GREENHOUSE GAS EMISSIONS REDUCTION IN ALBERTA

GREENHOUSE GAS EMISSIONS REDUCTION IN ALBERTA Blair Jarvis BUEC 562 – Environmental Economics University of Alberta June 27, 2005 Executive Summar...
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GREENHOUSE GAS EMISSIONS REDUCTION IN ALBERTA

Blair Jarvis BUEC 562 – Environmental Economics University of Alberta

June 27, 2005

Executive Summary Climate change is a growing concern for many people. Increasing global temperatures have been attributed to an increased amount of greenhouse gases (GHGs) in the atmosphere as a result of human activity. Thus, to address the issue, the global community agreed to the Kyoto Protocol. The accord is a well-intentioned document that has some flaws that may not necessarily result in real reductions in greenhouse gas emissions. It does not have any limitations on emissions by developing nations, and the world’s largest emitter of GHGs, the United States, has refused to ratify the treaty. Those nations bound by the treaty may have to sacrifice economic growth in order to meet their targets.

With the growth in Alberta’s economy, it is not realistic for Alberta to attain the targets laid out in the Kyoto Protocol. As a result, the Alberta government has proposed its own plan to cope with GHG emissions. It is a plan that focuses on reducing emissions on a per unit of production basis. This intensity-based system will allow for real reductions in emissions that will be sustainable into the future.

For Alberta to implement an intensity-based program it must fund technology development that will allow for reductions to be achievable. The Alberta government must also facilitate the integration of these new technologies by providing tax incentives to the companies that invest in emissions reduction initiatives. They must also support conservation by consumers by using tax incentives to encourage consumers to choose products that will use less energy and further reduce GHG emissions within Alberta.

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Table of Contents Executive Summary .................................................................................................... 1 Introduction................................................................................................................. 3 The Need for an Emissions Reduction Program......................................................... 3 Scope........................................................................................................................... 7 Program Outline.......................................................................................................... 9 Encouragement to Industry ....................................................................................... 11 Other Features of a Climate Change Plan................................................................. 11 Enforcement.............................................................................................................. 13 Costs.......................................................................................................................... 13 Why an Intensity-Based System Makes Sense ......................................................... 14 Why This Plan Makes Sense for Alberta.................................................................. 15 Risks.......................................................................................................................... 16 Conclusions............................................................................................................... 17 Recommendations..................................................................................................... 18

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Introduction The environment is becoming a more important issue with many people. Individuals are realizing that in order to enjoy a prosperous life, we must take care of our surroundings. This commitment to the environment has led to the desire for legislation to tackle a global environmental threat, global warming. The Kyoto Protocol was signed by the international community as a means to address this looming environmental issue.

With the different economic scenarios around the world, there are some regions where the Kyoto Protocol is logical and others where it is not. Alberta is one of these regions that have experienced tremendous economic growth since 1990, and as a result, it is not feasible to try and implement a cap-based emissions program in Alberta based on 1990 emission levels. In light of this, Alberta has proposed its own intensity-based emissions reduction program. It is a more realistic plan that will result in sustainable reductions; however it has some shortcomings that have been pointed out by different groups, including the Pembina Institute.

When Alberta chooses to enact a system, it must be one that results in real sustainable reductions in greenhouse gas emissions and can realistically be implemented.

The Need for an Emissions Reduction Program As shown in Figure 1, in the last 100 years, there has been an increase in global temperatures of approximately 0.6 oC. There are concerns that if this trend continues,

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there is potential for catastrophic environmental impacts such as a sea level rise causing flooding and other damage, climate zone shifts, and changes to water resources.1

Figure 1. Global Temperatures since 1860.2

There are some individuals that contend this temperature increase is a natural phenomena but many leading scientists have attributed this increase in global temperatures to a buildup of “greenhouse gases” (GHGs) such as carbon dioxide. Figure 2 illustrates how the earth is warmed. Greenhouse gases absorb and re-direct some of the infrared radiation back to the earth, resulting in a buildup of heat in the earth’s atmosphere, causing an increase in global temperatures.

