The federal government’s discussion of “just transition” legislation early in 2023 met with significant pushback from Alberta. Much of the disagreement owes to different interpretations of what a just transition is. Depending on whom you ask, it’s either an attempt by the federal government to shut down Alberta’s oil and gas sector or it’s a plan to create pathways to employment for oil and gas workers who are losing their jobs due to pressures created far beyond Canada. The former perspective sees an attack on industry, while the latter is looking to reconcile the industry we have today with the need to take action to prepare for a lower-carbon future.
The strongest argument for Alberta to embrace a transition is that we have no choice. This isn’t because the federal government set a net-zero greenhouse gas emissions target for 2050—which can’t be reached without action in Alberta—or even that worsening climate disasters compel us to act. No, we have to change because Alberta’s future as an energy-exporting province hinges on policy created in Washington DC, Beijing, New Delhi and Brussels. It’s here that the trajectory of demand for oil and gas, the key factor influencing the future value of Alberta’s oil and gas industry, is being set.
The pace of change on climate action is accelerating worldwide. While current pledges do too little to limit warming to 1.5°C, the promises made by governments worldwide would see oil demand soon peak before declining sharply. “The International Energy Agency, oil majors like bp and Equinor, and research consultancies like Bloomberg New Energy Finance and Rystad… all indicate that if climate policy action, technological development and economic momentum continue at least at the same pace as has been observed in recent years, oil demand will begin to decline before 2030, and is not projected to recover,” notes a December 2022 Pembina Institute study. A world where technological progress and clean energy deployment goes even faster could see oil demand fall to roughly half of current levels by 2040.
In Alberta one could easily miss this global trend. In early 2022, for example, only some 3 per cent of our personal vehicle sales were fully electric. But the story around the world looks very different. EVs now account for over 20 per cent of sales in China. Even the US, while off to a slower start, is seeing accelerating change, with 6 per cent EV sales in the third quarter of 2022, up from only 2 per cent two years before.
Climate promises worldwide will see demand for oil declining sharply.
This rapid transformation leads to an apparent paradox: the world will continue to demand oil and gas, and Alberta will continue to produce oil and gas, and yet that production won’t power Alberta’s economy and fill government coffers the way it once did. We’re already seeing less reinvestment by oil and gas companies in projects, even when oil prices spike. Capital is instead being returned—at record rates—to shareholders. The change is further reflected in employment. While Alberta job numbers have recovered from the COVID decline, they remain well below the 2014 peak, with companies focusing on efficiency improvements rather than job-intensive production growth.
The global demand for oil has grown for over a century, creating a seemingly unbreakable certainty across the history of the modern use of hydrocarbons. The reversal of this trend over the next decade stands to upend that century of wisdom. It changes everything.
Another pandemic or war resulting in an oil or gas supply crisis could throw the market into disarray. But Alberta can’t focus on short-term volatility and price spikes at the expense of longer-term planning. The issues Alberta faces require solutions to be in place before fundamental changes are felt—from addressing government revenues, to initiating public investment in new industries, to supporting workers and communities in transition, to ensuring companies take care of their environmental liabilities rather than dump them on the public.
Revenues from royalties on non-renewable resources (NRRs)—at least when oil and gas prices are high—have long allowed this province to keep taxes low while providing strong public services. But where some perceive an “Alberta Advantage” others see a nauseating resource roller-coaster. When commodity prices inevitably fall, just like a roller-coaster, Alberta hangs on desperately. The next price rise triggers a recovery in government revenues and a balanced budget. This cycle has repeated itself for decades, with NRRs making up anywhere from 6 per cent to 77 per cent of Alberta government revenues. The last large decline in NRR, in 2015/2016, saw the provincial budget move from a surplus of $1.1-billion to a deficit of $6.4-billion.
