Carbon Taxes and Financial Incentives for GHG Emissions Reductions in Alberta’s Oil Sands André Plourde Department of Economics & Faculty of Public Affairs Carleton University Ottawa, Canada 31 st USAEE/IAEE North American Conference Sheraton Austin, Texas 4-7 November 2012

Acknowledgements I wish the thank the Alberta Departments of Energy and of Finance for granting me permission to use some of the information on which this analysis is based. Thanks as well to CERI for copies of some of the studies published by the Institute. All errors and omissions are my responsibility. 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands2

Roadmap Context Key Assumptions Estimated Costs & NPVs Levels & distribution Introducing a Carbon Tax Estimated implications Who pays? Concluding Remarks 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands3

Context [1] Alberta’s sustained economic prosperity rests in no small part on ability to grow bitumen production from province’s oil sands deposits BUT… “concerns” (in Canada & internationally) over associated GHG emissions a key risk IDEA… examine some implications for SAGD development & production of introducing a carbon tax 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands4

Context [2] Computer simulation model Computer simulation model – Key price: US-dollar price of WTI at Cushing – Rules of thumb used to derive Canadian-dollar Alberta prices of bitumen, natural gas, electricity – Key cost assumptions from CERI (2012) – Detailed account of oil sands royalty and tax regime – Carbon tax…real (2012) $(Cdn) 5 to 50 FOCUS… FOCUS… “financial incentives” to producer from carbon tax 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands5

Key Assumptions Stylized SAGD Bitumen-production Facility: Key Assumptions Beginning of construction End of construction First year of production First year of peak production Last year of production Peak production (barrels per day) Total production over life of project (millions of barrels) Total capital expenditures (billions of 2012$) Import content for capital expenditures (percent) Capital expenditures per barrel of daily peak production (thousands of 2012$) Capital expenditures per barrel produced (2012$) at a real (2012) WTI price of $(US) 90 per barrel Bitumen price (per barrel, 2012$) Total operating expenditures (billions of 2012$) Operating expenditures per barrel produced (2012$) Total capital and operating expenditures per barrel produced (2012$) , November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands6

Estimated Total Costs & NPVs 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands7

Distribution of Estimated NPVs 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands8

Carbon Taxes as Estimated Per-barrel Costs 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands9

Estimated Carbon Tax Borne by Producer 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands10

Estimated Share of Carbon Tax Borne by Producer 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands11

Concluding Remarks [1] Overall, estimated increase in per-barrel cost due to introduction of carbon tax… Overall, estimated increase in per-barrel cost due to introduction of carbon tax… – 1% to 10% - for tax rates of $5 to $50 – 46% to 56% of increase “borne” by producer Rest borne by public (mostly Albertans) in form of lower royalty and CIT revenues – Share estimated borne by producer inversely related to assumed WTI price…until about $(US) 95 (almost) Constant at higher prices 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands12

Concluding Remarks [2] Think of these estimated effects as “financial incentives” to producer associated with introduction of carbon tax Think of these estimated effects as “financial incentives” to producer associated with introduction of carbon tax – IDEA… Modelling approach does NOT allow behavioural reaction on part of SAGD producer… In reality, producer would compare estimated effect of tax with cost of abating emissions & either pay tax or reduce emissions, whatever is in producer’s best interest 5 November 2012 / PlourdeCarbon Taxes in Alberta's Oil Sands13