Carbon Pricing and Its Impact on Electricity Prices

April 2013

• It has been suggested that one possible outcome of the US acceptance of the Keystone Pipeline is that Canada (and hopefully the US too) could see a carbon tax sooner rather than later.
• If and when Ontario gets around to having a carbon price, it begs the question as to how it might affect electricity prices.
• Given certain assumptions, for a typical natural gas-fired generating plant a carbon tax similar to BC’s current $30/tonne CO2 would cause natural gas-set prices to rise by at least $11/MWh and so the average Hourly Ontario Energy Price would rise by about $7/MWh.

Carbon pricing has been in the news of late.

In his February 12 State of the Union address, US President Barack Obama urged Congress to pursue a market-based solution to climate change. On March 12, a Climate Change Task Force led by US Representative Henry Waxman and Senator Sheldon Whitehouse released draft legislation that would impose a carbon price on large emitters. The Waxman-Whitehouse “discussion draft” contains initial 2014 “Carbon Pollution Fee” prices of $15-35/tonne and annual escalators of 2-8%. It also references the US Environmental Protection Agency in estimating that the fee would cover 7,000 facilities representing 85-90% of total US emissions.

Closer to home but still with a US tie-in, some observers are suggesting that one result of a possible US acceptance of the Keystone Pipeline is that Canada (and one would hope also the US) could see a carbon tax sooner rather than later.

For Canada, this would be an about-face from what the federal government has preached to date. So far, the national approach has been to ignore the tools most often recommended by economists – cap and trade or carbon taxes – and either ignore the issue altogether or discuss sector-by-sector regulation.  The basic features of these two tools are fairly well known. A carbon tax provides a known cost and unknown emissions outcome, while cap and trade provides a known emissions outcome for the portion of emissions under regulation and theoretically an uncertain cost – though many executions of cap and trade effectively cap the cost.

An example of a cap and trade system is the Greenhouse Gas Reduction Program in Alberta, where emitters of more than 100,000 tonnes of CO2 annually are required to reduce their emissions on an intensity-basis, with the ability to acquire Alberta-origin offsets or pay a $15/tonne of CO2e fee into the Climate Change and Emissions Management Fund. In 2008, Stéphane Dion introduced the ill-fated, carbon tax-centred Green Shift Plan. In 2010, British Columbia introduced a carbon tax that started at $15/tonne and now sits at $30/tonne. In BC, two representative impacts are $0.0667/litre for gasoline and $1.49/GJ for natural gas.

On the subject of carbon pricing and what it’s likely to take for Canada to meet its long-term carbon reduction goals, the National Round Table on the Environment and Economy (NRTEE) was the authority in Canada.  We emphasize ‘was’ because the NRTEE’s funding and work recently came to an end. The NRTEE’s most recent projections of Canadian carbon pricing date back to 2009 but they remain the most authoritative Canadian source. The graph below shows projected emissions and economy-wide carbon prices required to meet Canada’s 2020 and 2050 CO2 reduction targets.

Source:  Achieving 2050: A Carbon Pricing Policy for Canada, NRTEE, April 2009

Of great note are the 2020 value of $100/tonne CO2e and the 2050 value of $300/tonne CO2e (not actually shown on graph). These projected carbon prices are in 2006 Canadian dollars, so bringing those numbers forward to today increases them by about 15%.  As well, the NRTEE recommended an upper carbon price limit of $200/tonne CO2e by 2025 “to contain domestic costs and improve the cost-effectiveness of the carbon pricing policy”, and emphasized that such a price would see Canada fall short of its 2050 emissions reduction target.

(Future) Carbon Tax Impact on Ontario Electricity Prices

So if and when Ontario gets around to having a carbon price, it begs the question as to how it might affect electricity prices.

According to the latest Market Surveillance Panel report covering the period to the end of April 2012, coal and natural gas-fired generation set prices 64% of the time. It’s not unreasonable to assume that once coal is completely retired, natural gas will maintain the same 64% share of price-setting hours. For a typical natural gas-fired generating plant, a carbon tax similar to BC’s current $30/tonne CO2 would cause natural gas-set prices to rise by at least $11/MWh and so the average Hourly Ontario Energy Price would rise by about $7/MWh.

If you would like to know more about how these numbers were derived and – more importantly – what the impact would be on your electricity bill, please contact Aegent (Bruce Sharp by telephone at 416-622-9449, X112 or by e-mail at bsharp@aegent.ca).

Ontario Electricity Carbon Intensity: How Does It Measure Up? Read more »