The authors analyze the carbon tax options facing Alberta for cutting down on greenhouse gas emissions, especially in the electricity sector.

On November 22, 2015, Alberta made a dramatic announcement based on its Climate Leadership Plan: carbon emissions are going to be rapidly reduced with the introduction of an economy-wide carbon tax of $30 per tonne of carbon dioxide (tCO2). In particular, the Alberta electricity sector, until very recently the province’s leading source of greenhouse gases (GHGs), was given clear objectives for the year 2030: phase out coal-fired generation and increase renewable energy generation to 30 percent (these are not emissions reduction targets per se). There is much work left to design the legislation and regulations required to achieve these goals. But, as interested observers, we are curious about how this plan might roll out and what some of the implications might be.

We present results from a short analysis of two policy options that Alberta could use to achieve its climate policy goals, mainly those set for the electricity sector. Both options use a carrot and stick approach. They differ on the sizes of the carrot and the stick. The stick is the carbon tax; the carrot is a renewable energy credit (REC) of up to $35 per megawatt hour (MWh) of production from a renewable energy generator (hydro, wind, solar, biomass, geothermal). RECs are a form of subsidy providing additional revenue for eligible renewable electricity projects, and are, in this case, paid out at a pre-arranged rate and term.

If we call the first option big stick, then applying the carbon tax of $30/tCO2 in the spirit of an economy-wide application to all emissions (as in British Columbia) will drive out coal generation. To achieve the goal of 30 percent renewables, an average REC of $15/MWh is required.

The second option, small stick, is based on a best-in-class technology approach. Here, the best-in-class standard is a modern combined-cycle gas turbine (CCGT) plant; any other plant (gas or coal) that produces more emissions per MWh of production will pay the $30/tCO2 carbon tax only on those emissions above this threshold, reducing the impact of the tax to only a portion of the emissions. This more complicated approach also achieves the goal of phasing out coal but requires a carrot with a higher average REC payment for renewables of $25/MWh.

The two options are compared in figure 1 from the point of view of cumulative emissions in the electricity sector between now and 2030. The big stick results in lower cumulative emissions than the small stick, although only marginally. More important, both options result in cumulative emissions that are significantly below what would happen if the previous policy, the Specified Gas Emitters Regulation (SGER), were to continue. In fact, when REC support is included, these two options achieve emissions reductions that likely exceed the 32 percent reduction goal of the US Clean Power Plan.

Lyseng-Pitt fig1

Comparing the two options from the point of view of carbon tax revenue generated and REC payments required, the carrot and stick differences are more apparent (figure 2).

Lyseng-Pitt fig2

The Alberta government is revealing more details of their proposed plan and it appears they are favouring an approach similar to the small stick option.  This may reflect concern about suddenly shocking their economy with a large tax increase.  It also parallels their proposed carbon tax strategy in oil sands production, in which “high performing facilities” set the threshold for when emissions are taxed.  Nevertheless, the goal of phasing out coal generation and increasing renewable energy generation to 30 percent achieves significant emissions reductions by 2030.

Of course, this simple analysis does not estimate the cost of electricity or other impacts across the Alberta economy. Particularly in the small stick option, tax revenue from the power sector will likely be insufficient, and carbon tax revenue generated elsewhere in Alberta’s economy will have to be redirected toward REC payments in increasing amounts in line with the province’s stated goal of revenue neutrality.

Furthermore, additional intervention will be needed to keep the electricity system reliable. Our results indicate that wind power will be the main renewable energy generator that will be built, given the estimated future costs and the REC incentives. Figure 3 shows what the future 2030 generation mix in Alberta would look like under both the big stick and small stick options. A mechanism to incent a new fleet of open-cycle gas turbine (OCGT) generators, used to balance the fluctuating wind power output, will also likely have to be devised. While other balancing options could be considered (like purchasing some of these services from BC Hydro next door), additional costs to maintain reliability will be required.

Lyseng-Pitt fig3

With the small stick option likely emerging in Alberta, a Canadian tradition will be maintained: parochial approaches to important policy choices. A $30/tCO2 carbon tax will likely be applied differently in Alberta than in BC. Furthermore, with carbon pricing elsewhere in Canada (Quebec, Ontario and maybe Manitoba) based on a carbon cap-and-trade model, we see the influence of the British North America Act: energy resources are the realm of the provinces. This may not be a bad thing, as jurisdictions wrestle with a tough problem (emissions reduction) and learn the pros and cons of different approaches while dealing with their local economic realities.

This article is part of the After Paris: Next Steps on Climate Change special feature.