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United Nations Department of Public Information. Combating Global Warming: The Climate Change Convention. February 1997. http://www.un.org/ecosocdev/geninfo/sustdev/climate.htm. 2 School of Environmental Sciences, Climatic Research Unit, University of East Anglia, Norwich, United Kingdom. 1999. http://www.grida.no/climate/vital/17.htm.

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Figure 2. Impact of greenhouse gases.3

Some greenhouse gases are found naturally in the atmosphere, while others result from human activity. They also differ in their ability to absorb heat in the atmosphere. Carbon dioxide is the most abundant GHG and is the molecule most commonly attributed with the greenhouse effect. Other gases that contribute to the greenhouse effect include water vapor, methane, nitrous oxide and ozone. There are additional gases that are not naturally occurring and are only present as a result of human activity. These include hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), and sulfur hexafluoride (SF6), which are generated in a variety of industrial processes.4

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Sustainability Now. December 8, 2002. http://www.sustainability.ca/index.cfm?Mid=66&k1=286. U.S. Environmental Protection Agency. Global Warming – Emissions. 2005. http://yosemite.epa.gov/oar/globalwarming.nsf/content/emissions.html. 4

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The chart on the right hand side of Figure 3 shows that at slightly more than 2%, Canada contributes only a small fraction of the world’s CO2 emissions. However, Canada is the second highest emitter of CO2 per capita behind the United States. Some of the higher emissions can be attributed to our northern climate and sparse population that requires more transportation. That being said, there are still opportunities to improve this number.

Figure 3. Global Emissions of CO2.5

The charts below illustrate that Alberta is a significant contributor to Canada’s CO2 emissions. Alberta is responsible for approximately 30% of Canada’s CO2 emissions. Extraction and processing of fossil fuels, along with power generation are significant factors in Alberta’s role as a key emitter in Canada. Coupled with Alberta’s financial status, these figures may cause some in other parts of the country to want to

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International Energy Agency. 1998. http://www.grida.no/climate/vital/11.htm.

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force Alberta to significantly reduce its emissions, even if it causes some economic harm. Thus, Alberta had to take a leading role and develop a plan that made sense before the federal government enacted its own ideas which may not have been in Alberta’s best interest.

Figure 4. Breakdown of emissions in Alberta and Canada.6

Scope Many governments and environmental organizations have sought to reduce global production of GHGs. The problem to date is that on a global scale the problem is so massive, it is difficult to get started. In addition, in a global setting there are so many competing objectives and different “scenarios”, it is nearly impossible to draft a plan that effectively targets the entire globe and will obtain consensus.

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Alberta Energy and Utilities Board. 2004. http://www.ags.gov.ab.ca/activities/CO2/figure1.shtml.

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The Kyoto Protocol is a well-intentioned treaty intended to reduce global greenhouse gas emissions. However, the protocol does not apply limits to developing nations and has not garnered the support of the world’s largest polluter, the United States. Thus, regional governments must take action as a first step in making a concentrated effort to reduce emissions.

The paragraph above addresses two key flaws of the Kyoto protocol. First, there are jurisdictions (developing nations) that are not bound by any emissions limits. Second, any developed countries that have had their economy shrink, Russia for example, are already below their targets and rather than making improvements, are able to sell excess credits. This does not result in any real improvement in the worldwide output of greenhouse gas emissions. In fact, this may encourage businesses to shut down efficient facilities in “Kyoto-enforced” jurisdictions and build a new facility in a nonenforced zone. This does not reduce the output of emissions and may also hurt the economy of a jurisdiction attempting to do its part for the environment.

