilities that cannot meet the emissions standard will be subject to a carbon levy. As of January 1, 2017, the levy will be C$20/tonne of GHGs. That amount will increase to C$30/tonne as of January 1, 2018. The anticipated effect is that it will drive best-in-class performance.

Another key component of the Plan is its broad application. The existing regime only applies to large emitters, which account for approximately 45 per cent of provincial GHG emissions. As noted in the Report, implementing a credible GHG policy in comparison to other global GHG regimes requires that the remaining 55 per cent of the emissions be addressed as well. The new regime under the Plan attempts to do just that. Once fully implemented, it is expected to cover approximately 78-90 per cent of provincial GHG emissions, including large emitters, small emitters and consumers. The major consumer impacts are expected to be increased costs of home heating fuel and gasoline. In that regard, initial reports suggest that gasoline costs may increase by up to C$0.07/litre and natural gas prices by over C$1.50 per gigajoule.

Alberta is touting the carbon pricing aspects as being revenue neutral, with all of the revenue remaining in Alberta to be used to fund efforts such as: provincial initiatives to reduce GHGs; research and innovation; green infrastructure and development of renewable energy projects. It is unclear how the mere fact that all of the revenues remain in the province without associated tax cuts in other areas qualifies a program as being 'revenue neutral'. Nevertheless, the Plan involves a portion of the revenues being invested in an adjustment fund that will help individuals and small businesses offset some of the increased costs associated with meeting the Plan's requirements.

In what appears to be a direct response to criticisms that Alberta hasn't done enough to restrict GHG emissions in the oil sands sector, the Plan contemplates an absolute annual emissions cap of 100 megatonnes of GHG from oil sands production. Currently, oil sands emissions account for approximately 70 megatonnes of GHGs per annum. By transitioning to performance-based standards, coupled with the implementation of a legislated emissions cap, it is expected to create the conditions for continued oil sands growth in a manner that rewards innovation and enables oil sands producers to remain globally competitive. As stated by Alberta's Premier Notley when she outlined the Plan:

"The simple fact is this: Alberta can't let its emissions grow without limit. But we can grow our economy by applying technology to reduce our carbon output per barrel. And that is what this limit will provide."

The Plan will also include provisions for recognition of new upgrading and co-generation in the oil sands sector. Alberta's existing regime has been criticized for not directly addressing the benefits of co-generation (coupling energy production with heat production). The Plan attempts to address that omission.

The Plan specifically targets methane emissions, particularly in the oil and gas sector. The climate change impact of one molecule of methane is 25 times that of carbon dioxide, so targeting its emissions will accelerate GHG reductions. Under the Plan, methane reductions from oil and gas operations will decrease by 45 per cent. The reduction will occur through the application of emissions design standards on all new facilities coupled with the development of a joint initiative on methane reduction, which will include industry, environmental groups and indigenous communities.

The final aspect of the Plan involves a renewed focus by the government on energy efficiency. Alberta has been criticized as being one of the only provincial jurisdictions without a significant energy efficiency initiative. The province has responded to that criticism by confirming it will implement an energy efficiency program. Details of the program are anticipated to be released in January.

Notwithstanding the Plan's multi-faceted approach to GHG regulation, it is interesting to note that it does not encompass any significant cap-and-trade measures. This means that Alberta will remain isolated from any of the cap-and-trade regimes that other provinces, such as Ontario and Quebec have signed onto. The Plan represents a made-in-Alberta approach in response to an Alberta problem. Whether or not remaining isolated from other jurisdictions will be beneficial to Alberta in the long term is unclear. However, at least in the short term the reviews are positive. In a news release that was also issued on November 22, 2015, several oil and gas companies, including Canadian Natural Resources Limited, Cenovus Energy Inc., Shell Canada Limited, and Suncor Energy Inc. each confirmed their general support for the Plan.

The multi-faceted aspects of the Plan represent a very different approach to GHG regulation than Alberta currently employs (or for that matter that other provinces have adopted). Indeed, moving from a single method of regulating GHGs, by means of emissions intensity to a variety of methods, is likely a reflection of the fact that regulating GHGs is a complex issue requiring complex solutions and a recognition that a one-size-fits-all approach is too simplistic.

The Plan's specifics still need to be flushed out (most notably what the product-based performance standards will entail and how the province will ensure the increased use of renewable energy production). Furthermore, implementing the Plan will result in a variety of commercial implications, not the least of which include, among other issues: compensation for early coal plant retirements; impacts on power purchase arrangements involving coal-fired power plants and the efficient operation of the plants; cost of grid expansion and re-enforcement and/or stranded transmission assets that were built for coal base-load generation; effects on pool prices and index-based contracts; allocation of the incremental 30 megatonnes of carbon to incremental oil sands production; and the auction/market mechanisms for new renewable projects.

Based on the initial media responses, Alberta is being heralded as a leader in its approach to climate change. It remains to be seen if that view continues to be held after the Paris meeting and after the Plan is fully implemented.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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