Coal could be the real winner under federal carbon tax, new report suggests

The federal carbon tax could favour coal-fired power plants over clean sources like wind and solar in its approach to industrial emissions, a new report says, potentially undermining a central aim of the Liberal government’s policy.

Environment Minister Catherine McKenna released a regulatory proposal in December 2018 that provided details on the heavy emitters portion of the carbon tax, including how levies would be applied to electricity generators. Independent think-tank The C.D. Howe Institute reviewed the proposal and found it would actually give a leg up to higher-intensity emissions like coal and “diminish” investment in renewables, due to a decision to raise a critical threshold on certain producers.

“This is indisputably a carve-out for coal that departs from the principle of an economy-wide carbon price,” said Grant Bishop, who wrote a report on the institute’s findings published Tuesday.

The report could add weight to claims that the federal carbon tax introduced by Prime Minister Justin Trudeau does little to target high-intensity industrial emissions. It could also have an impact on coal-related emissions in Alberta, which still depends heavily on the fuel source to generate power.

The federal carbon tax applies in provinces that do not have their own emissions reduction policies in place — currently Saskatchewan, Manitoba, Ontario and New Brunswick. Premier-designate Jason Kenney has said he will repeal Alberta’s carbon tax after he takes office, which would mean the federal tax will also apply in that province.

The federal carbon tax is broken into two parts: an economy-wide tax on fuels like gasoline and diesel, and a heavy emitters tax, or output-based pricing system (OBPS), that will be applied to industrial polluters.

In December, McKenna released a regulatory proposal for the OBPS that would force coal-fired facilities to pay levies based on a threshold of 800 tonnes per gigawatt hour (GWh), compared with a threshold of 370 tonnes per GWh for natural gas. That higher target effectively provides more space for coal providers to sidestep levies, giving them a comparative advantage over natural gas or even emissions-free energy sources like hydro, wind and solar.

Minister of Environment and Climate Change Catherine McKenna is seen speaking at Laurentian University in Sudbury, Ont., on March 7, 2019.

“The result of differentiating the benchmark is that a more GHG-intensive coal-fired power plant may pay less for each tonne of GHG emissions than a natural-gas fired power plant,” Bishop wrote in the report.

Ottawa has yet to release its final regulations on the OBPS, though it says it will be applied retroactively as of January 2019. The economy-wide fuel tax, meanwhile, was introduced April 1, 2019.

The economy-wide aspect of the carbon tax has been used by some provincial leaders to attack the federal government, and was a key issue for Kenney’s United Conservative Party in last week’s Alberta election. Ontario and Saskatchewan have already launched lawsuits against the feds on the constitutionality of the carbon tax, which observers expect to reach the Supreme Court of Canada.

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