A Primer on Alberta’s Oil sands Royalties

Fulfilling its campaign promise, the new NDP government announced a review of Alberta’s royalty framework in June 2015. The province receives royalty revenue from three main sources – natural gas, crude oil, and oil sands. Since the 2009-10 fiscal year the largest contributor to Alberta’s royalty revenues has been the oil sands. If you want a sense of how important oil sands royalties have been for Alberta’s finances, consider this: In the 2014–15 fiscal year, the government collected just over $5 billion from oil sands royalties. These royalties covered over 10 per cent of the province’s operational expenses of$48.6 billion in the same fiscal year. Over the last six fiscal years the oil sands have contributed an average of 10 per cent of revenues to provincial coffers. This makes oil sands royalties the fourth largest contributor behind personal income taxes (23 per cent), federal transfers (13 per cent) and corporate income taxes (11 per cent). But how many Albertans really understand how the royalty system works? What do we mean when we say “royalty”? How does the Alberta Government calculate royalties on oil sands producers? If the system is going to change, it’s important that Albertans understand how the current system works. That is what this paper is designed to do. For Albertans to properly judge the impact of new policy, they need a solid understanding of the current policy environment. We all know that oil prices have dropped and oil sands producers are losing profitability. As such, changes to the royalty system could have a deep and profound impact on the sector. Here are some of the issues this primer will study: • Pre-payout projects vs. post-payout projects, in other words, the classification of projects for royalty purposes based on whether the cumulative costs of a project exceed its cumulative revenues • Monthly payment of royalties vs. annual payment • Understanding the unit price of bitumen and how that price is applied • Gross vs. net revenues and the application of royalties • How the price of oil and the exchange rate between Canadian and U.S. dollars impact royalties • The historical and forecast contribution of oil sands royalties to Alberta’s finances Needless to say, a primer like this should be required reading for policymakers. It should also be required reading, however, for any Albertan who cares about the long-term benefit of the oil sands to Alberta’s revenue, and our financial future as a province

Peering into Alberta’s Darkening Future: How Oil Prices Impact Alberta’s Royalty Revenues

The price of oil just keeps collapsing — and the fate of Alberta’s revenues is buckling with it. Going into March 2015, it seemed as if prices might have finally found a bottom, somewhere between US$48 and US$52. By the second week of March, they began falling again, to the low forties. These are prices the Alberta government had not even ventured to fathom when first putting together its forecasts for the impact of falling oil prices on the province’s finances. Come the fourth quarter of the Alberta government’s 2014/15 fiscal year, the province’s finances will begin to really feel the blow from the plunge in oil, as royalty payments dry up significantly. Come the 2015/16 fiscal year, the situation becomes even bleaker. In fact, the current fiscal year will seem pleasant compared to the next one. Due to a stronger than expected first half of the year, actual bitumen and crude oil royalties collected in Alberta from April to September 2014 exceeded estimates by $1.3 billion. That will mitigate some of the damage that the continuing slide in prices will cause by the year’s end, with the government’s third quarter update showing expected year-end crude oil and bitumen royalty revenues falling short of the budget target by$549 million. So severe has the fall in oil prices been that, in March 2015, the number of barrels of conventional oil that the government collects in royalties could plummet by up to 53,000 barrels from the 2014/15 budget forecast, declining to just 4,100 barrels per day. This suggests that prices may be nearing a point where royalty collection from conventional crude oil production is at risk of being virtually eliminated. Bitumen royalties are not faring much better. Relative to July 2014, per barrel royalties in February 2015 have potentially declined by 60 to 90 per cent.  All told, the combined effect of the changing exchange rate, lower prices, and the lower royalty rates that take effect in this low-price environment, will lead to a potential decline in crude oil and bitumen royalty revenues of 42 to 74 per cent in the 2015/16 fiscal year. This corresponds to a monetary decline of roughly $3.3 billion to$5.8 billion. If oil prices stay below US$45 per barrel, that decline will become even more severe. The pain for Alberta revenues does not end there. The government will be facing additional losses in land sale revenues, natural gas royalties, and tax revenues. Still, even the surprisingly strong revenues for the first half of the year suggest a serious problem with government forecasts. By the end of September, the government had collected$5.198 billion in crude oil and bitumen royalties, 33 per cent higher than originally forecast. That government estimates could be so far off the mark raises serious questions about the methods the province is using to forecast royalties. In a province so dependent on resource royalties for its revenues, adding the unpredictability of unreliable forecasting methods can only put its fiscal planning at that much greater risk of instability

