Saving TransAlta: a demonstration of Canada's Clumsy Carbon Pricing

Canada’s Prime Minister announced aspects of a carbon pricing policy again last week. This time there were some details on how much more people in four provinces would pay for fossil fuels, the estimated revenues from those charges, and what is to be done with those revenues. Subsequently there’s much commentary on the content of announcement, and I’ll offer some more, but my attention was returned to a topic I prepared to write on quite some time ago: the impact of government actions in Alberta on a company owning much of the coal-fired generation in its province. I’ll use that company to demonstrate why I refer to the allegedly national policy as Canada’s Clumsy Carbon Pricing (CCCP).

The government’s website contains a section on “Ontario and pollution pricing” [sic] that describes the two main aspects of CCCP:

The federal carbon-pollution [sic] pricing system will be implemented in Ontario, under the federal Greenhouse Gas Pollution Pricing Act with the following features:

• For larger industrial facilities, an output-based pricing system for emissions-intensive trade-exposed industries will start applying in January 2019....
• A charge applied to fossil fuels, generally paid by registered distributors (fuel producers and distributors), as set out in the Greenhouse Gas Pollution Pricing Act, Part 1, will start applying in April 2019…

Because the 2019 pricing for provinces not deemed to have met federal pricing requirements is only now being finalized it will not be effective January 1st, but April 1st, while the Output Based Allocations (OBAs) that are still not finalized are still to be effective four months prior to that - on January 1st.

Clumsy - at best.


As OBAs will be the first element of a plan to impact my province of Ontario, and the one where people might still influence the unfinished design, it might be worthwhile to comment on them. I’ve noted in a previous post Canada’s Ecofiscal Commission has branded themselves the authority on all things environmental and economic, so their write-up on OBAs could be the standard explainer.

Here’s how OBAs work. [Emission-Intensive and Trade-Exposed] firms are allocated emissions credits based on their level of output (the O in OBAs). The number of credits or “allocations” (the A in OBAs) that they get depends on a sector-specific performance standard, which sets a benchmark for tonnes of GHG emissions per unit of output. Effectively, firms get an amount of credits that corresponds to what their total emissions would have been if their emissions intensity of production had matched the standard.

Theoretically, but let’s look at how OBA’s have influenced an energy company in Alberta.

TransAlta.

Not long after the government received a “Climate Leadership Report” from an advisory panel in 2015, TransAlta shares were trading at a record low having dropped from over $37 in the summer of 2008 to under $4.50 by January 2016.

The main two planks of the Climate Leadership plan from Alberta’s NDP government didn’t look good for TransAlta:

• putting a price on greenhouse gas emissions

• ending pollution from coal-generated electricity by 2030

A column at the time wrote of TransAlta’s share price:

...there’s good reason why shares are so cheap. The company estimates about 25% of its earnings come from coal-fired power plants in Alberta, a fuel which will be phased out of the province by 2030. Additionally, a newly issued carbon tax will make TransAlta’s operations more expensive.

Today the shares have rebounded, last closing at about $7. The change could be attributed to how the Alberta government has acted with regards to coal and pricing emissions. The federal government had previously legislated a timed phase-out of coal at modern emission levels. Alberta’s jumping up that period caused one set of payments to generators (including TransAlta). The carbon charge allowed, surprisingly, some companies to escape contracts from a Balancing Pool in the province, which in turn had contracts to purchase supply from generators (including TransAlta), and eventually those purchase agreements were bought out by the balancing pool - reportedly at a cost “equal to the remaining net book value of the units.” These actions may have no implications for understanding if Canada will have similar carbon pricing in each province under the CCCP, but the decision to treat the electricity sector as Emission-Intensive and Trade-Exposed (EITE) certainly does.


Jason Dion explains (on Ecofiscal’s site) how including all generators in Alberta’s OBA regime for electricity is logical:

Alberta’s “output-based pricing” policy reduces the net carbon tax that electricity producers pay. Under the policy, producers only pay the carbon tax on their emissions that exceed a benchmark — the emissions intensity of an efficient natural gas-fired electricity plant. Electricity that is less emissions intensive than this benchmark gets credits for the difference that they can then turn around and sell.
...an efficient natural gas plant pays nothing. Renewable producers, on the other hand, get a net benefit: they generate credits under the output-based pricing system that they can sell to other electricity producers.
Alberta’s system helps maintain the price signal from carbon pricing while limiting the cost. Under the system, no producers pay the full cost of their GHG emissions. But the carbon costs that result still reflect the relative carbon intensity of different generation sources. (Importantly, this includes renewables. The fact that non-emitting renewable producers can opt-in to the system — instead of being disadvantaged by it — is a critical design feature.)

Uh huh.

