Why Canada Oil-Sands Industry Wants CO2 Tax Harper Hates: Energy

Photographer: Jimmy Jeong/Bloomberg

Bitumen, or oil extracted from oil sands, is analyzed at a research facility in Edmonton, Alberta, Canada. Oil companies operating in Canada such as Exxon Mobil Corp., Total SA of France and Canada’s Cenovus Energy Inc. plan to convert billions of barrels of the sticky bitumen into diesel and gasoline.   Close

Bitumen, or oil extracted from oil sands, is analyzed at a research facility in... Read More

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Photographer: Jimmy Jeong/Bloomberg

Bitumen, or oil extracted from oil sands, is analyzed at a research facility in Edmonton, Alberta, Canada. Oil companies operating in Canada such as Exxon Mobil Corp., Total SA of France and Canada’s Cenovus Energy Inc. plan to convert billions of barrels of the sticky bitumen into diesel and gasoline.  

Canadian Prime Minister Stephen Harper has vilified political opponents who support a tax on carbon-dioxide emissions. The oil-sands industry, Canada’s fastest growing CO2 polluter, says he’s out of step.

The contradiction of an industry seeking a new tax on itself has emerged in energy-rich Canada because producers are concerned the crude they process from tar-like sands will be barred from foreign markets for releasing more carbon in its production than competing fossil fuels.

Oil companies operating in Canada such as Exxon Mobil Corp. (XOM), Total SA (FP) of France and Canada’s Cenovus Energy Inc. (CVE) plan to convert billions of barrels of the sticky bitumen into diesel and gasoline. Under foreign and domestic pressure, they now see a greenhouse-gas levy helping to provide access to markets and more predictable costs for Canada’s biggest export industry, which shipped C$68 billion ($68 billion) of oil in 2011.

A carbon tax “is one of the ways to promote better performance of the industry,” Andre Goffart, president of Total’s Canadian unit, said in an interview in Calgary. “The principles are probably agreed upon by the players. The question is, where do you put the level to incentivize the industry to go in a more efficient way?”

Europe’s third-largest oil company joins a group of competitors around the world calling for a price on carbon. Many favor taxes over a cap-and-trade system to encourage cuts. After European Union emissions credits plummeted in price, securitizing CO2 has lost favor among jurisdictions considering pollution limits, said Guy Turner, director of commodities and energy economics at Bloomberg New Energy Finance in London.

‘What You’re Getting’

“At least with a tax, you know what you’re getting,” Turner said in an interview from London. “The cost is in effect fixed. Industry will be able to lobby for a rate of tax that it feels it can wear.”

European Union carbon permits have sunk 88 percent from a 2008 intraday high of 29.69 euros ($40.30) a metric ton. Permits for December dropped 10 percent yesterday to close at 3.42 euros, data from the ICE Futures Europe exchange in London show.

“A carbon tax maximizes the use of markets and minimizes complexity,” Pius Rolheiser, an Imperial Oil Ltd. (IMO) spokesman, said in a phone interview. “On that basis, a carbon tax is a better approach.” Imperial, Canada’s second-largest oil producer by market value, is 70 percent-owned by Exxon.

Brian Ferguson, chief executive officer of Calgary-based oil-sands producer Cenovus, said last year that a carbon tax is “probably the most effective means of regulating and addressing the cost of carbon.”

Emissions Debate

The debate in Canada over how to slow the pace of emissions from the nation’s fastest-growing source of greenhouse gases echoes choices being considered around the world.

Conservative Prime Minister Harper, who said in remarks during a 2008 election campaign that a carbon tax would “screw everybody” in Canada, favors other ways to curb greenhouse gases.

“Our government is committed to reduce GHG emissions at the industrial source rather than through an economy-distorting carbon tax regime,” Rob Taylor, a spokesman for Environment Minister Peter Kent, said in an e-mail.

The country needs to meet a 2020 commitment to lower emissions by 17 percent from 2005 levels under the Copenhagen Accord. Nations such as Australia and subnational governments have already chosen taxes to cut pollution.

Canada’s government introduced regulations last year that capped the amount of carbon that can be emitted by coal-fired power plants and has been negotiating with the oil-and-gas industry on similar rules.

Pricing ‘Intuition’

Australia, the world’s largest per-capita emitter of greenhouse gases, in July set a fixed carbon price that works much like a tax of A$23 ($24) a ton for the country’s largest 500 emitters, including miner BHP Billiton Ltd. (BHP) The Canadian province of British Columbia enacted a carbon tax in 2008 that covers about 70 percent of fossil-fuel consumption, making its gasoline among the most expensive in the country.

“The intuition behind carbon pricing is straightforward: we should tax things that we do not want, and making it more expensive will reduce pollution,” Marc Lee, senior economist at the Ottawa-based Canadian Centre for Policy Alternatives in Vancouver, said in a Jan. 13 report. “A carbon tax provides greater certainty around the price of GHG emissions, but poses a great deal of uncertainty around actual emission reductions.”

British Columbia’s carbon tax is currently pegged at C$30 a ton and adds about 6.7 cents to a liter of gasoline. The tax has helped the province’s per-capita emissions decline almost 10 percent from 2008 to 2010, with families paying an average of C$386 per household, the report said.

Hydropower Reliance

Neighboring Alberta, home to the oil-sands industry, has a carbon levy of C$15 a ton for industrial emitters that exceed limits. Finland was the first country to enact a carbon tax, followed by Sweden in 1991 and a handful of other jurisdictions including the U.S. city of Boulder, Colorado.

Per-capita emissions in Canada, which relies on low-carbon hydropower for almost 60 percent of its electricity generation, are only exceeded by Australia, the U.S. and Saudi Arabia among large polluters.

“The world is monetizing carbon,” said Daniel Gagnier, president of the Energy Policy Institute of Canada, an advocacy group funded by business. “If a country looks at Canada and says your energy exports are too carbon-intensive, then it becomes an economic competitiveness issue.”

A case in point is TransCanada Corp. (TRP)’s Keystone XL pipeline. The project would bring Canadian heavy crude to the Gulf Coast, helping companies earn world prices for their commodity, which currently trades at a $31.75 discount to benchmark U.S. crude because of scant capacity to move oil from Alberta.

Lobbying Efforts

After two years of lobbying U.S. officials to approve the pipeline, the Canadian government is now watching as environmental groups, emboldened by Canada’s 2011 annulment of the Kyoto Protocol, push to derail the $5.3 billion project.

At the same time, Canadian politicians are trying to thwart EU plans to implement a carbon-reduction directive that would penalize Canadian crude.

Still, global efforts to tax carbon emissions have slowed following the 2008 recession and the failure of negotiators at United Nations-sponsored talks to create a replacement for the Kyoto climate agreement that would include China and the U.S., the world’s largest emitters.

Canada, the seventh-largest emitter, was the first of 191 signatories to withdraw from Kyoto.

For oil-sands producers, carbon pricing may be the answer to reduce risk associated with carbon regulation and access to markets, said John Stephenson, a Toronto-based fund manager.

“What business hates is a lack of clarity,” Stephenson, who helps manage C$2.7 billion at First Asset Investment Management Inc., said by phone. “Even a bad tax would be better than discussions that are endless.”

To contact the reporters on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net; Andrew Mayeda in Ottawa at amayeda@bloomberg.net

To contact the editors responsible for this story: Susan Warren at susanwarren@bloomberg.net; Chris Wellisz at cwellisz@bloomberg.net

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