​Climate legislation is a work in progress full of risks energy companies can’t ignore

A national climate plan is coming, whether industry likes it or not.

And energy companies need to figure out how it will affect them and how they can manage the change.

Under the new Pan-Canadian Framework on Clean Growth and Climate Change, announced in October by the federal Liberal government, if provinces don’t have their own climate plans in place by 2018, the feds will impose a $10/tonne carbon levy, like it or not. Saskatchewan and some other provinces didn’t like it one bit.

In Alberta, that announcement didn’t ruffle too many feathers because those feathers had already been ruffled by the NDP a year earlier. After all, by 2018, Albertans will already be paying three times that federal level, at $30/tonne of CO2.

After 2018, the federal program has the carbon levy rising in $10 increments each year until 2022 when Canadians will be paying $50/tonne for CO2 emissions by 2022.

Somewhat overshadowed by a spat between the federal government and Saskatchewan over carbon pricing, the Pan-Canadian Framework actually has most of the provinces onboard. The agreement includes numerous complementary measures to reduce emissions in the electricity sector, industry, transportation and buildings.

It mirrors Alberta’s plan to phase out traditional coal-fired power by 2030 and its regulations requiring the oil and gas industry to cuts its methane emissions by up to 45 per cent by 2025.

It adds regulations and subsidies to encourage the use of electric vehicles and tougher building codes by 2030 that will require all homes built to be energy self-sufficient.

“From an Alberta oil and gas producer perspective, there are no additional measures and costs, at this time, over and above what the Alberta government has announced in the past year provincially,” says Dana Saric, associate with Osler, Hoskin & Harcourt LLP in Calgary.

Saric, whose legal focus is oil and gas, and is well-versed on climate change regulations, says that while the federal plan introduces a number of measures that aren’t part of Alberta’s Climate Leadership Plan, the core of it is no more ambitious than Alberta’s climate plan and that the “stuff about clean tech and jobs and adaptation and resilience uses a lot of words like ‘working together,’ ‘partner with,’ ‘cooperate with provinces,” so that part of it doesn’t add anything more—except some ambiguity.”

The Alberta story

Carbon pricing is the most contentious feature of the both the federal and Alberta’s climate plans. In Alberta, which has had a carbon levy applied to its largest industrial emitters since 2007, a much broader $20/tonne carbon emission levy came into effect in January 2017. Industry knew it was coming, but it still left companies scrambling to fill out the right forms and apply for the right exemptions.

“It’s been really hard to find out what the rules are,” says Scott Van Vliet, president of Environmental Refuelling Systems (ERS). The company offers a range of fuel purchase and supply, transportation and onsite delivery services, mainly for the oil and gas industry. “There are a lot of companies that are exempt and a lot that aren’t exempt, industries that are exempt and industries that aren’t exempt. It’s been very confusing.”

As a reseller of fuel, ERS is largely exempt from paying a carbon levy, but it is also a large consumer of fuel.

“We run a transport fleet. We’ve got tanks we operate, gen sets, stationary equipment and mobile equipment, so when our transport guys are not operating on the highway and are onsite back in the bush, is that exempt or is that not exempt? Or when we are working for a customer that's exempt, how does that affect us? I feel sorry for some of our customers,” he says.

Darren Gee, president and chief executive officer of Peyto Exploration & Development, echoes a sense of frustration.

“It’s obviously been a bit of a scramble to get all this in place. I'll don’t think everybody fully understands what the legislation involves,” Gee says.

Peyto consumes fuel in the production of natural gas but, as an oil and gas producer, it’s exempt from the carbon levy until 2023.

“It’s basically a tax on fuel that’s supposed to flow through to where it’s consumed,” Gee says. “We drill the wells, gather the gas, put it through our facilities, process it, send it to TransCanada and they ship it down through their pipeline into the local distribution system. There’s no carbon tax being charged at each handoff of the product until you get to the guy that consumes it. So Atco and Enmax or whoever you buy your gas from for your home will be the guys collecting the carbon tax.”

Service companies in the service of producers, drilling and fracking wells are also exempt from the carbon levy for now, but some less direct services will pay for carbon emissions and those costs will find their way back to producers in their invoices, along with the additional costs of managing the paperwork and bureaucracy processing the carbon levy.

“It’s already been said by a lot of people, but it’s probably worth reiterating that we have to compete with the U.S. and every additional layer of costs makes us less competitive and we give up market share to our competitors,” Gee says.

Expanded fuel tax

Companies like Peyto and ERS and pretty much every other business in Alberta has recently turned to business management consulting firms and lawyers to better understand what is required of them under Alberta’s Climate Leadership Act (CLA). Consulting firm EY, for example, provided its clients with a summary of the CLA at the end of the year. It’s not light reading, but here are some of the key concepts and exemptions that summary highlights, as it applies to the oil and gas industry.

