Carbon taxes could hit oilpatch hardest

Certain sectors of Canada's economy are at risk of losing their competitive edgeif provinces miscalculate their adoptionofcarbon taxes.

It's a danger as governments look at how they can put a price on carbon, which is viewed as one of the best ways to reduce emissions and address climate change.

Four provinces already have some type of carbon tax or cap-and-trade system. The rest of the provinces will likely follow suit,as the federal government is vowing to establish a pan-Canadian policy to combat climate changewithin 90 days of the UNclimate conference in Paris, which begins in two weeks.

This is way too important of an issue to ignore.Chris Ragan, Ecofiscal Commission

Introducing a carbon tax raises the price of most products, but the real risk for provincial governments thatmishandlethe policy would be driving some companies out of business orout of the country.

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These are some of the findings in a new report released this morning by the EcofiscalCommission, a think-tank based at McGill University. The group's board members include an oilsands executive, the head of an environmental groupand politicians of every stripe.

The group advocates for taxing pollution and recyclingthe money back into the economy.

Most sectors are OK

The Ecofiscal report looked at how much of the country'seconomy would lose its competitiveness if a carbon tax was introduced.Its findings were simple most of Canadian business is fine.

That's because much of our economy consists of the service sector, things likefinancial services, and adding a carbon tax wouldn'tmake much of a difference.

Conversely, the vulnerable industries are those that areemissions intensive or trade exposed. Companies that produce significant emissions will see costs rise, while businesses that rely on exports won't have much ability to increase their prices to cover the added expenses of a carbon tax. Examples of these industries include refining, cement productionand the oilsands sector.

The oilsands, in particular, fall into both categories as an emissions-heavy operation that also relies significantly on exporting to international markets.

Impact of carbon pricing

9 years ago

Duration 6:23

Chris Ragan of the Ecofiscal Commission says Canadas economy can withstand a carbon tax

"This is way too important of an issue to ignore. The last thing we want is for our producers, our firms, to shrink or close down shop and jump across the border and start up business there. Because we then bearthe economic costs," said Chris Ragan, chair of the Ecofiscal Commission, in an interview."Canada's emissions fall, but someplace else, they go up. Globally, there would be no environmental benefit, but we would bear the domestic economic cost."

This year, some companies in Alberta's oilpatch threatened to move investment dollars outside of the provincewhenever the government talked about making changes to corporate taxes and royalty rates. So it's not out of the question that, depending on how a new carbon tax was introduced, it could drive some companies to spend money elsewhere.

"You need to pay attention to this competitiveness issue," cautions Ragan. "If you are going to design a carbon price, let's actually identify which sectors are potentially exposed to this issue and then let's design a policy in a way that deals with it."

Where will the tax money go?

While the oilpatch is one industry that would beaffected by a carbon tax, that doesn't mean it is against such a policy. In fact, the industry is in favour of pricing carbon in an attempt to improve Canada's environmental reputation.

The oilpatch has two demands, though. It wants everyone to pay the carbon tax, whether you produce oil, burn gas in your car, or use natural gas to heat your store. It also wants the government to spend the revenue generated by a carbon tax on innovation into reducing emissions.

The latter could almost be seen as a subsidy to industry.Oil executives often admit that whenever they can find ways to reduce emissions, they are oftenable to cut their costs. For example, if a company can find a way to use less energy to extract bitumen, itsaves money and produces less greenhouse gases.

"If you want to change those behaviours, you should do that through a carbon tax. A broad carbon tax across industry," said Al Reid, a vice-president with Cenovus Energy, at a conference in Calgary last week."But anything from a broad carbon tax should be used to fund innovation."

Whether the Alberta government willchooseto levy a carbon tax and, if so, where itputs the money, isn't clear. Environment MinisterShannon Phillipssaid this week the government is still weighing its options. There are varying opinions about where the money would be best spent whether it should begiven back to taxpayers, used for general revenue or put into an innovation fund.

All of this discussion is happening as the Alberta government is expectinga deficit of more than $6 billion this year.

"What's the best way to increase revenues?" said Ragan."I would argue one of the best ways to increase revenues would be to price carbon rather than to tax profits or to tax income. It's more efficient, it's better for the economy."

Subsidy for affected industries?

For industries such as the oilsands,which could see its competitiveness reduced by a carbon tax,the Ecofiscal Commission suggests governments should look to provide some sort of targeted financial relief transparent and temporaryto givefirms incentive to become cleaner over a specific time. Such relief could mean temporarycorporate income tax cuts orcarbon price relief.

There is stillnot consensus thata carbon tax will create the environmental change that everyone hopes.

Kenneth Green, with theFraser Institute, likes the premise of pricing mechanisms, but he doesn't think it will actually work forcarbon.

"You raise the price of goods and services across your economy," said Green. "What happens with that, you raise prices, you reduce demand, you reduce compensation and you reduce competitiveness compared to other jurisdictions that don't have the price."

Specifically, for Alberta, Green saidit has to staycompetitive so companies keep investingin the province.He warns,"Texas is not going to put in a carbon price any time soon, I can assure you."