Carbon regime missing in action in BC’s new LNG tax regime

It was widely expected that BC’s budget announcement - tabled on February 18th - would involve an announcement on fiscal changes surrounding Liquefied Natural Gas (LNG) revenues in the province, and the budget contained just that. Specifically, BC Finance Minister Mike de Jong announced a new tax in BC’s bourgeoning LNG industry – a tax on LNG liquefaction income. Liquefaction is the energy-intensive process that converts natural gas into the more easily shipped liquid state, using a combination of low temperatures and high pressure (reawakening some of those high-school chemistry memories, are we?). But there was no mention of changes to BC’s existing (and effective) Carbon Tax to bring LNG emissions in line with BC’s legislated climate targets, nor of any alternative approaches, such as cap and trade or offsets, to meet these.

There is an elephant in the room when it comes to most official discussions about such a major expansion of long-lived fossil fuel extraction and export infrastructure: How would the massive development of LNG export facilities factor into domestic and global greenhouse gas emissions concerns? BC’s ambitious emission targets simply can’t be reconciled with the projected LNG emissions (more on this below), and the Budget failed in not addressing this.

With LNG, GHG emissions occur throughout the path from gas in the ground to combustion at the end point, and there is a wide-range of variability in this regard. Emissions can stem from:

Extraction/fracking – this depends largely on the particular gas ‘play’ and the difficulty of extracting from a particular source

Pipeline transport – this is likely a small fraction of the total energy and emissions (but there is some uncertainty over the extent of fugitive methane emissions)

Liquefaction – this is a large source of emissions, and the major question here is whether liquefaction is ‘direct-drive’ (powered by the gas itself) or electric drive (lower emissions – but would it be hydroelectric? Wind?)

Shipping – this too is a very minor component of overall emissions

Combustion – efficiency is a factor here (e.g. single-cycle vs combined-cycle technology)

Other emissions considerations include the extent to which natural gas might or might not offset coal combustion (mostly in China, where energy demand is intense and growing), the combustion efficiency and nature of the coal that might be offset, and the potential presence of carbon capture and sequestration at various steps of the process. There is clearly a lot of uncertainty here – and it is surely something that deserves increased attention – whether or not oil and gas is extracted for domestic or foreign use. Greenhouse gases do not obey borders.

BC has previously shown itself to be a leader in taking meaningful actions to address GHG emissions in the province, including its legislated emission reduction targets, its carbon tax (the leading global example of a carbon pricing policy) and its zero-emission electricity regulation that had been introduced for new electricity generation. But as former BC Premier Gordon Campbell left, and successor Christy Clark came into power, LNG development was a hot topic, and BC’s climate leadership began faltering. To ensure compliance with the province’s legislation, Clark arbitrarily reclassified natural gas as a “clean fuel” if it is used to power LNG plants in BC in an amendment to the Clean Energy Act. The gas might be natural, but it ain’t clean! It is cleaner than coal, with roughly half the emissions per unit of energy, but BC’s planned LNG plants would be enormous energy consumers, and at this scale natural gas direct-drive would entail a huge volume of emissions.

Analysis by climate scientist (and as of recently, politician) Andrew Weaver estimates 73 megatons per year of carbon pollution from five proposed LNG plants alone, which makes it impossible to achieve provincial targets of 43 megatons annually by 2020 and 13 megatons by 2050. What about offsetting dirty coal by selling Canadian LNG to China? As Weaver puts it: “Selling LNG to China so that it might decrease its carbon emissions means that we in BC will have no choice but to throw our own targets out the window.”

With no reference to carbon pricing for LNG in the new budget, it remains unclear how BC’s provincial Liberals plan to close this gap. As previous work from SP has shown, BC’s Carbon Tax has been a success - environmentally, economically, and politically – despite what we hear in current political debates elsewhere in Canada. Though a carbon price far beyond the current $30/tonne Carbon Tax would be required to have sufficient bearing on a development that would, alone, more than double total current provincial emissions it is regardless important to subject the emissions from the proposed LNG plants to a carbon price in the same way as combustion-based emissions in BC .The success of the Carbon Tax has much to do with its broad base. It would be unjustified to exempt the vast non-combustion emissions from the LNG sector from a price signal, whether this is done by extending the Carbon Tax or introducing a cap and trade system.

On the new BC LNG income tax, the centerpiece of the Budget: it is designed as a two-tiered system, with a 1.5% tax applying to income at the start of production at new liquefaction plants, which then rises to a maximum rate of 7% (or potentially less – this is still to be determined) once the plant has recovered capital costs. So, 7% is the upper bracket, and it is quite likely that LNG plants will face lower rates in practice raising the industries competitiveness.

The news regarding the tax on LNG liquefaction income did not come as a surprise - the provincial Liberal party had previously described a plan to eliminate existing provincial debt using a new “prosperity fund” announced before the last BC election, and this tax revenue would feed into the fund. The new BC budget (described by Minister de Jong as being “boring, balanced”) was correctly anticipated to be ‘in the black’ and signal BC’s strong fiscal performance. The new budget - which follows several previous budgets that were ‘in the red’ - forecasts three years of surplus budgets. But it is important to note that the anticipated surpluses are due to non-LNG fiscal modifications – LNG income tax revenue would of course not start coming in until LNG liquefaction begins (in current plans, the first exports would start towards 2017). Precisely how these fiscal changes will affect the liquidity of Canada’s Liquefied Natural Gas assets is yet to be determined…

And uncertainty remains about the timing and scale of BC’s LNG exports. There is also a lot of uncertainty about how the natural gas market will evolve over time – and importantly the market price for the gas in Asia. Marc Lee from the Canadian Center for Policy Alternatives offers some interesting analysis in this regard, expressing that it is fairly unlikely that the BC government will see as high a price for the gas than it uses for its analysis, reducing estimates of potential revenues. The official details of B.C’s new budget are outlined here.