Alberta's emission regulations -- are they joking?

I taught a fourth-year class at Simon Fraser University where I allowed students to pick a “natural resource” topic that they would study, present and write on. I learned a lot from my students (who enjoyed the experience [pdf]) and asked each to write a blog post on an interesting dimension of the area they studied.

Here’s a lightly edited post from KW:

Alberta has promised to reduce annual provincial CO2e emissions by 50 million tons by 2020 and 200 million tons by 2050. To do so large emitters are now regulated, and must reduce their emissions by 12% annually. The government realized the importance of the Alberta energy sector to Canada’s economy. They therefore developed a program which will not only meet these targets, but do so at lower economic costs than strict regulation. Under this program, the non-regulated sector can receive offset credits for reducing their emissions. Regulated firms for whom it is more costly to reduce emissions can alternatively purchase these offsets at the fixed price of $15 per ton of CO2e. Given this low price of offset accounts for 0.2% of the price of oil, it is sure not to harm the huge energy corporations which do business in Alberta. Furthermore if the free market is unable to supply enough offsets for the regulated sector, they can just pay an equivalent carbon tax on their extra emissions. This ensures that market pressure will not push up carbon prices.

If this were not enough protection for the energy corporations, the plan breaks down the anticipated reductions as follows: 12% conservation and efficiency, 28.5% greening energy production and 69.5% carbon capture and storage. This means energy firms will not have to incur the costs of significantly greening their operations (28.5%) as carbon will simply be captured and stored in the future (69.5%).

Agriculture is the main offset creator in this program but due to the low carbon price they are not changing their practice to earn offsets. However in order to appease both the regulated and unregulated sector, policy makers began lowering their standards for earning offsets, creating the huge problem of imperfect additionality. Now lucky firms are able to cash in on business as usual upgrades, sometimes even earning two-for-one offset credits. This means that farms can continue on with business as usual practices, the energy sector can continue with business as usual emissions, and the politicians can celebrate their grand achievement in reducing emissions.

From an economic standpoint the greatest attribute of this program is its ability to reduce emissions at a lower economic cost than strict regulation. It allows the free market to determine who reduces their emissions, and by how much. However this is also the punch line of the joke. By fixing the carbon price, the free market is not able to influence the price, therefore essentially fixing supply and demand with the price.

Bottom Line: The monetary incentive attached to the current carbon price is not enough to affect change on either the demand or supply side of the offset market. Therefore this theoretically sound program has been reduced to a carbon tax on 10% of regulated sector emissions.