October 30, 2019

By Katherine Monahan & Dave Sawyer

Alberta Premier Jason Kenney implemented Bill 1 – An Act to Repeal the Carbon Tax soon after his April 16 victory. The Act removed the carbon tax from consumer fuels such as gasoline and diesel but didn’t change the carbon pricing regulation imposed on large industrial emitters, the Carbon Competitiveness Incentive (CCI). 

In response to Bill 1, the federal government -- that has been reassured in recent court challenges that it has the legal authority to implement carbon pricing across the country --  announced soon after that the federal backstop carbon price would kick in on January 1, 2020. 

With the threat of the federal backstop looming, and the risk of outsourcing industrial GHG policy to Ottawa, the Alberta government faced a conundrum. They had campaigned on a promise to axe the fuel carbon charge, and ease regulations on large emitters, but weakening the existing CCI too far could lead to the federal Output Based Pricing system being implemented forcefully in the province.

Yesterday’s release of the TIER program strikes a good balance of pre-election political posturing with pragmatic policy.

The TIER program is a hybrid model that combines the old Conservative-born SGER (2007-2018) with the NDP’s CCI (2018-2019). The Specified Gas Emitters Regulation (SGER) had calculated each facility’s historical emissions and mandated them to improve their emissions performance relative to that baseline. If they did not, they would need to either pay for emissions over the limit or comply with carbon offsets (unchanged from previous system), or banked or traded emission performance credits.

The criticism of the SGER from industry was that new, more efficient facilities would still face requirements to reduce their emissions even if they had invested in some of the best emissions control technologies. The major criticisms from environmentalists were a) the relatively weak average cost of polluting (since firms pay only for their emissions in excess of the benchmark), and b) the weak incentive for older, poor-performing firms to invest in newer, more efficient, technologies.

In developing the TIER approach, the Alberta government decided to address the former of these concerns: the criticism from industry. The new regulation allows facilities to choose between a benchmark set on facility-specific historical emissions, OR a benchmark based on best performance among your peers for the particular product (e.g., in-situ bitumen).

So, for example, if you are the very dirtiest facility, you would have a long way to mitigate to arrive at the efficiency of the high-performance product-specific benchmark, and would choose the less onerous historical benchmark. However, if you were one of the cleanest and most efficient facilities, your emissions would actually be below the high-performance benchmark. Choosing this benchmark would allow you to actually earn credits for your emissions profile. 

The high-performance benchmarks for the product are calculated as the average emissions intensity of the top 10% performing facilities, or on the top performers for sectors with limited facilities. These benchmarks aren’t tightened (i.e., ratcheted-up over time as technology progresses) but will be examined during 5-year review cycles (first review in 2023). Industry was promised that there would be a cap on tightening rates, ensuring that the regulation would not impact economic output.

The facility-specific benchmarks are based on 90% of historical emissions intensity for an individual facility. Starting in 2021, these benchmarks will be tightened at 1% per year until they meet the other benchmark. This marks one of the biggest impacts of the repeal of the CCI, since poor performers, mostly older less efficient facilities, will be subject to much weaker stringency and requirements to improve.

Conventional oil & gas facilities below the 100,000-tonne regulatory threshold may opt in to TIER. This would protect up to 34,000 smaller facilities from the federal fuel charge. New and modified facilities can choose to be exempt from the regulation for the first 3 years. There is also a “support mechanism” for facilities demonstrating economic hardship as a result of the regulation.

One positive element in terms of climate change, is the electricity sector which is not trade-exposed and therefore faces little concern over emissions leakage. Electricity is an exception to the benchmarking options in other sectors, and all power generation will remain subjected to the “good-as-best-gas” standard for emissions intensity. Renewable electricity facilities are allowed to opt in to TIER, providing them a chance to earn credits that can be sold to other regulated firms.

The marginal carbon price will be set at $30 per tonne of carbon dioxide equivalent. The price matches the federal benchmark for 2020 but would need to rise by $10 per tonne to $50 by 2023 to stay in step (and in compliance with the federal backstop regulations). Since the draft TIER regulation is silent on any price increases, this will likely be a bargaining chip in equivalency negotiations.

The government has estimated that replacing the CCI with TIER will save industry $330 million in 2020 alone, with savings increasing thereafter. As with the CCI, facilities can meet TIER compliance through unused (banked or traded) emission offset and emission performance credits generated under SGER and CCI. Credits from 2014 and earlier don’t expire until the end of 2020, for example, whereas more recent credits have an eight-year expiry date. To maintain some revenue flow, no more than 60% of a facility’s compliance obligation can be met with emissions performance credits or Alberta-based emissions offsets.

Any revenues collected though SGER went towards a “technology fund” to finance investments in low-carbon technology by the regulated industries themselves. Some media outlets have reported that revenue collected through TIER will continue to fund clean technologies, but that half of every dollar raised (after $100 million) will go towards debt or deficit reduction, as well as the province's “energy war room,” a new office aimed at countering criticism of the oil and gas industry.

The TIER program, as legislated, will come into force on January 1, 2020. There has not yet been any official response from the federal government as to whether it will meet equivalency requirements.

Katherine Monahan

Senior Fellow

Dave Sawyer

Executive in Residence