To start, the CLA exempts companies subject to Alberta’s Specified Gas Emitters Regulation (SGER). Those rules cover approximately 45 per cent of the provinces emissions. The current value of carbon emissions under the SGER is $30/tonne (but is payable on emissions in excess of baseline emissions set out for each emitter).

Under the CLA, the $20/tonne carbon level is essentially a fuel tax. It applies across all manner of fuels—gasoline, propane, ethane, kerosene, diesel, jet fuel. But, on a per litre basis, because of the differences in energy densities of each fuel type, and therefore different CO2 emission intensities, each fuel has a different levy rate.

So diesel is taxed an additional 5.35 cents/litre while gasoline is just 4.41 cents/litre, while heavy fuel oil takes a 6.35-cent surcharge and ethane a 2.04-cent surcharge.

Natural gas has a carbon levy of $1.01/GJ.

Exemptions are an important part of the CLA. Fuel used in the oil and gas production process, including vented or flared gas, is exempt until 2023. Emissions from the drilling, completion, workover or abandonment of a gas or oil well, or an “activity integral” to the operation of a gas or oil well, an oil battery or an oil production site (other than thermal wells) are exempt of the carbon levy.

Fuel moving in and out of a refinery or terminal, oil well, oil battery, oil production site or oilsands processing plant is exempt.

Natural gas production and all the activities of producing wells and moving the gas through the gathering system to a processing facility to transmission pipeline are exempt.

Fuel that is used to produce another fuel or another substance is exempt. Fuels used as a solvent or diluent in the production or transport of bitumen or other substances are also exempt. These two exemptions maintain the status quo for the petrochemical industry and the activity of moving bitumen. And an exemption on fuels sold to farming operations maintains the status quo for Alberta’s agriculture.

Interestingly, some exemptions based on “class of persons” include “Indians or Indian Bands” living on a reserve, the Government of Canada, armed forces of another country and foreign air transport services. Also, the fuel used in flights originating and landing in Alberta are subject to the carbon levy, while flights to neighbouring provinces or abroad aren’t.

The Canadian story

The long-term goal of the Pan-Canadian Framework is to achieve deep reductions in carbon emissions by 2050 through eliminating fossil fuel use in the electricity system, dramatically improving energy efficiency in industry, transportation and buildings, and eventually using clean electricity to supply the energy that is needed.

In other words, it’s incredibly ambitious. According to Stikeman Elliott’s lawyers, Trudeau’s carbon plan also introduces more questions than answers. For example, under the framework, it’s unclear what tools the government intends to use to enforce a floor price on carbon. It also doesn’t address how the proposed carbon pricing lines up with Canada’s commitments under the Paris Agreement. And it doesn’t sufficiently differentiate how the two carbon pricing models—a carbon tax versus a cap-and-trade model—will work across jurisdictions.

As carbon emissions prices go up, the buying and selling of verified emissions offsets will become more attractive. Companies that have invested in renewable projects and have surplus emission offsets as well as aggregators of offsets created by small generators of emissions will want to sell those offsets, but what will that market look like?

The federal government is proposing to work with provinces to provide a standard framework for emission protocols so that, potentially, offsets can be traded between provinces and internationally. That integrated market still seems a ways off and, in Alberta, tradable emission offsets still must be generated in the province and sold to companies operating in the province.

But despite the current gaps in the Pan-Canadian Framework and despite the fact that the federal climate legislation is a work-in-progress and despite climate policy missteps in various provinces—such as high electricity prices in Ontario, cross-border refueling in B.C., last minute roll out of rules in Alberta—companies that don’t get ahead of climate change legislation do so at their peril.

“Climate change considerations may not be at the top of the list when developing a project or expanding a business, but climate change can’t be absent from your considerations,” says Jason Kroft, corporate law partner in Stikeman Elliott’s Toronto office. “Regardless of the flavour of the moment, climate change looks like it’s on the agenda of most governments. And currently we have a very focused federal government alongside a number of provincial governments who want to see climate change addressed.”

A lot has been written about climate change compliance being another layer of costs in manufacturing and in the energy sectors, which already faced economic challenges, Kroft says. “So that’s one way to look at it. You can say that Trudeau will be out of power eventually and Wynne will be out of Ontario and Notley will be out of Alberta and maybe things would go back to where they were. But that would be a risky gamble. The more likely case is that climate change in some fashion will be on the agendas of most governments as the years pass and the issue crystallizes in people’s minds.”

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