Alberta climate change leadership plan announcement

What does the Climate Change Leadership Plan for Alberta mean for the energy sector?

Phasing out of coal by 2030The panel recommended that Alberta pursue a regulated shutdown of coal generation on a schedule developed in consultation with the federal government and the Alberta Electrical System Operator (AESO). It also advised that existing coal generation be replaced with 50-75% renewable power and the balance with natural gas.

To maintain electricity reliability, the phase-out of coal is to be done on a calculated schedule balanced with the appropriately paced development of natural gas and renewable power capacity. It was also recommended that renewable development be supported by a clean power call through which the government will provide partial, long-term revenue certainty for renewable power at the lowest overall cost to consumers. The Alberta government also distinctly stated that the plan will not unnecessarily “strand” assets.

Economy-wide tax on carbon – what does this mean?Effective January 1, 2017, all sectors will be subject to an economy-wide carbon tax of $20 per tonne, to be increased to $30 per tonne by January 2018. The Climate Change Advisory Panel also recommended an annual escalation of 2% more than inflation, but there is no current indication whether this will be adopted. The broader economy-wide carbon tax will be applied to fuel volumes that are attributed to 90% of all emissions in the province; the breadth of this will apply to the largest proportion of emissions compared to any other Canadian plan.

Carbon emissions from oil sands operations capped at 100 megatonnes per yearThe third feature of the new plan is an absolute limit on oil sands emissions of 100 megatonnes (Mt) of greenhouse gas emissions per year, with provisions for new upgrading and cogeneration. The regulatory approval process for new projects will need to take into account both project-specific-emissions and the effect of project emissions on the absolute cap.

The Climate Change Advisory Panel recommended that new projects, through the Alberta Energy Regulator, be encouraged to adopt new technology or process design to focus on reducing greenhouse gas emissions, and that new project approvals be subject to the development of satisfactory climate mitigation and adaptation planning.

The absolute cap on oil sands emissions is a significant departure from the previous intensity-based cap. There is considerable debate about whether this approach risks slowing or stopping the development of future oil sands projects. Given that the industry currently emits 70 Mt annually, unless there are significant efficiency-based emissions reductions from existing projects, new projects will have to compete for the remaining capacity in order to come online. Some believe this will incentivize companies to seek regulatory approval for new projects before the absolute cap is reached, although it’s not clear how the Alberta Energy Regulator will approve projects giving consideration to the cap.

On 22 November 2015, Alberta Premier Rachel Notley released a Climate Leadership Plan for Alberta in advance of the Climate Change Summit COP 21 in Paris. The plan is based on the recommendations of the province’s Climate Change Advisory Panel.

The panel was chaired by University of Alberta energy economist Dr. Andrew Leach and panellists included Linda Coady of Enbridge, Gordon Lambert of Suncor Energy, Stephanie Carins of Sustainable Prosperity and Angela Adams of the Fort McMurray Métis Nation.

The plan’s main considerations are:

• An accelerated phase-out of coal-fired power generation by 2030

• An economy-wide carbon tax

• An absolute cap on oil sands emissions

• A methane gas emissions reduction plan

Together, the different parts of the plan will affect all Albertans and many industries. Highlights from the recent announcement are outlined below.

Alberta climate change leadership plan announcement

Methane reduction strategy will be introducedAnd finally, a significant element of Alberta’s Climate Change Leadership Plan recommends the establishment of a firm target for the reduction of oil and gas methane emissions by 45 % by 2025, which will be supported by a methane reduction strategy that will include a hybrid regulatory and market-based approach to reduce methane emissions from oil and gas operations in the province.

Pound for pound, the comparative impact of methane on climate change is more than 25 times greater than CO2 over a 100-year period. Therefore, reductions in this area will provide substantial gains towards climate change mitigation.

As part of the roll-out of the methane gas reduction strategy, a voluntary joint initiative on methane reduction and verification will be established. For example, it is expected that there will be a new regulatory framework to manage fugitive emissions in new facilities and for leak detection and repair in existing facilities. There will also likely be short-term initiatives that would provide market-based incentives (e.g., offset credits) for upgrades of existing facilities.

What does this mean for the current Specified Gas Emitters Regulation?The current Specified Gas Emitters Regulation will remain in place in the short term. In June 2015, the marginal price of carbon for large emitters was set to increase to $30 by 2017. The Climate Leadership Plan discussed the eventual replacement of the regulation by a Carbon Competitiveness Regulation (CCR). The CCR would still target large emitters, but the smaller emitters would have the option to opt-in to the CCR if the economics of CCR carbon pricing are favourable over the end-use carbon scheme. The details of the CCR are yet to be developed, but will ultimately provide policy and guidance for Alberta’s industrial sector on emissions quantification and reporting. Cross-sector industry players, including coal, oil sands and natural gas, should keep a close eye on how to capitalize on opportunities and avoid legislative pitfalls as the legislation is developed.

