The new leader of the federal Liberals, Stéphane Dion, wants to eliminate “preferential” tax treatment for carbon-spewing oil-sands developments in northern Alberta.
Dion’s proposal, which is contained in his 53-page energy and climate-change plan, notes that oil-sands development is “the single biggest driver” of Canada’s increasing greenhouse-gas emissions. Many scientists believe that greenhouse gases, such as carbon dioxide and methane, cause global warming by forming a thin shield high in the atmosphere that prevents heat from escaping into space.
Canada has an estimated 170 billion barrels of proven reserves of oil in the oil sands. This is greater than the proven oil reserves of any other country except Saudi Arabia.
Oil-sands developers use much more energy than conventional oil producers because of the difficulty in mining petroleum from heavy tar. Massive amounts of natural gas are burned to convert water into steam, which heats the rock and enables the oil to flow freely.
“Every barrel of production produces four times the emissions associated with a conventional drilled barrel of oil,” Dion writes in his plan. “Currently, for every barrel of synthetic oil that is produced at the oils [sic] sands, as many as 80 kilograms of greenhouse gases are released, and between 2 and 4.5 barrels of wastewater are consumed.”
Dion states that one way to address the environmental impact would be to implement a new accelerated capital cost allowance class for oil-sands mines or expansions. “Given the current international market for oil, with tight supply and high prices, the profit margins associated with these projects no longer justify their current preferential tax treatment,” Dion writes.
Under the current rules, oil-sands developers can write off all of their capital costs before they have to pay any corporate taxes. Dion claims in his plan that this has provided $400 million in subsidies to oil-sands developers between 1996 and 2002.
Dion proposes linking tax breaks to greenhouse-gas emissions and water usage. Those projects that demonstrate they are “carbon neutral and/or provide significant water usage improvements...based on third-party verification” would retain the 100-percent capital-cost allowance. Others would not qualify.
“Such a reform of the tax treatment of oil and gas development will be a way to encourage the sustainable exploitation of fossil fuel resources with far less impact on the environment,” Dion writes.
Clare Demerse, a climate-change policy analyst at the Alberta-based Pembina Institute, told the Georgia Straight that Dion’s proposal is a “great thing”. The 100-percent write-off of capital expenses currently available to oil-sands producers, Demerse pointed out, contrasts with tax policy for ?conventional-energy and renewable-energy producers. These, she said, can only write off 25 percent of their capital costs before paying taxes.
She pointed out that the preferential policy for oil-sands developments was introduced in the mid-1990s, when oil prices were far lower than today’s US$60-per-barrel range. “At this point, oil has gone up by so much, something like 200 percent, and capital development in the oil sands has skyrocketed,” Demerse said. “It doesn’t make sense any more.”
On November 29, the Pembina Institute issued a report stating that despite “record oil prices, record oil sands production and record profits for oil companies, the royalty return to Albertans for each barrel of oil sands oil declined by 32 percent between 1996 and 2005”. The report, called “Thinking Like an Owner”, also claims that Ottawa’s revenue loss could be as high as $1.65 billion because of tax breaks granted to oil-sands projects. It notes, too, that cost overruns on oil-sands projects lead to delays in revenues rolling into federal and provincial government coffers.
Pierre Alvarez, president of the Canadian Association of Petroleum Producers, told the Straight that the oil-and-gas sector isn’t the only industry that has access to the tax write-offs that Dion wants to address. “I find it interesting that he singled us out,” Alvarez said. “The mining industry has access to that, as do a lot of the renewable-energy sources. Is he talking about taking it away from one or all? I think that’s question number one.”
Alvarez added that his industry will “challenge” Dion about this. “We would hope that he would not make up his mind on an issue as important as that without talking to people about what the implications are,” he said.
Alvarez noted that his association, which includes Canada’s largest energy producers, reached an agreement with Dion on climate-change actions when the new Liberal leader was environment minister. Alvarez described Dion as “very open and consultative”.
In addition, Alvarez pointed out that the previous Liberal government introduced three green plans without any major disruptions. “At each stage, we have been able to work with the government of the day to arrive at a solution that was progressive in terms of moving the file forward, but without killing the industry,” he said. “I would expect that we would be able to do it again.”
The Pembina Institute’s Demerse praised Dion’s energy and climate-change plan for trying to reduce household emissions of greenhouse gases. The plan contains numerous policy planks in this area, including rebates for buying energy-efficient appliances, and tax write-offs for retrofitting homes.
“Stéphane Dion’s plan is seemingly committed to Kyoto [reducing greenhouse-gas emissions by six percent below 1990 levels between 2008 and 2012], so we think that’s really important, and it’s really reassuring,” Demerse said.
However, Demerse characterized Dion’s targets for heavy industry as “unambitious”. He has proposed “immediate caps on emissions” with “absolute caps” in place by 2012. A carbon market would be created to let market forces reward companies that reduce emissions.
The runner-up in the Liberal leadership race, Michael Ignatieff, proposed a “revenue-neutral, nondiscriminatory emissions tax”, and third-place finisher Bob Rae called for a capping of carbon-dioxide emissions.
“Heavy industry is half of our greenhouse-gas pollution,” Demerse explained.
Alvarez, on the other hand, said he thinks it’s “unfortunate” that the Kyoto Protocol has dominated the environmental debate over the last 10 years, claiming it has delayed taking “sensible first steps” to address greenhouse-gas emissions. He described the European effort to introduce a carbon market, of the kind that Dion is proposing, as “an unmitigated disaster”.
“We’ve got to take energy efficiency seriously in this country from automobiles to home use, and not just hope that we make progress,” he said. “And we’ve got to get our head around the [research-and-development] challenge, because there are no silver-bullet solutions. No emissions trading, no tax changes will come up with a solution in the short term either in Canada or globally. China is building 500 coal-power plants. That will so dwarf anything we’re doing in this country.”