Alberta has proposed its own climate change plan that will attempt to reduce greenhouse gas emissions through an intensity based limit, rather than an absolute cap. This will allow industry to continue to grow, while at the same time making real improvements in the output of emissions. Critics, such as the Pembina Institute, have argued that by 2020, the Alberta plan may in fact increase the overall level of emissions

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above 1990 levels by 66-83%.7 This statement makes it easy to criticize the Alberta plan as a one that does not address the need to reduce emissions. However, supporters of an intensity-based solution will argue that Alberta cannot control the demand for goods and services, but by introducing intensity limits, can ensure that commodities are produced most efficiently in Alberta, thus reducing the overall global emissions.8 The aim is for Alberta to reduce its GHG emissions as a function of GDP by 50% by 2020. Increased output in Alberta at “best-in-class” emissions levels will offset less efficient production in other parts of the world.

Program Outline Alberta has proposed a plan based on an intensity-based system to address GHG emissions. The following proposal takes many points from the Alberta plan and adds some additional items where the Alberta government’s proposal is insufficient.

The emissions limits will need to be broken down by sector.8 The oil sands extraction and processing plants will have different emissions levels than a power generation facility. The Alberta plan intends to apply limits by sector, but there are differences within an industry as there are facilities of different ages and technology that should be addressed in initial emissions limits; coal versus natural gas in power generation as an example. These differences must be carefully applied, as the intent is to

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Matthew Bramley. An Assessment of Alberta’s Climate Change Action Plan. September 2002. http://www.pembina.org/pdf/publications/plan_critique020906.pdf. 8

Alberta Government. Albertans and Climate Change: Taking Action. 2002. http://www3.gov.ab.ca/env/climate/docs/takingaction.pdf.

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encourage the lowest emissions option. Thus, there must be a scale of emissions limits dependent on a number of factors. These must become more stringent as new technologies become available and facilities are upgraded. If a facility has beaten its emissions intensity limit, it can transfer the excess emissions allotment to another facility that has not met its target. This will provide a financial incentive for some facilities to pursue improvements beyond the emissions limits and further technology development. Any capital expenditures for emissions reduction projects should be eligible for tax deduction to help ease the burden of upgrades to a company.

The emissions intensity limits will not be limited to a single facility. If a company decides to build a wind farm in southern Alberta, it can pool this facility with its existing coal plant to get a combined emissions level per unit of output. This will result in companies investigating both upgrades to current facilities as well as other “green” technologies that may make more sense financially. The end result is that production per unit has become less harmful to the environment.

The companies will not be required to develop the technologies entirely on their own. The Alberta Energy Research Institute (AERI) has been assigned the task of funding, coordinating and harmonizing energy research and technology development.9 These efforts ought to include the University of Alberta and University of Calgary to maximize the potential of these projects. This has the potential of creating a new industry in Alberta focused on the development of new technologies aimed at improving the

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Alberta Government. Albertans and Climate Change: Taking Action. 2002. http://www3.gov.ab.ca/env/climate/docs/takingaction.pdf.

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efficiencies of industrial facilities. There is the potential to make Alberta a leader in this sector and a region that others will look to when they are trying to make improvements.

Encouragement to Industry The goal of industry is to make a profit. Thus, to encourage industry to adopt new environmentally friendly initiatives, there should be a financial incentive. By offering tax incentives for projects aimed at reducing emissions, the financial burden faced by the affected companies will be reduced. Allowing companies to sell their surplus emissions will result in some firms pursuing technologies that will take them below their emissions limits. The end goal is to meet a desired emissions level per unit of output, so it does not matter how the emissions are distributed as long as at the end of the day, the overall goal is achieved. Firms that choose to invest in “green alternatives,” such as wind energy should be rewarded by allowing these firms to apply the “CO2 savings” to their other operations. This should promote more investment in these alternative technologies.