Assessing Policy Support for Emissions Intensive and Trade Exposed Industries

Jurisdictions implementing emissions pricing often face concerns arising from emissions-intensive and trade exposed (EITE) industries. These industries face higher costs than counterparts in other jurisdictions without emissions pricing. There is also risk of emissions leakage, where economic activity from EITE industries in a jurisdiction with emissions pricing leaves for jurisdictions without pricing, leading to lower economic activity and no net reduction in emissions. As a result of these two concerns, jurisdictions implementing carbon pricing often implement complementary policy to mitigate the cost impacts on EITE industries. In this paper we provide an overview of the EITE definitions and support policies in place in Canada and compare those to definitions and policies in Australia, California and the European Union. We evaluate both domestic and international EITE support policies using the metrics of administrative costs, economic efficiency, emissions reduction incentive, and equity across and within sectors

Who is Getting a Carbon-Tax Rebate?

With its 2016 budget, the Government of Alberta laid out the basic details of the carbon tax rebate. The rebate is constructed to increase based on household size, and will decrease with income after a pre-set cutoff. The government has stated six in 10 households will be eligible for a full rebate, with an additional six per cent receiving a partial rebate. This paper examines the income distribution of Albertans, to determine how the rebate and income cutoffs affect different types of Alberta families. Using easily available data from Statistics Canada, we shed light on the question of who will receive a carbon-tax rebate. Based on 2013 data on median incomes, single-parent families, elderly families and single Albertans are all groups where a majority of households will receive rebates. In some cases, it appears well over 50 per cent of those groups will receive a full rebate. However, fewer than 50 per cent of Alberta families that are couples (with and without children) will receive a rebate. Still, even those that get a rebate will not necessarily exactly break even against the additional costs they incur from a carbon tax. Interestingly, the lowest-income households, which are most likely to qualify for a rebate, appear to be in a position where they will receive a larger refund than they will pay in carbon taxes. For households where incomes fall in the middle of the provincial distribution, the data suggest that the rebate will come close to compensating for additional costs of the carbon tax, although it may fall slightly short. The analysis presented below is a first pass at a very important question facing Albertans. When data from the 2016 census becomes available, we will be much better able to evaluate which Albertans will be eligible for the rebate. The census will enable a more precise evaluation of whether the rebate matches the government’s 66 per cent goal

The Case for a Carbon Tax in Alberta

In 2007, Alberta demonstrated that it could be a leader in the effort to reduce greenhouse gas emissions by becoming the first North American jurisdiction to put a price on carbon. Given that the province had long been criticized for its central role in the carbon-based economy, Alberta’s move was important for its symbolism. Unfortunately, the emissions policy itself has delivered more in symbolism than it has in actually achieving meaningful reductions in greenhouse gas emissions. The Specified Gas Emitters Regulation (SGER), as the carbon-pricing system is formally called, has only helped Alberta achieve a three per cent reduction in total emissions, relative to what they would have been without the SGER. And emissions keep growing steadily, up by nearly 11 per cent between 2007 and 2014, with the SGER only slowing that growth by a marginal one percentage point. Alberta’s carbon-pricing policy simply fails to combat emissions growth; the province needs a new one. Lack of progress in reducing emissions appears to be partly attributable to the fact that many large emitters find it more economical to allow their emissions to rise beyond the provincially mandated threshold, and instead are purchasing amnesty at a lower cost through carbon offsets or by paying the levies that the SGER imposes on excess emissions. But it is also partly attributable to the fact that the SGER only applies to large emitters who annually produce 100,000 tonnes of CO2-equivalent all at one site: mainly oil sands operations and facilities that generate heat and electricity. This excludes operations that emit well over that threshold, but across diffuse locations. The transportation sector, which is typically spread out in just such a way, is the third-largest sector for emissions in Alberta. Its emissions are also growing faster than those of the mining and oil and gas sector, even as emissions in the electricity and heat generation sector are actually declining. And if we combine the emissions from the transportation sector with those of the manufacturing and industrial sector, which can also be characterized by scattered operations, they substantially exceed those of the electricity and heat generation sector. Indeed, over 58 per cent of Alberta emissions come from places other than oil and gas and mining. There will surely be those who prefer strengthening SGER to a carbon tax; this is not likely to make enough of a difference for Alberta to meet its carbon-reduction goal of 218 Mt by 2020. The government would make far more progress by implementing a broad carbon tax, similar to the one in British Columbia, which applies to all emitters and consumers. The cost to the economy would not be steep: For a $20 per tonne tax, the cost would be 0.9 per cent of gross output (or 1.7 per cent at$40 a tonne). And the cost to households would be less than $700 a year. As in B.C., the proceeds would be better recycled in the form of reduced corporate income taxes, personal taxes, and subsidies to lowincome households, to offset the extra burden and distortions a carbon tax would create. But unlike the current SGER, a carbon tax would succeed in being more than a symbolic, largely futile gesture

