A new E-Brief by Grant Bishop, associate director of research at the C.D. Howe Institute, says that the federal government’s proposed output-based pricing system for large emitters may have the perverse effect of favouring coal over natural gas in those jurisdictions that currently rely heavily on coal for electric power. The federal output-based pricing system is the second and still-unenacted prong of its carbon pricing backstop.
If Alberta’s new government proceeds with its plan to eliminate the carbon tax and weaken its own output-based pricing system, the federal government has promised that it will impose its carbon pricing backstop on the province, including the federal output-based pricing system. If that happens, Bishop says Alberta may find it cheaper to fire up a coal plant to meet electricity demand than to turn to natural gas. Investment in renewable energy may also suffer.
Under output-based pricing, power plants will pay a carbon price on emissions that exceed a benchmark. Under the proposed federal plan, the benchmark will be fuel-specific. Natural gas plants will pay the carbon price on emissions above 370 tonnes per GWh. But coal plants won’t face a charge until their emissions hit 800 tonnes per GWh. Even though coal is far more carbon-intensive than natural gas, Bishop’s E-Brief shows that in Alberta, the average carbon cost for electricity generation would be lower for coal than for natural gas.
The higher benchmark for coal is intended to protect electricity prices in jurisdictions that are heavily coal-reliant. The federal plan is to lower the coal benchmark over time until 2030, when it will be equivalent to natural gas. Bishop says that protecting electricity prices is a laudable objective, but there are better ways of doing it, such as through rebates directly to consumers.
The big risk, according to Bishop, is that electricity providers will turn to coal rather than to natural gas to meet periods of heavy demand. If coal does show a cost advantage, it will narrow in the years leading to 2030, but it still may affect decisions over that period.
The federal output-based pricing system also does not give output-based credits to zero-emissions electricity generators. According to Bishop, this may tilt investment toward facilities that generate greenhouse gases rather than toward renewable sources. He urges Ottawa to impose a uniform benchmark for all forms of power generation. The principle should be “one benchmark for one product.”