Other Features of a Climate Change Plan A large criticism of Alberta’s plan to cope with climate change is that is does not do enough to encourage citizens to make changes to reduce their contribution to GHG emissions. Among some of the omissions mentioned by the Pembina Institute are

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addressing personal transportation choices such as public transit and fuel efficient vehicles, as well as making our homes more efficient.10

To truly make an impact, Alberta cannot only become more efficient in how it produces, it must become more efficient in how it consumes. Improving the public transit infrastructure in the province as well as using tax incentives to encourage choosing environmentally friendly options for the home and transportation will go a long way in showing that Alberta truly is focused on reducing its contribution to GHG emissions. Education will also play a key role as Albertans will need to learn how small changes in their behavior can make significant impacts. The federal “One-Tonne Challenge” campaign was well intentioned, but it lacked the financial incentives to encourage citizens to carry out many of the suggested changes.

AERI is responsible for coordinating industrial efforts to improve efficiency. A similar program should be set up and funded by the government to help reduce the contribution of consumers to global warming. This should include research into products that will result in lower consumption levels of electricity and hydrocarbons. This can contribute to the “environmentally-focused” industry that was mentioned before. This would drastically improve Alberta’s reputation when it comes to the environment and turn Alberta into an exporter of environmental knowledge.

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Matthew Bramley. An Assessment of Alberta’s Climate Change Action Plan. September 2002. http://www.pembina.org/pdf/publications/plan_critique020906.pdf.

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Enforcement A major drawback of the Kyoto protocol is that it will be a cumbersome program to monitor and enforce. If Alberta enacts its own program, it has the power to force operators to comply as it can respond to non-compliance with fines or revoking a facility’s license to operate. This clout will add credibility to the plan and with clear penalties, companies will fully understand their position. This should lead to an increased likelihood for success. The Kyoto Protocol on the other hand, has questions as to how it will deal with non-compliance or ensure a reputable emissions trading system is operated.

Costs The enactment of this type of climate change program will not come without some costs. Companies will need to make investments to improve their environmental performance. This will hurt their bottom line in the short-term. The tax deductions given to help with these improvements will ease some of the financial burden, but that will result in less tax revenue by the province. These are short-term costs that given the current economic status of the province, Alberta can withstand. It can be argued that the companies will be better off long-term as Kyoto is only the first step in environmental legislation and eventually other jurisdictions such as the United States and developing countries will be required to meet certain standards. By adopting a pro-active approach, Alberta’s industries may hold a competitive advantage when these other firms are forced to adapt in the future.

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In addition, the provincial government will be required to fund AERI and other organizations that are involved in developing new technologies to address GHG emissions. The current provincial surpluses should be used in part to fund these initiatives. Not only will it result in real benefit, it is also an important public relations gesture to show that Alberta is using its natural resource revenues to reinvest to reduce the environmental impact of these developments.

Why an Intensity-Based System Makes Sense The biggest argument against an intensity-based system is that it allows for industry to actually increase its emissions. This statement cannot be disputed. If an industry grows, emissions may in fact increase.

The above statement does not concede that total emissions will in fact increase. If total consumption remains constant, and Alberta becomes more efficient, it must be taking production away from a less efficient plant somewhere else. This is the entire basis of an intensity-based system. It does not facilitate the shuffling of emissions to another region outside the jurisdiction of enforcement or allow for phantom reductions due to economic downturns to be counted as improving emissions levels.

The Kyoto protocol for example would encourage a plant in an industrialized nation closing and re-opening in a developing country. Irregardless of this new plant’s efficiency, the original country would see a reduction in its emissions, thus, getting closer to achieving its Kyoto target. The intensity-based system also does not hamper economic

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growth, allowing for both environmental reforms without harming the population’s standard of living.

Why This Plan Makes Sense for Alberta Aside from the Kyoto Protocol not necessarily resulting in real improvements to GHG emissions, it is on such a large scale, it will be cumbersome to manage. If Alberta enacts its own plan, it can keep it on a manageable scale and with the knowledge that the Alberta government will be able to enforce the plan.

