Alberta’s cap on oil sands emissions could cost billions

The cumulative value of lost production from 2027 to 2040 could total C$150 billion (in 2015 dollars), with negligible environmental benefit

By Kenneth P. Green
and Taylor Jackson
The Fraser Institute

Alberta’s energy industry has been hit hard by the decline in oil prices, but the province is still home to the world’s third largest oil reserves, and despite a temporary glut, oil will still largely power the world for the foreseeable future.

However, just how much oil Alberta will produce in the future remains uncertain, not just because of low prices and unstable global oil markets but also because of polices from the Alberta government, including the 100 megatonne (Mt) annual cap on greenhouse gas (GHG) emissions.

Ken Green
Ken
Green

Before understanding the potential impacts of the cap, we need to understand how oil sands production might grow in the future. The National Energy Board (NEB) recently forecasted that oil sands production could more than double, from 2.30 million barrels per day in 2014 to 4.76 million barrels per day in 2040. This additional production could provide Albertans and Canadians with immense economic benefits, including higher royalty revenues for governments.

But an emissions cap may jeopardize some of this potential future oil sands production.

A recent Fraser Institute study estimated future emissions levels from oil sands production using the NEB’s estimates of potential production to 2040.

For example, if producers reduce the emissions intensity of oil sands production by a modest amount, cumulative production losses may total two billion barrels of oil between 2027 and 2040. If producers aren’t able to reduce their emissions intensity levels, the cap could have a larger effect and more oil would be left in the ground.

Taylor Jackson
Taylor Jackson

The amount of oil left in the ground would also come at a high cost. Based on projections of future oil prices, and accounting for things such as the cost of preparing oil for transportation, the cumulative value of lost production from 2027 to 2040 could total C$150 billion (in 2015 dollars).

To make matters worse, this high cost will come with very little environmental benefit. This is not surprising given that over the last few years GHG emissions from the oil sands have comprised less than 0.15 per cent of global emissions. Based on estimates of how much oil could be left in the ground if oil sands producers improve the emissions intensity of production, emissions from the oil sands could be only 15 Mt lower in 2040 compared to a no-cap scenario.

To put this into perspective, in 2012 global GHG emissions were estimated at just under 45,000 Mt, making the reductions from Alberta’s emissions cap a drop in the bucket. And global emissions are expected to grow in the future, unless counties take unexpected dramatic actions.

The emissions reductions from the cap will also come at a high cost of more than $1,000 per tonne of GHG reduced. By comparison, in 2018 when Alberta’s revised carbon tax is fully phased in, emissions will be priced at only $30 per tonne. In addition, the United States Environmental Protection Agency puts its highest estimate of the social cost of carbon emissions at only US$183 in 2040. Put differently, the cost of reducing emissions with the emissions cap may be roughly five times greater than the upper estimate of the social cost of carbon and more than 30 times larger than the fully phased-in carbon tax.

Reducing greenhouse gas emissions is a reasonable policy objective. But it must be done in a cost-effective manner. The 100 Mt cap on GHG emissions could place large costs on Albertans and Canadians by potentially constraining future growth in oil sands development, while providing little environmental benefit.

Kenneth P. Green is senior director and Taylor Jackson is a policy analyst in Natural Resource Studies at The Fraser Institute.

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