Dion's Tax Grab - here's why it doesn't work

OK - so Liberal leader Stephane Dion has proposed that starting in just 9 months, large industrial CO2 emitters will have hard caps set and that if they do not meet these caps they will need to pay the federal government $20 / tonne of CO2 emitted, with the tax rising to $30 / tonne in 2011... And through this he is going to have us meet our Kyoto goals...

OK - say that half of the CO2 emissions in Canada come from these emitters. That means that assuming we did nothing to the other half (the voters heating their houses and driving their SUVs), that the large emitters would need to reduce their emissions by about 70% from current to get the nation to 6% below 1990. If we assume that Canada's current CO2 (and equivalent) emission are about 800 Mt/y currently, which isn't far off, this means that industry would need to reduce emissions by 280 Mt/y starting in 9 months. The tax to avoid doing something would be $5.6 Billion per year. Now, should industry do something or pay the tax?

Let's look at the oil sands industry. CO2 emissions from oil sands are about 80-100 kg/bbl of oil produced. Let's say 1 tonne per 10 barrels. If Alberta wants to produce 3 million bbls per day, that would be 300,000 t/d or 109 Mt/y.

If Stephane gets his way, Oil companies have three choices:

1. Pay the emission taxes, which would constitute about $2/bbl of oil.
2. Invest in CO2 capture and sequestration technology. The CO2 capture technology is proven, but expensive (around $40 per tonne based on capital and operating costs), and large sequestration has not yet been proven. Cost estimates for this run perhaps as high as the capture step. Let's be generous and say that the capture and storage cost only $50 per tonne. That's $5/bbl. Also - these projects will take 3+ years to engineer and construct. Therefore any current producer will still pay the fine for longer than Stephane's "2 year do gooder" payback scheme.
   
3. Not build projects in Alberta and invest in projects elsewhere in world that have oil. For example, Angola. Let's look at this more carefully. If crude oil is worth $50/bbl, and it cost $30 a barrel to extract oil sands and upgrade it to synthetic crude, then an oil company can make a profit of $20 per barrel. (before royalties and taxes). Let's look at Angola - offshore Angola you can hunt for oil in deep water and produce a light crude oil for about $25 per barrel. Of course, there are risks there, such as exploration risk (e.g. you drill holes in the sea floor for $100 million a piece and find nothing) and political risk (Angola hasn't been the most stable place in the world over the last 50 years).

So - if I can choose to spend $2, $5 or zero and take a risk somewhere else, which should I pick. If we say that companies invest in Alberta because of stability, that stability premium is the cost difference between producing oil in Alberta versus Angola. If the stability premium rises due to government action, it will make Alberta less attractive and make some investors choose to go elsewhere.

The result of the Liberal plan with therefore be:

• No one will invest $5 /tonne in carbon capture and storage
• They will choose one of the other two options
• If $2-3/bbl increase in the stability premium in Alberta changes the risk equation, the $100 Billion investment in Alberta will disappear overseas where there is less government intervention. And that lost investment will hurt more than just Alberta. As was pointed out a few months ago, the federal and other provincial governments benefit immensely from these projects. Think about the poor towns in Atlantic Canada that will stop getting cheques from the fathers, brothers and children who've moved to Ft. McMurray for work... Think of the increased cost on the EI program for the hundreds of thousands of people who will loose their jobs.

If we assume for a moment that the $2-3/bbl increase in stability premium doesn't change the risk equation and the projects go ahead, then the federal government will pull in an additional $5-8 billion per year in revenue, that they have promised to spend on climate change projects. But if industry is INCREASING emissions and paying the tax, what EXACTLY is the government going to be able to do to reduce the nation's emissions? Because they would need to reduce all non-industrial emissions by greater than 100% (which is of course impossible).

Alternatively, they could build projects to remove CO2 from the atmosphere. I suspect that would cost more than the $20-30 per tonne they are collecting - especially after the bureaucracy uses up 50% of the money...

Finally - they could use the money to buy emission credits from other countries, like Russia. Of course, that would just send money overseas and do nothing to reduce CO2 emissions and therefore have no effect on the supposed problem.

Which means of course, it's a waste of time. Unless of course the goal is to create more government bureaucracy - because it will do that very nicely...