Bad mix

As Alex Mlynek reported in her Briefcase blog earlier this year on Canadian Business Online,sales of oil and gas rights in the Horn River region have hit record highs in recent months. On June 16, Randy Eresman, the CEO of EnCana (TSX: ECA) announced the company had secured the rights to drill on 220,000 acres of gas shale deposits in the Horn River area. Eresman says Horn River holds the potential to eventually become among the largest resource plays in North America — comparable in size and scope to the Barnett Shale in north central Texas, which produces 3 billion cubic feet of natural gas a day.

So far this fiscal year, the province of British Columbia has derived more than $480 million from these sales of rights. Yet curiously (for a province where the oil and gas sector is so rapidly expanding) British Columbia is also among the first jurisdictions in North America to introduce a tax on carbon. That tax, announced in the February provincial budget, is set to go into effect July 1. It will tax carbon at a low “starter” rate of $10 a tonne. By 2012, that will ramp up to $30 a tonne. (Lest you think British Columbia is alone in this effort, on Thursday June 19, Liberal leader Stéphane Dion proposes his own version.)

Environmentalists applauded B.C.’s decision, and many economists agree that putting a price on carbon is the most immediate way to reduce emissions. People respond to price signals, and a tax is the strongest policy lever a government has to price the environmental cost in to carbon-intensive activity — thus encouraging low-carbon alternatives. Or so the theory goes.

But B.C.’s odd mix of policies — allowing record sales of rights to develop oil and gas, the sectors that generate the most greenhouse gas emissions in Canada, while taxing carbon — presents an interesting conundrum. On the one hand, the government is encouraging a mushrooming oil and gas sector; on the other, it’s proposing to tax emissions (much of which will come from that sector) to the hilt.

This situation may help explain why the B.C. government put $3.4 million towards Spectra Energy’s effort to test whether the Horn River area is ready for the magic of carbon capture and sequestration (CCS). That’s the technological alchemy whereby greenhouse gas emissions are removed from the atmosphere and pumped deep underground for permanent storage.

Like Alberta, B.C. faces the dilemma of how to grow an expanding resource sector while bringing emissions under control. CCS is seen by many as Canada’s best hope for reducing the carbon footprint of a fossil fuel-intensive economy. So on May 26, Spectra Energy announced conducting a $12 million feasibility study of CCS at Fort Nelson near Horn River, together with the support of the provincial government and the good wishes of the U.S. Department of Energy. (The DOE will study whether it is possible to sequester natural gas this way — and develop a manual of best practices.)

Spectra Energy’s Western Canadian initiative is headed by Doug Bloom. In a conference call with Gary Weilinger, another Spectra VP, and Canadian Business, he said CCS is a “safe, proven technology.” (Spectra already operates seven other CCS projects elsewhere in Canada.) For Bloom, “Fort Nelson is simply a good opportunity to try it out on a larger scale.” The goal is to pump 1 million tonnes of carbon dioxide and other greenhouse gases underground each year. The feasibility study will test the geology of the region and ensure the cavity in question can store that amount of gas, leak free.

Some, such as Ian Bruce, a climate change expert with the David Suzuki Foundation, have questioned whether public money should be going towards such projects, particularly at a time when commodity prices — and in particular those for natural gas — are through the roof. But Bloom says the public spend is justified by the public benefit. Spectra literature claims that sequestering 1 million tonnes of carbon a year is the equivalent of taking 250,000 cars off the road.

More of a concern is the economic and environmental impact of this provincial government’s decision to implement two policies at direct cross-purposes — at the same time.

By taxing carbon, the Gordon Campbell government earned kudos from an environmentally-aware electorate. Yet by allowing drilling activity to expand, the government is filling its coffers with rights revenues and encouraging the emissions-intensive activities its carbon tax is supposed to discourage.

Attempting to square this circle by putting public money into carbon capture isn’t going to make the problem go away anytime soon. Assuming the geology is leak free, the Fort Nelson CCS project won’t be in operation for several years; drilling on one well for the feasibility study starts later this year, and the other in 2009. Meanwhile, emissions from new drilling activity
in Horn River will rise, and the government will collect additional revenue from the carbon tax on those emissions.

A government that allows its oil and gas sector to expand — while simultaneously introducing a carbon tax — undermines, at least in the short term, the point of having the tax in the first place. Meanwhile, Bloom says the company’s strategy for coping with its carbon tax liability will be to pass the costs on to shippers, who will eventually have to pass those costs on to consumers. That means higher energy costs, at a time when consumers are already hurting.

If the B.C. government really wants to encourage green growth, a smarter approach might be to let industry test out and implement a CCS strategy first, before auctioning off rights. As it is, all this mix of policies will achieve for certain is increased revenue for the government. That may be a great for government finances, but it’s a lousy way to promote an economically savvy green policy. Too bad consumers and taxpayers end up paying a disproportionate amount of the price.


Rachel Pulfer
is the U.S. correspondent for Canadian Business. A journalist since 1999, and features editor of Canadian Business from 2005 to 2007, she has been nominated for three National Magazine Awards. In Letter from America, her online column, Rachel comments on economic and cultural developments in the U.S. and their significance for Canada.