December 7, 2017

By Katherine Monahan

Yesterday, Alberta announced elements of the design of its output based allocation for large industrial facilities, titled “the Carbon Competitiveness Incentives” (CCIs). The CCIs are the second component of Alberta’s carbon pricing system (there is already a carbon levy being applied to heating and transportation fuels).

Building on advice presented in 2015 from the Climate Change Advisory Panel, including Smart Prosperity Institute’s own Stephanie Cairns, the CCIs provide relief to trade exposed industries from the full costs of the carbon levy. This addresses concerns over carbon leakage and competitiveness impacts, including to avoid any perverse reactions where production (and related emissions) swap to jurisdictions not subject to carbon pricing.

The policy will take effect on New Year’s Day, but includes a gradual (3-year) phase in period. The plan replaces the 10 year old Specified Gas Emitters Regulation, with a design shift towards encouraging the least emissions intensive process for developing a particular product (for example, a barrel of in-situ bitumen, or a kWh of electricity). In other words, a final product is judged against its peer products, where dirtier producers face compliance obligations to bring them in-line with cleaner technologies and practices. The system it replaces had established compliance obligations only against facility-specific historical emissions.

Alberta should be congratulated for the extensive consultations and stakeholder engagement that have informed the final design.

SPI’s Reaction:

• Economy wide carbon pricing is an essential element to any climate change strategy, and today’s release marks a significant milestone in Alberta’s implementation of its Climate Leadership Plan.
• The program design is meant to minimise firm-level cost impacts, while still providing incentives to adopt clean technologies and shift to cleaner, less emissions-intensive means of production.
• A well designed market based approach provides rewards for clean production, investments, and innovation.
• To encourage ever improving clean investments, the product benchmarks should continue to be strengthened and free allocation should be incrementally tightened over time. This will ratchet-up the effective/average rate firms have to pay to pollute, as well as increase the value of generating/selling performance credits. Review periods will be essential in this regard, as we continue to pave the way to a low carbon economy.

Design Framework:

• Emissions Intensive Trade Exposed Industries, such as oil sands operators and chemical manufacturers, receive free allocation of performance credits up to the product benchmark.
• The benchmarks are set to award producers that demonstrate superior clean behaviour relative to their peers (e.g., top-quartile for least emissions intensive) with spare (and therefore sellable) performance credits. The ability of the firm to sell excess credits encourages continued clean behaviour and further uptake of clean technologies.
• Firms producing a dirtier product and creating more emissions than the benchmark will face compliance obligations. They will need to buy performance credits from other firms, use banked credits, or alternatively pay the carbon levy to the management fund.
• The CCIs applies to large emitters producing more than 100 000 tonnes per year, as well as those that are eligible to opt in. Although electricity is not generally trade exposed, it will be included in the CCIs to minimise electricity price impacts in Alberta’s currently coal-intensive grid.
• In March 2017, Alberta announced that a limit will be implemented on the use of credits for compliance (offsets or performance credits). This ensures that firms must pay a portion of their compliance obligation into the fund at stable prices. The final design will determine what percentage of compliance can be met through the use of credits and how this will change over time.

Image courtesy Kris Krüg, Flickr Creative Commons