This plan can become a permanent solution with the intensity limits simply becoming more stringent as it becomes sensible to do so. This plan may serve as a model for other jurisdictions to follow. As this type of model is applied elsewhere, it will allow for a standardization of emissions levels that are simply enforced by the regional government. In addition to other jurisdictions following the Alberta model, there is the potential to coordinate efforts and develop a larger enforcement zone. As an example, there is the potential that the western Canadian provinces could sign a joint agreement. Any such plan would need to be developed cautiously as each region will be focused on their own interests so there is the potential for disagreements to arise.

If Alberta takes a lead role in addressing GHG emissions, it will improve Alberta’s reputation towards the environment. It may also facilitate Alberta using its influence to encourage other provinces to make their own improvements.

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The enactment of this plan will have many benefits. The first of which is that it will result in more efficient industries within Alberta. It offers the opportunity to become a leader in a new “environmentally-focused” industry. It will result in Albertans becoming more energy efficient and becoming less-reliant on fossil fuels. Finally, it will foster the creation of a sustainable culture seeking environmental improvements.

This will allow Alberta and Canada to follow a plan that makes stable long-term changes to climate change rather than a “crash-diet” solution or “freebie” attainment due to economic collapse that is rewarded by the Kyoto plan.

Risks The enactment of such a plan is logical but is not without some risk. If the capital investments required are too substantial, it may make some industries uncompetitive with other jurisdictions that do not have the same emissions limitations. The tax concessions mentioned before should help reduce the risk of this occurring.

Canada has signed the Kyoto protocol and committed to reducing its GHG emissions by 6% below 1990 levels by 2012.11 There is a risk that Alberta may enact its own plan which the federal government may decide is not acceptable and still proceed with its own plan. In any case, the two levels of government must have a formal agreement so that companies understand what the emissions limits will be. Otherwise, 11

Kyoto Protocol to the United Nations Framework Convention on Climate Change. 1997. http://unfccc.int/resource/docs/convkp/kpeng.html.

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there will be confusion companies not be able to pursue their own strategy if they are unsure how the governments will behave.

For the Alberta plan to succeed, it needs to be clearly laid out. The timeframe for different emissions levels as well as how emissions may be exchanged between companies needs to be addressed. Industry must be consulted so that enforcement penalties are understood and emissions limits for different industries and facility types make sense. If it is not done properly, there is the potential that some facilities may close resulting in job loss and spurning economic growth.

Conclusions The earth is warming up. Most well-reputed scientists attribute this change to increasing greenhouse gases in the atmosphere as a result of human activity. Thus, the status quo is not satisfactory. The global community has developed the Kyoto Protocol as an attempt to tackle this issue.

The Kyoto Protocol may work in some jurisdictions, but it does not make sense for Alberta or Canada. There needs to be an alternative path to obtain the same results. This is where an intensity-based system can be successful. It will allow economic growth to continue while at the same time developing positive steps towards achieving sustainable emissions reductions.

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For such a plan to succeed, it must be supported by government to foster the development of new environmentally friendly technologies. It must also support industry and individuals through tax concessions to invest in these environmental improvements. If the Alberta government can encourage its citizens to adopt a “greener” lifestyle, Alberta can become a leader in attaining sustainable environmental improvements without hampering economic growth.

Recommendations Alberta must implement its plan in the shortest possible timeframe. Their current plan needs to be expanded to encourage consumers to make environmentally friendly choices.

The Alberta government must have an agreement with the federal government that its plan will be acceptable within Alberta and that companies will not be forced to follow two sets of rules. The emissions limits and timeframe must be negotiated with industry so that it the plan is realistic but will still make a long-term impact in reducing GHG emissions.

Alberta must also educate its citizens and the rest of Canada so that everyone understands the reasoning for this type of plan and that by rejecting the Kyoto Protocol, Alberta is not turning its back on the environment.

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