On October 20 and 21, 2014, the BC Government introduced key new legislation to LNG projects proposed for the province. The details of the LNG tax and new greenhouse gas (GHG) legislation are long-awaited policy and fiscal developments that are critical inputs to LNG proponent assessments of British Columbia's business competitiveness. This update discusses each in turn.
The LNG Tax
On October 21, the provincial government introduced Bill 6, the Liquefied Natural Gas Income Tax Act, which imposes, starting in 2017, a two-tier income tax on revenues from LNG sources at the time of production. Effectively, taxpayers with revenues from LNG sources will pay a tax of 1.5% of net proceeds from those LNG revenues once commercial production begins and until their capital investment is recovered (described in the legislation as a tax on "net operating income"). After that point, they will pay a tax of 3.5% (rising to a rate of 5% in 2037) of the amount by which aggregate net proceeds from an LNG source exceeds the amount of the capital investment account associated with that LNG source (described in the legislation as a tax on "net income").
The capital investment account generally consists of the costs associated with constructing the LNG facility, including storage tanks and marine loading systems. As a result, the higher tax rate is only payable once the capital costs have been recovered.
Tax paid at the 1.5% rate is deductible against the higher rate tax, which in practice means the 3.5% (5% in 2037) tax is the maximum amount of tax payable. This is materially less than the 7% maximum second tier tax rate discussed by the province earlier in the year.
The LNG tax is applicable to income from: the sale of LNG, rents and fees for the use of an LNG facility, and fees for processing gas at an LNG facility, as well as other activities that are related to liquefaction.
The LNG tax applies on a facility by facility basis, which means that taxpayers must calculate the LNG tax payable in respect of each particular LNG facility separately.
In addition, the legislation includes a Natural Gas Tax Credit to qualifying persons who are engaged in or who have income derived from liquefaction activities. This credit will be equal to 0.5% of the cost of natural gas acquired by a corporation at the inlet to a LNG facility, but the maximum amount of the credit that can be used in each year will be limited to the lesser of the corporation's BC income tax payable after all other BC income tax credits are deducted, or the amount that would effectively reduce the taxpayer's BC corporate income tax rate to 8% instead of the current 11%.
Regulation of LNG Greenhouse Gas Emissions
On October 20, the provincial government introduced Bill 2, the Greenhouse Gas Industrial Reporting and Control Act. If enacted, Bill 2 will repeal and replace the Greenhouse Gas Reduction (Cap and Trade) Act, S.B.C. 2008, c. 32 to regulate greenhouse gas emissions from LNG facilities.
LNG facilities face a greenhouse gas emissions "intensity" benchmark of 0.16 carbon dioxide tonnes for each tonne of liquefied natural gas produced. LNG facility operators must avoid exceeding this emissions limit. Four types of compliance units they can use to do so are recognized:
- Offset Units allow operators to obtain credits for reducing emissions of greenhouse gases or for removing greenhouse gases from the atmosphere through an accepted emission offset project.
- Funded Units permit operators to make payments to the Minister of Environment to obtain credits. It appears that the Ministry may use some of the money collected here to invest in technology funds focused on accelerated market adoption of clean energy technologies that reduce greenhouse gas emissions. The press release accompanying this bill suggests that the contributions to this fund will be at a rate of $25 per tonne of carbon dioxide equivalent.
- Earned Credits allow operators to earn credits for having actual greenhouse gas emissions below the emissions limit that may be applied in future years.
- Recognized Units are offsets from other jurisdictions that are recognized under the regulations to be, or deemed to be, the equivalent of an offset unit.
Bill 2 also allows for the transfer of compliance units between operators, which appears to allow an operator who is able to reduce emissions intensity below 0.16 to profit from earned credits by trading them to other facilities.
The bill also allows for administrative penalties for an operator's failure to comply with compliance obligations.
How the compliance units regime will be implemented, including the cost of obtaining offsets, the mechanics of how they will be traded, and the monetary amount of administrative penalties, remains outstanding because the mechanics of this regime will operate by regulations to be established later.
According to the government press release, this 0.16 carbon dioxide intensity standard sets a new global standard for LNG facilities, which typically have emissions intensities of 0.18 to 0.27. The press release also suggests this bill will be accompanied by an incentive program for LNG facilities to reduce carbon dioxide intensity from 0.23 to 0.16 from internal reductions in emissions rather than through the purchase of compliance units. The provincial government anticipates funding this incentive program through taxes and royalties collected from the LNG industry.
This legislation is similar to the 2007 Specified Gas Emitters Regulation under Alberta's Climate Change and Emissions Management Act (the federal government also proposed a similar regime at one point, but has not implemented it). In Alberta, large emitting facilities are required to reduce their greenhouse gas emissions intensity 12% from a baseline via offsets or paying into the technology fund at $15 per tonne of carbon dioxide equivalent (a healthy local Alberta offset market has emerged with prices below this threshold). BC's regime is more expensive, requiring a reduction of approximately 11-40% from the government-identified standard (which may be difficult if the 0.18 intensity reflects current new build performance), and charging $25 per tonne of carbon dioxide equivalent for offsets.
While it remains to be seen what effect the LNG tax and new GHG costs will have on proposed projects' final investment decisions, investors now have significantly more information about these costs of LNG in BC.
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.