The roller-coaster has started back up the hill. Alberta’s August 2022 fiscal update shows the province took in $14.6-billion more in non-renewable resource revenue than it had budgeted for. The government now expects non-renewable resource revenue to comprise some 37 per cent of its revenues, up from 6.5 per cent in 2015/16 or 24 per cent in 2021/22, and much higher than the 22 per cent initially projected for 2022/23. In late November the province said it expected a $12.3-billion surplus for 2022/23.
But what happens when—in the looming era of shrinking oil demand—the ride stops? Alberta companies will likely continue to produce oil for a long time, but as global demand shrinks, the value of the resource will fall. At the same time, oil companies will be attempting to achieve their own net-zero targets, which will increase their costs and reduce their profits.
Governments have no shortage of options when it comes to raising revenue from sources other than non-renewable resources. Long before oil demand was headed into a permanent decline, economists were proposing various options in Alberta such as a sales tax, higher income taxes, higher corporate taxes or property transfer taxes. Each comes with various pros, cons and political dimensions. But another tax stands out for its direct link to the decarbonization challenge—a tax on carbon emissions.
We already raise billions of dollars in government revenues annually by taxing carbon. Alberta taxes emissions from large industrial facilities. A federal tax covers most of the remaining carbon emissions, largely from consumers. The principle of both is straightforward: by taxing carbon, governments can tackle two policy goals at once, creating an incentive to reduce emissions while generating revenue.
Carbon pricing remains a hot-button political issue in Alberta. But the provincial large-emitter tax was introduced by a Conservative government and is almost two decades old. The federal tax is rebated to individuals and families in a lump sum based on the revenue raised in each province. Most Canadians actually get more money back from the rebates than they paid in carbon tax, making the policy progressive. And two federal elections have confirmed broad nationwide support for a consumer-level carbon tax.
Partisanship seems to be a strong predictor of support for carbon pricing, and may be more important than the actual cost of the policy in determining an individual’s level of support. The use the revenues are put toward also affects how much public support a carbon tax attracts.
Oil and gas won’t power our economy and fill government coffers like it once did.
In an economy undergoing transition, the role of government is more important than ever. This goes beyond simply fixing market failures to shaping and creating markets. In 2022, for example, the US government’s Inflation Reduction Act encouraged climate action through far-reaching industrial policy.
But we don’t have to look outside Canada or even outside this province for examples. The development of steam-assisted gravity drainage (SAGD) opened up the largest growth so far in Alberta’s oil sands. This breakthough technology came via considerable investment by the provincial and federal governments. Peter Lougheed’s PC government gave the equivalent of $1.4-billion (in 2019 dollars) to the Alberta Oil Sands Technology and Research Authority (AOSTRA) to develop and prove the technology. The early-stage deployment of SAGD unlocked development and economic growth in this province—a lesson for the government to follow again today.
Large government investments come with risk. The Lougheed and Getty governments were sometimes criticized for unduly influencing public investment decisions, leading to the occasional disaster (e.g., over half a billion dollars lost on NovaTel). Today, Alberta Innovates, a Crown corporation tasked with funding the province’s research and innovation priorities, makes investment decisions at arm’s length from government.
Alberta must walk a fine line, leveraging existing capabilities and expertise in the province while also looking to new and disruptive opportunities within the broader energy sector and beyond. It’s risky to focus too closely on the existing oil and gas resource or to attempt to manage risks that come from other governments’ decisions, as the Kenney government learned the hard way in 2021 after spending $1.3-billion on Keystone XL, a pipeline subsequently cancelled by the US government.
Technologies such as carbon capture and storage (CCS) and hydrogen produced from gas certainly might play a role in a net-zero global energy system. Alberta has already committed $1.2-billion through 2025 to two commercial-scale CCS projects. But our government should also be wary of overinvesting in technologies to decarbonize oil and gas production. Public money shouldn’t replace funding from investors and companies when a project’s economics justify private investment. Indeed, our provincial carbon tax is supposed to be creating an incentive for companies to decarbonize without using public money. Instead, the government should work to understand the barriers to investment, differentiating between concerns over a lack of policy certainty and cases where companies simply want subsidies.