What does this mean for the Climate Change Emissions Management Fund?The Alberta Climate Change Emissions Management fund was established in 2009 under the Climate Change Emissions Management Corporation (CCEMC) as a key part of Alberta’s climate change strategy. The CCEMC mandate was to establish or participate in funding for initiatives that reduce emissions of greenhouse gases or improve Alberta’s ability to adapt to climate change. The Government of Alberta administers the collection of all compliance funding each year generated from payments under the Specified Gas Emitters Regulation and pools those funds in the Climate Change and Emissions Management Fund. The funds are sourced from industry and made available to the CCEMC through a grant from the Government of Alberta.

Recommendations in the Climate Change Leadership Plan include a focus on investment in innovation while refocusing

the CCEMC towards a portfolio-driven funding approach that invests in riskier ventures and reexamines the Alberta innovation system to ensure provision of tools for success. The panel also recommended the creation of a task force with a four-month timeframe to reorganize Alberta’s innovation system for success.

The recommendations provided create uncertainty for the future of the Climate Change Emissions Management Fund. However, organizations should keep a close eye on how to capitalize on the opportunities that will be presented with an evolved funding mechanism that is expected to be a benefit to innovative technology development focused on emissions reduction, including methane.

How to assess the risk and opportunities associated with the new Climate Change Leadership Plan?Many companies are assessing what they can do to prepare for the coming changes and mitigate risks to their business plan, strategy and viability. It is expected that there will be an increased risk for smaller producers both in terms of administrative and compliance costs. Our EY climate change specialists can help you navigate these changes and prepare for the future.

Some key questions to consider:

• Have you assessed the full potential impact of the newly proposed Climate Change Leadership Plan on your business strategy?

• Consideration should be given to probable and possible market prices for power and the economic impact on oil and gas production and potential related effects on supporting industries, labour costs and overall industrial demand.

• Have you created an accurate profile of your organization’s current and future emissions?

• Modelling emissions will be necessary to determine how emissions regulations will impact your organization from a financial and operational perspective now and in the near future. It’s important to recognize that the new regulatory framework will have enterprise-wide implications that stretch beyond regulatory compliance.

• Have you assessed your financial exposure to climate change regulatory risk?

• Conducting an impact assessment of the proposed changes on your organization’s financial health will be key for future capital planning. This is closely tied to emissions modelling and projections.

• Conducting a cost-benefit analysis to assess financial investment required to reduce emissions using technology vs. paying the incremental tax will be key for future capital planning.

• What opportunities are presented for your organization based on the new Climate Change Leadership Plan recommendations? What incentives could be available and how can you position your organization to capitalize on incentives programs or new market conditions?

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This publication contains information in summary form, current as of the date of publication, and is intended for general guidance only. It should not be regarded as comprehensive or a substitute for professional advice. Before taking any particular course of action, contact Ernst & Young or another professional advisor to discuss these matters in the context of your particular circumstances. We accept no responsibility for any loss or damage occasioned by your reliance on information contained in this publication.

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Learn more To explore how EY’s Oil & Gas team can help you adapt to the new regulatory environment, contact one of our professionals:

Meghan Harris-Ngae Energy Market Leader Climate Change & Sustainability Services

Tel: + 1 403 206 5030Mail: meghan.harris-ngae@ca.ey.com

Kent Kaufield Managing Partner – Calgary

Tel: + 1 403 206 5100Mail: kent.d.kaufield@ca.ey.com

Barry Munro Oil & Gas Leader

Tel: + 1 403 206 5017Mail: barry.g.munro@ca.ey.com

• Is your organization considering an acquisition or divestiture? How will the regulations impact these decisions?

• Your changing carbon exposure may impact these decisions. Knowing what carbon price exposure risk is with respect to new acquisitions or divestitures will be key for future decision-making.

• Does your organization have the resources and expertise to assess the impact of a carbon tax on your organization and gaps that need to be addressed?

• Climate change regulatory compliance has historically been managed by the environment and/or regulatory function. It’s important to address whether the right resources are in place to not only assess the financial and operational impact to your organization but to mitigate the risk and put measures in place to address the immediate and long-term impacts. The impact will no longer only be felt by large emitters in the province — every organization will be impacted — so it’s important to address the extent.

• Does your organization have a climate change strategy that will guide future decision-making?

• Climate change strategy/policy for your organization is essential to navigate the changing regulatory landscape to ensure climate change adaptation is aligned with corporate priorities.

Organizations should monitor regulatory developments, including discussion around the Specified Gas Emitters Regulation. Its price and stringency requirements may continue to stand, but the full implications of a transition to the CCR are unknown at this stage.

The panel’s recommendations include the provision of full compliance flexibility, including the ability to purchase Alberta-based carbon offsets and Emission Performance Credits. More work and analysis are required to set the standards for many products and sectors, and this is expected to unfold in the coming months.

Although there are clear risks to many organizations, there are many opportunities embedded throughout the Climate Leadership Plan that should be explored and capitalized on. Organizations would be wise to monitor this closely and be poised to take advantage of policy incentives and position themselves to navigate and adapt to changing regulatory requirements.

It is expected that Alberta’s Royalty Review Panel will release its report early in 2016. It’s also expected that there will be interplay and harmonization between the recommendations from both the Climate Change Leadership Report and the Royalty Review Panel report. A full assessment on the impacts to industry will be able to be completed at that time.