Napoleon, carbon pricing and the cost of uncertainty in Canada

What would a $30/ton price on carbon in 2016 mean for Canada’s fossil fuel exports, and for the national economy? The answer: serious changes. 

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If Canadian energy firms could not produce receipts for carbon taxes paid on the carbon produced in the extraction and production process, then a tax would be levied that assumes it was produced in the most carbon-intensive way (which is correct in the case of oil-sands).

This would provide strong incentives for Canadian firms to reduce the carbon intensity of their production in order to access Chinese markets.

France has long proposed implementing border carbon taxation but has backed down under pressure from trade partners. As one of the world’s largest economies with a deep knowledge of the WTO regulatory system, and the lawyers to back up their approach, China would have no such trouble.

The stars are aligned for China to move ahead with decarbonising its economy and competing on the global renewable energy stage. The question for Canada is whether our own economy will survive the transition to a low-carbon world. 

Managing economic uncertainty: hedging lessons for Ottawa

The question to ask ourselves is: what would a $30/ton price on carbon in 2016 mean for Canada’s fossil fuel exports, and for the national economy? The answer is: serious changes. The largest energy companies continue to operate as if the world existed in a climate-policy vacuum. The fact that our current federal and western provincial governments operate as facilitators to an out-of-date and non-competitive oil and gas system means that it could be a rude awakening for the national economy.

International oil market analysts indicate that nine out of 10 barrels of oil sands production would be uneconomic at lower oil prices. Investors should take note: Chinese buyers of Canadian oil sands assets are already feeling buyer’s remorse based on the most recent fall in oil prices.

With a carbon tax on fossil fuel imports to markets like China, Canadian producers would no longer be able to compete with a growing renewable energy sector and lower-cost producers in Russia and Central Asia, and the mother of low-cost oil producers, Saudi Arabia.

Given the likelihood of rapid Chinese action on carbon repricing, are Canadian corporate leaders adequately prepared for the future? Considering that there is no national climate policy to speak of, and that Canada’s energy majors have actively undermined any attempts to build a domestic or international carbon pricing regime, prudent investors should be worried.

Even the most forward-thinking of Canadian energy players refers to a theoretical $68/ton shadow price on carbon by 2040 (compared with current estimates that a realistic price today would be $50/ton). This is willful blindness to the reality of policy progress in China and other jurisdictions.  The energy sector is not ready for Chinese climate policy action that could have cascading impacts on commodity pricing in other key markets for Canadian producers, including the United States.

Uncertainty, carbon re-pricing risk and Canadian economic stability

In response to carbon re-pricing risk, central bankers in countries like England are already examining the readiness of their economies for a low carbon future. If Canada wishes to remain a globally competitive economy, and to protect investors from carbon re-pricing risks, then investment industry leaders, including pension funds, need to carry out similar stress-testing on the implications of carbon re-pricing on the share values of Canada’s largest energy companies.   

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