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Or sign-in if you have an account.Prime Minister Mark Carney and Alberta Premier Danielle Smith shake hands in Calgary on May 15, before signing an agreement on oil pipeline approvals and carbon pricing. Photo by Brent Calver/Postmedia filesThe grand bargain between Prime Minister Mark Carney and Premier Danielle Smith that could lead to the construction of a West Coast oil pipeline comes with two costs for the oil and gas industry. Alberta agrees to a higher industrial carbon tax and oilsands producers invest in carbon capture, utilization and storage facilities that could cost at least $20 billion. The industrial carbon tax and the requirement for “decarbonized oil” are now being hotly debated in Alberta.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorThe debate bears on Alberta’s tax competitiveness for new investments, not only in the oilpatch, but also in fossil-fuel-using industries such as electric power. Because the U.S. does not have a carbon tax, the question is whether Alberta’s industrial carbon tax makes the province less tax-competitive for investment compared to the U.S.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againMuch analysis of these issues has focused on corporate income taxes, royalties, sales taxes on capital inputs and other capital-related charges, but so far little has been done regarding the impact of energy taxes. To fill this gap, my new study published by the Fraser Institute compares the effects of taxation on the cost-competitiveness of investments in oilsands, conventional oil, natural gas and electric power production in Alberta, Texas and New Mexico.Looking just at standard taxes, Alberta’s effective tax rate on marginal costs is actually lower than in Texas and New Mexico for the oilsands, gas and power, though not for conventional crude. Alberta’s tax advantage comes from its relatively low corporate income tax rate, profit-based oilsands royalty and low fuel tax rate, and also because it doesn’t add on other taxes, such as the retail sales taxes and high severance taxes used in Texas and New Mexico.My study looks in addition at the effects of taxation on energy producers’ marginal cost of production. Why? Economic theory predicts that competitive businesses will produce to the point where the price charged for a product equals the marginal cost of producing it. Produce more than that and you lose money: costs exceed revenues on the extra output. Produce less and profits are being left on the table: more output generates more revenue than cost. Taxes that add to the marginal cost of production therefore cause businesses to reduce output, lay off workers and forgo investment opportunities.Carbon taxation affects company’s marginal costs in a couple of ways. Under the current rules, companies don’t pay the industrial carbon tax on all their emissions, just those in excess of a specified threshold. For these firms, the carbon tax adds to their marginal cost of production. However, instead of paying the tax, companies can either invest in technologies to reduce emissions or buy carbon credits from firms that are generating less than their threshold emissions. If the price of the credits is less than the carbon tax rate, that makes such deals win-win. The price of carbon credits is established by supply and demand and at the moment those implacable forces are producing a price per tonne that is substantially less than the carbon tax rate. Last year credits cost about two-fifths of the official carbon tax rate of $95/tonne. Until now, companies liable to pay carbon tax have had about one-third of their emissions covered by purchasing carbon credits.A key point here is that the market for carbon credits affects the marginal costs of all firms, even those operating below their emissions threshold. How so? If such firms produce more output, thereby generating some more emissions, they lose the revenue they would have made by selling credits. In effect, the cost of not being able to sell credits adds to their marginal cost of production.This system does “put a price on carbon” but its effect is to reduce Alberta’s tax advantage. Even with a tax of only $95/tonne of carbon emissions, Alberta loses most of its tax edge for oilsands investment and is at a distinct tax disadvantage for investment in conventional crude and power. Things get even worse at $170/tonne, which was originally planned to kick in in 2030. With that rate of tax, Alberta loses all of its tax competitiveness, except in natural gas.Under the Smith-Carney MOU, however, the carbon price now rises to just $140/tonne by 2040. On the other hand, credits are made more expensive by establishing a minimum price of $110/tonne for them and fewer emission allowances will also be available. That will pinch the supply side of the credit market and boost the demand side, which will also have the effect of raising credit prices and increasing companies’ marginal costs. As the table shows, under these arrangements Alberta completely loses its tax advantage, with the power industry affected most since it relies on natural gas to produce energy. That will mean higher utility prices for Alberta consumers and businesses.What about carbon capture and storage (CCUS)? The U.S. subsidizes CCUS investments at $85 per tonne of stored carbon, while Canada and Alberta will cover about three-fifths of the capital costs. The CCUS cost is also supported by saving companies money on their carbon tax payments or allowing them to sell more of their carbon credits. But although these effects reduce the marginal cost of production they don’t fully offset it, so producers still pay some of that cost.Taxes aren’t everything, of course. Alberta may still be attractive to investors because of the quality of its resources or management and its lower wage costs compared to the U.S. Even so, my conclusion is that Canada’s carbon policies create a tax disadvantage for the province — and therefore the country.Jack Mintz is the President’s Fellow, School of Public Policy, University of Calgary. His paper “Impact of Carbon policies on Competitiveness in Oil, Natural Gas and Electric Power: An Alberta-U.S. Comparison” was published by the Fraser Institute’s Mathison Energy Research Initiatives, June 25. Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.