Big and Little Feet Provincial Profiles: Manitoba

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for Manitoba, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in Manitoba. In contrast, a consumption-based emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in Manitoba through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in Manitoba but which support consumption in a different province, territory or country (and vice versa). For example, emissions associated with the production of Manitoba crops that are exported to Ontario for processing and sale in an Ontario grocery store are recorded as a trade flow from Manitoba to Ontario. Moving in the opposite direction, emissions associated with the production of motor gasoline in Alberta that is exported to Manitoba for sale are recorded as a trade flow from Alberta to Manitoba. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Big and Little Feet Provincial Profiles: Territories

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for the Yukon, Northwest Territories and Nunavut, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in the territories. In contrast, a consumption-based emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in the territories through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in the territories but which support consumption in a different province or country (and vice versa). For example, emissions associated with the production of gold in Nunavut that is exported to Quebec for processing and sale are recorded as a trade flow from the territories to Quebec. Moving in the opposite direction, emissions associated with the production of British Columbia natural gas that is sold to a Northwest Territories utility and used to generate electricity for homes in the Northwest Territories are recorded as a trade flow from British Columbia to the territories. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Big and Little Feet Provincial Profiles: New Brunswick

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for New Brunswick, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in New Brunswick. In contrast, a consumptionbased emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in New Brunswick through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in New Brunswick but which support consumption in a different province, territory or country (and vice versa). For example, emissions associated with the production of motor gasoline in New Brunswick that is exported to Quebec for sale are recorded as a trade flow from New Brunswick to Quebec. Moving in the opposite direction, emissions associated with the production of Nova Scotia natural gas that is sold to a New Brunswick utility and used to generate electricity for New Brunswick homes are recorded as a trade flow from Nova Scotia to New Brunswick. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Big and Little Feet Provincial Profiles: Prince Edward Island

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for Prince Edward Island, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in Prince Edward Island. In contrast, a consumptionbased emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in Prince Edward Island through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in Prince Edward Island but which support consumption in a different province, territory or country (and vice versa). For example, emissions associated with the production of Prince Edward Island crops that are exported to Nova Scotia for processing and sale are recorded as a trade flow from Prince Edward Island to Nova Scotia. Moving in the opposite direction, emissions associated with the generation of electricity in New Brunswick that is exported to Prince Edward Island for sale to a Prince Edward Island homeowner are recorded as a trade flow from New Brunswick to Prince Edward Island. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/

Big and Little Feet Provincial Profiles: Newfoundland and Labrador

This communiqué provides a summary of the production- and consumption-based greenhouse gas emissions accounts for Newfoundland and Labrador, as well as their associated trade flows. It is part of a series of communiqués profiling the Canadian provinces and territories.1 In simplest terms, a production-based emissions account measures the quantity of greenhouse gas emissions produced in Newfoundland and Labrador. In contrast, a consumption-based emissions account measures the quantity of greenhouse gas emissions generated during the production process for final goods and services that are consumed in Newfoundland and Labrador through household purchases, investment by firms and government spending. Trade flows refer to the movement of emissions that are produced in Newfoundland and Labrador but which support consumption in a different province, territory or country (and vice versa). For example, emissions associated with the production of Newfoundland and Labrador crude oil that is exported to New Brunswick for refining and sale as motor gasoline are recorded as a trade flow from Newfoundland and Labrador to New Brunswick. Moving in the opposite direction, emissions associated with the production of a Quebec manufactured good that is exported to Newfoundland and Labrador for sale are recorded as a trade flow from Quebec to Newfoundland and Labrador. For further details on these results in a national context, the methodology for generating them and their policy implications, please see the companion papers to this communiqué series: (1) Fellows and Dobson (2017); and (2) Dobson and Fellows (2017). Additionally, the consumption emissions and trade flow data for each of the provinces and territories are available at: http://www.policyschool.ca/embodied-emissions-inputs-outputs-datatables-2004-2011/