Originally published in The Hub:

The grand bargain between Alberta and the federal government has reheated the public debate over the competitiveness impacts of industrial carbon pricing. We welcome this debate, because critics tend to build their case on a recurrent misunderstanding: that facilities today pay $95 per tonne of carbon. This $95 policy price captures all the headlines, but it’s not even close to what facilities actually pay. Let’s take a look at how it actually works to see the impact on competitiveness. Industrial carbon pricing systems, such as Alberta’s Technology Innovation and Emissions Reduction (TIER) system, are built specifically to account for industrial competitiveness.

Yet critics continue to lace up their gloves against a version of this policy that doesn’t exist. Last week, The Hub’s editorial board fell into this routine of shadow boxing, throwing this jab:

“But at $95 per tonne, the maximum marginal effective tax rate on oilsands—what producers would face if no allowances were provided [author’s emphasis]—reaches 48.8 percent…and climbs to 76.4 percent under the $170-per-tonne trajectory originally scheduled for 2030. Investors deciding where to deploy the next dollar of energy capital must price that ceiling, not just today’s sheltered rate.”

But allowances under TIER are not discretionary. They are a core mechanism used to protect the competitiveness of trade-exposed industries. If they were stripped out, costs would certainly soar—but no one is proposing they be stripped out.

To understand how this all works, let’s go back to industrial pricing 101, using the example of cement (because it has mercifully simple numbers). Producing one tonne of cement generates about one tonne of CO2. A tonne of cement today costs about $100, and the industrial carbon price in Alberta is set at $95. Critics often look at these numbers and conclude that carbon pricing either doubles the price of cement or comprises 95 percent of its price.

But neither is true, as this math misses three key details of the policy design:

Allowances: The majority of a facility’s emissions (typically around 80 percent, but as high as 95 percent for the most trade-exposed industries) face no carbon price because they are shielded by free allowances. Emitters only pay carbon costs on their excess emissions, a small fraction (about 5–20 percent) of what they generate. The lowest-emitting facilities also earn credits by beating specific emissions benchmarks.

Buying credits from other facilities: When facilities do face a compliance bill, they don’t have to pay the government the $95 per tonne. Instead, they can purchase credits on the open market. In Alberta, credits now sell for around $30, and they can be used to cover 90 percent of compliance costs.

Earned credits: To avoid paying for that fraction of emissions, facilities can choose to decarbonize. Facilities that can reduce their emissions for less than the headline price can earn surplus credits that they can resell.

So instead, the rudimentary math works out more like this:

• The cement facility only faces a carbon bill on its excess emissions, say 20 percent of the total.
• Under the TIER rules, the plant doesn’t just cut a cheque to the Alberta government at $95 per tonne. It can buy $30 credits to cover 90 percent of its bill.
• The remaining 10 percent is covered by paying the policy rate of $95 per tonne. That averages out to $36.50 per tonne as its average compliance cost on covered tonnes.
• Spread that cost over all the tonnes emitted, and the effective carbon cost is just $7.30 per tonne.

That actual cost is 92 percent less than you’d get by a flat application of the $95 headline price. The specific details vary from province to province, but this is why actual costs are far less sensational than critics claim.

Credible estimates of how much the average Alberta oil company is paying in carbon costs this year range from nine Canadian cents to one U.S. dollar per barrel. Under the Canada-Alberta implementation agreement signed in May, costs could increase to a high-end estimate of three U.S. dollars per barrel by 2040. While a few dollars a barrel is not nothing, it is hardly an existential risk to one of Canada’s most lucrative and resilient industries.

But costs are only half the story. Alberta’s carbon pricing framework isn’t a standalone policy; it’s part of a grand bargain that delivers a massive, structural benefit to the oil industry: a new million-barrel-per-day pipeline from Alberta to the West Coast.

“Alberta’s carbon pricing framework isn’t a standalone policy; it’s part of a grand bargain that delivers a massive, structural benefit to the oil industry: a new million-barrel-per-day pipeline from Alberta to the West Coast.”

Etienne Rainville, Vice President for Central Canada, Clean Prosperity

When our organization studied the combined effects of these gradual carbon price increases and the newly unlocked pipeline capacity, we found that the representative oil sands projects saw their per-barrel profitability increase by between 30 and 91 percent, net of carbon costs. Producers won’t just benefit from being able to export more; they will earn higher prices for all of their barrels, because the increase in coastal pipeline capacity will significantly reduce the longstanding discount on Canadian oil that largely results from our overdependence on the U.S. market.

The competitiveness risk here isn’t industrial carbon pricing, it’s not getting top dollar for our products on global markets.

The Hub’s editorial board warns that investors must price in a worst-case “ceiling” because allocations will diminish over time, but let’s look at the pace of that reduction. Between 2030 and 2040, the legislated tightening rates of nearly all facilities are either 0.5 or 1 percent per year. That means facilities will only see a modest 5–10 percent increase in their carbon exposure in the next decade—miles away from the total exposure the editorial board suggests.

Contrary to what some are arguing, the federal-Alberta grand bargain does a respectable job of balancing competitive energy growth and emissions reductions. To understand why, critics must stop shadow boxing against imaginary scenarios and look at the real costs, balanced against the real benefits.

_{Photo credit: Syncrude Canada}