TransAlta was overjoyed by this “critical design feature,” as demonstrated in their press release when it was announced:

TransAlta's existing wind and hydro facilities will receive credits for emissions below the performance standard of 0.37 tonnes of CO2 [tCO2e] per MWh. Effective January 1, 2018, these credits can be used to offset up to 40%, escalating to 60% by 2022, of the carbon price obligations incurred by generation that exceeds the performance standard…
"By treating existing renewable generation equally, we expect to eventually receive $30 million to $50 million annually in credits attributable to our existing renewable assets."

Let’s try to fit this into a rough equivalency - under CCCP - with Ontario.

The $30 million noted by TransAlta, at 0.37 tCO2e per megawatt-hour (MWh), and $30/tCO2e implies annual production of 2.7 million MWh (TWh) - which happens to match the expected production from their 381 MW of wind capacity at a 30% capacity factor and 804 MW of hydro at 25% capacity factor. These credits have value to TransAlta as they can be sold within the sector - to themselves.

What if, under the allegedly national CCCP policy, Ontario had that same OBA scheme? Since 2013 Ontario’s low/no greenhouse gas generators have produced over 142 million MWh annually - and on average curtailed another 7 million potential MWh. An OBA crediting $20 tCO2e for production below the Alberta standard equates to a 1.05-$1.1 billion, which would climb to $2.6-$2.8 billion at the $50/tCO2e rate planned by 2022.

Can you imagine that!

$2.6-$2.8 billion a year, almost all of which would be owned by the province, either because supply was generated directly by Ontario Power Generation, or because the supply contracted from generators energized by uranium, wind, water and sun includes the environmental attributes.

$2.6-$2.8 billion!

That’s about 60% of the revenue expected from carbon pricing on fossil fuels in Ontario.

Heck, that’s as much as Ontario planned to borrow annually to SUBSIDIZE ELECTRICITY under the [un]Fair Hydro Plan!

But sadly, these credits would have no value because Ontario has no generators meaningfully above the 0.37 t CO2 emissions level - and it’s a sectoral policy within a carbon pricing framework, despite the theory that pricing works more efficiently because it works across sectors.

I wrote “A Tool to Heal, A tool to Steal” on carbon pricing six years ago, and I still think that’s the dual nature of pricing emissions. In that piece I wrote of the fee-and-dividend model, “I am not opposed to this model.” While I’m not opposed to the fuel taxes, in the least, I am offended by the lack of a national standard, and more so by the unnecessary attempts at manufacturing a partisan divide on the issue. Spot the difference between this aspect of the fee-and-dividend model long advocated by the Citizens’ Climate Lobby:

Equal monthly per-person dividend payments shall be made to all American households (½ payment per child under 18 years old, with a limit of 2 children per family) each month.

And this from CCCP:

individuals in Ontario will receive a tax-free Climate Action Incentive payment after filing their 2018 tax return starting in early 2019. Climate Action Incentive payments in Ontario will be calculated as follows for 2019:

• $154 for a single adult or the first adult in a couple.
• $77 for the second adult in a couple. Single parents will receive this amount for their first child.
• $38 for each child in the family (starting with the second child for single parents).

Did you spot the marriage penalty?

Astute readers may have noted my [sic] references on including “pollution” in a quote. The word has become another unhealthy partisan tool. CO2 is a pollutant exactly like water is - the dose makes the poison. It is broadly acknowledged CO2 will be a poison in much of the world - it is not acknowledged it has become a poison here, nor is it likely to for some time yet. The reason for introducing the term “pollution”, when US President Barack Obama started utilizing it, was pretty clear - people act on pollution. An all-party committee in Ontario agreed on phasing out coal in power generation mostly due to actually harmful smog - not due to potentially harmful greenhouse gas emissions. But it's utility now seems in dividing tribes people between the harmed/polluted and the harmful/polluters.

In Ontario we aren't polluted - at least not by CO2.

“Pollution” is simply the latest distasteful term in the partisan emissions pricing battle. “Revenue neutrality” became a thing - as if the government collecting money for redistribution wasn’t already an aspect of the size of government a certain portion of every society has opposed forever. Now that portion is tarred as polluters. Meanwhile we seem to be convinced nothing could possibly justify increasing the size of government in pretending redistributing all new funds is a necessity. Where did the possibility of a government doing great things go?

Finally, there are the tactics of implementation. As studies have suggested carbon pricing reduces demand more than expected from the price change, it is likely more effective to show the price on fuel payment receipts. Similarly, there is evidence carbon rebates will not strengthen support for pricing, at least if not visible. The government has chosen to use the existing tax system in the CCCP, which does seem the most efficient way of distributing money - but to many it will be invisible.