Canada’s Carbon Tax Hike and Strategic Implications for Oil & Gas Firms
In line with promises made during his election campaign, the Canadian Liberal government of Justin Trudeau enacted the Greenhouse Gas Pollution Pricing Act in 2018. This act set a carbon tax that increased from C$20/tCO2e in 2019 to C$50/ tCO2e in 2022 and obliged provinces to either develop similar pricing schemes or follow the federal one. The ante was upped in November 2020, when the government announced that the tax would be hiked by C$15 annually beginning in 2023, reaching C$170/tCO2e in 2030. This move sets Canada on the path towards exceeding its commitment under the Paris Agreement to reduce greenhouse gas emissions by 30% in 2030 compared to 2005.
Firms in the Canadian oil and gas patch have faced significant headwinds since the oil price collapse in mid-2014. Lower commodity prices have been exacerbated by tight takeaway space, lower investment, and higher divestment. The ongoing coronavirus pandemic has also resulted in sharply lower demand for liquid fuels, and calls for the economic recovery to be powered by low-carbon energy. Firms, particularly those in the oilsands, have largely remained resilient with profitability approaching pre-2014 levels, despite commodity prices being 30%-40% lower. Potential breakthrough technologies that could significantly reduce upstream emissions, particularly carbon capture, utilization and storage (CCUS) and its enablement of blue hydrogen, are already proven. A sharply increasing carbon tax may provide the business case for broad-based adoption of these innovations at scale.
Strategic approaches for firms include reducing upstream emissions using technology, offering low-carbon fuels to sustain consumer demand and diversifying revenue streams through the sale of upstream by-products like electricity and CO2. Larger oilsands firms, especially the integrated ones, will put effort into all three areas, but their focus is likely to remain on oilsands development, given the long-life of that resource base. Natural gas players will need to be more tactical, and may adopt the approach taken by European majors of turning their attention to the electricity and hydrogen market. The Canadian oil and gas industry is entering into an uncertain period, where the ability of firms to develop and deploy technological breakthroughs while maintaining focus on operating costs and shareholder returns will be key. The carbon tax hike, while onerous in the short-term, could be the catalyst for anew cycle of investment and profitability, even in a carbon-constrained world.