New outlook on oil production likely pushes 'bite’ of Alberta carbon cap beyond 2040
Last week, the NDP government in Alberta tabled Bill 25, to advance the imposition of an annual cap of 100 megatonnes (MT) for greenhouse gases from the oilsands, making Alberta the first major oil producing region to institute such a cap. Based on current production and greenhouse gas emissions, the cap ostensibly leaves enough room for oilsands GHG emissions to increase by 50 per cent from current levels.
We had previously been critical of the cap. Based on the data available at the time we did our first analysis of the cap’s likely impacts and costs, we concluded that the cap would likely begin to bite in 2025 (assuming no real improvements in emission intensity) or 2027 if we assumed continued improvements in emission intensity. Based on oil production estimates at the time, we estimated that the cap would result in production losses between 2027 and 2040 of about two billion barrels of oil, with a cumulative loss of value of about $150 billion (in 2015 dollars). The lost value could reach $250 billion if producers are unable to improve their emissions intensities. At the time, we estimated that the cost of reducing greenhouse gases under this plan would be more than $1000.00/tonne.
The good news is that seems unlikely to happen given new forecasts of oil prices and production levels. The bad news is that the cap is unlikely to matter much because new estimates of production based on forecasted prices and other environmental policies are so low that the cap is unlikely to bite until 2040, or later.
While Alberta regulators recently suggested the province would hit the cap in 2030, a new report from the National Energy Board (NEB) suggests it might be farther off still. As the NEB recently estimated in its newest energy supply and demand projections to 2040, the new “Reference Case” assumes that oil prices will be $17/bbl lower in 2040 than it did in its forecast earlier this year. As the price of oil drives development of the resource, the NEB now estimates that oil production in Canada will only rise 41 per cent by 2040. Even if one made the pessimistic assumption that a 41 per cent rise in production would result in a 41 per cent increase in emissions (it almost certainly won’t with technological improvements a given), that’s still well short of hitting the cap, even in 2040.
While terrible market conditions may have made Alberta’s carbon cap temporarily moot (something that ENGOs may seize upon to discredit the cap’s contribution to “social license” for pipelines) we should remember that market conditions can equally make it unmoot, and dampen regrowth of the oil sector when, as is widely assumed, the price of oil rebounds in the future. In fact, the cap looming out there would certainly affect decisions regarding whether or not one might wish to invest in the oilsands for the longer term. But then, some would argue that’s part of the whole “leave (most of) it in the ground” movement.
The real problem with Alberta’s carbon cap is that, like much of the Alberta Climate Leadership Plan, it’s arbitrary, and the government seemingly failed to do any meaningful analysis of the potential costs and benefits of the action. And its implementation suggests that the NDP feels no reason to do mid-course corrections to their plan despite the continued (and projected to continue) suffering of the Alberta economy. Governments should take uncertainties out of the equation to the extent they can, not dropping in arbitrary caps whose uncertain impact can only increase uncertainty about future oilsand production.
Subscribe to the Fraser Institute
Get the latest news from the Fraser Institute on the latest research studies, news and events.