Twice the offsets, half the credibility for the offset system

The Governments of Alberta and Canada announced today that a final funding formula had been reached for Shell’s Quest project, a carbon capture and storage operation housed at Shell’s Scotford Upgrader in Fort Saskatchewan.  The fact that the funding model has been agreed upon is great news, since although I have been critical of Alberta’s carbon capture and storage strategy in the past, I think that these pilots provide a crucial opportunity for technological advancement.  In this case, proving that CCS can work, at scale, in an oilsands upgrader has the potential to be a game-changer.

The good news in this press release ended for me when I read, “Alberta is updating its carbon offset program to allow multiple-credits…(for)…large-scale, direct injection CCS projects.”  Under this arrangement, projects, “will receive a bonus credit for every tonne of offset credit created through the capture and storage of their CO2.” In other words, capture and store 1, get 2.  A similar bonus credit regime for CCS had been proposed under both the Waxman-Markey and Kerry-Lieberman cap-and-trade bills in the US.

Chris Severson-Baker at Pembina does a good job of explaining some of the issues with a multiple-credit approach asking, “Wouldn’t it be nice if your loonies turned into toonies overnight?” I have two key issues with the approach myself: 1) Why 2? and 2) Why fund CCS via double offsets and not via the CCEMC? (Acronym soup: the CCEMC administers revenues from Alberta’s carbon charge. The Fund into which these revenues flow is the Climate Change and Emissions Management Fund (CCEMF))

Why a factor of 2?  I think you can make a compelling case that an emissions reduction sourced through CCS is worth more to Alberta than an emissions reduction from an existing, proven technology.  Deployment of CCS will drive learning, and the lowered future abatement costs from deploying a new technology will benefit Alberta, and so it makes sense in this case for the government to bear some of the costs of this risky investment.  Many of the same arguments are made in favour of solar power – I hear this every time when I criticize Ontario for paying 80c/kWh for solar power.  My question to the Alberta Government is the same as I would ask about a feed-in tariff – why 2 credits?  Why twice as much?  Why not 3 or 1.2675? I suppose 2 is a convenient number, but I would hope there is more to it than that.

My second question is why the Alberta Government chose to finance CCS via the offset system?  Offset systems only have credibility when the emissions accounting is thorough – in an ideal world, they allow firms to outsource emissions reductions to the cheapest contractor, while still ensuring that emissions reductions actually occur.  I can’t see the rationale for disrupting the emissions accounting in the offset system to provide extra funds for CCS rather than financing it through the Climate Change and Emissions Management Fund (CCEMF) because, for all intents and purposes, it’s a zero sum game.

How will the project affect the compliance behaviour under Alberta’s GHG policy?  Last year, Shell purchased 550,000 tonnes of offsets, generated 615,000 credits through the use of cogeneration, and was still short of their compliance targets and so had to pay into the CCEMF at the specified $15/ton rate.  With today’s arrangement, Quest will provide them with an additional 2 million tons of credits per year, which will more than offset their compliance obligations.  Shell’s emissions last year were 5Mt, so with their credits from Quest and their use of cogeneration, more than half of this could be offset, far exceeding the reductions which will be required under Alberta law.  Their emissions will go up with the Scotford expansion coming online, but not by enough to leave them short compliance credits.

The double credits for Quest will reduced CCEMF revenues in three ways.  First, Shell will avoid paying into the CCEMF by using some of the additional credits generated by Quest.  Second, Shell will likely no longer need to buy any offsets on the open market, and so these offsets can be used by other firms to avoid paying into the CCEMF (the highest-cost compliance option), and there were almost 5 million tons worth of compliance credits purchased from the CCEMF last year so there are plenty of firms looking for even a slightly lower-cost option.  Third, any excess offsets from Quest will also be sold by Shell, again to other companies who will retire them to avoid paying into the CCEMF.  As a result of the double-credits, annual CCEMF revenues are likely to decrease by approximately $15 million per year (assuming the CO2 price stays at $15 and Quest sequesters 1Mt/year).  The total impact of the Quest project on CCEMF revenues is likely to be closer to $30 million per year, or almost half of the CCEMF revenue from last year.

So, as far as I can see, essentially the same outcome as the double-credits achieves, both in terms of revenue for Shell and cost to the CCEMF could have been achieved with a $15 per-ton-sequestered payment from the CCEMC without sacrificing the integrity of emissions reduction accounting within the offset program.

I hope that we will see a much more lengthy explanation of the decision to use a multiple-credit approach to provide short-term funding to CCS.  The model may only be implemented for the short term, but the impact on the credibility of our offset regime could last much longer.