Oilsands emissions cap—high cost, little benefit

The Alberta government is currently in the process of implementing a 100 megatonne cap on greenhouse (GHG) emissions from oilsands production. A recent Fraser Institute study finds that this policy could come at a high cost and result in only minimal environmental benefit.

Before understanding the potential impacts of the cap, we need to understand how oilsands production might grow in the future. The National Energy Board (NEB) recently forecasted that oilsands 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.

For example, if producers reduce the emissions intensity of oilsands 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.

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 like the cost of preparing the oil for transportation, the cumulative value of the 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 oilsands have amounted to less than 0.15 per cent of global emissions. Based on estimates of how much oil could be left in the ground in our scenario where oilsands producers improve the emissions intensity of their production, emissions from the oilsands 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 over $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 will be roughly five times greater than the upper estimate of the social cost of carbon and over 30 times larger than the fully phased-in carbon tax.

Reducing greenhouse gas emissions is a reasonable policy objective. But it needs to 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 oilsands development, while providing little environmental benefit.