Using future revenues to pay for cleanup obligations looks like a pyramid scheme.
While change can create opportunities for Alberta as a whole, our provincial government has a responsibility to support the workers and fossil-fuel-dependent communities that face a larger share of the burden during a transition. This could be a rural community where a junior oil or gas company doesn’t reinvest, or an oil sands company automating operations with self-driving ore-hauling trucks, in either case cutting jobs. True “just transition” policies go even further, creating new opportunities for workers and communities that have historically been excluded from economic opportunities.
Simply injecting money into the economy shouldn’t be the goal. The role of the government should be to support workers and communities, not private companies and investors who have chosen to take on risks of change within markets. Supports should include retraining/re-employment with income and benefit supports as needed, as well as pension bridging for people close to retirement. These were elements of Alberta’s successful Coal Workforce Transition Program.
Much like the energy system itself, whole communities will be reshaped by the coming transition. Supports must be flexible enough to adapt to changing circumstances and different community members. For example, some Albertans will require entirely new services such as childcare as well as education and retraining support before they can re-enter the workforce. Providing early access to retraining funds can create smoother transitions. Managing other potentially disruptive social impacts of transitions will be critical. The basic elements of community life—families, social networks, schools, local organizations, even cultural identity—can change as a jurisdiction shifts its economic focus.
Whatever proactive action Alberta takes, a significant bill is waiting to come due: the costs of cleaning up outstanding environmental liabilities generated by oil and gas production across the province. In principle the rules are clear and simple: the companies that chose to develop, sell and profit from Alberta’s oil and gas resources are responsible for cleaning up and safely closing the sites at the end of production, and these costs are a part of the overall economics of production. Reality, however, is more complicated.
The cleanup costs for Alberta’s oil sands, for example, are managed through the Mine Financial Security Program (MFSP), while conventional oil and gas falls under the Liability Management Framework, both enforced by the Alberta Energy Regulator. Both approaches have so far failed to create real security (e.g., cash or other funds such as a letter of credit) against future liabilities. This is due to poor program design that relies too heavily and too optimistically on the future value of the resource and that requires companies to take action too late, when they very well may no longer have the financial ability to do so. The programs also have little transparency on the determination of the costs of existing liabilities. The upshot is that today over half the money in Alberta’s orphan well fund, the vehicle that’s supposed to ensure conventional oil and gas cleanup costs are paid by industry, comes from loans from the federal and provincial government. On the oil sands side the MFSP holds only pennies on the dollar in actual security against the outstanding liabilities—less than $2-billion for a cleanup cost expected to exceed $33-billion. Some estimates put the eventual oil sands cleanup cost in the hundreds of billions of dollars.
We must address these failings without further delay. The story emerging from the US thermal coal industry should serve as a cautionary tale. Coal companies are legally required to restore the land when the mining is complete. But as the value of the US coal market has declined over the past decade, companies aren’t holding up their end of the deal. Instead, they’re transferring assets and mining permits to smaller companies that lack the capital to complete the cleanup. When these companies prove unable to cover their environmental liabilities, the costs—along with outstanding health and pension obligations—fall to the public. Once an industry has gotten to this state, governments and regulators can do little.
The Government of Alberta should heed two important lessons. The first is an underlying design issue that’s incompatible with an industry in transition. As long as a sector is growing, revenue from future projects can pay for the cleanup of projects at the end of their life. However, when large structural change looms—such as a global decline in demand for oil—the use of future revenues to pay for prior obligations looks less like prudent fiscal management and more like a pyramid scheme. It’s critical that we require that actual funds from existing production be available to cover the eventual cleanup costs. At the same time, in order to ensure these funds are sufficient, we need more transparency and third-party verification of liability costs.
The good news is that the volatility that can create high prices in the transition period also creates an opportunity for Alberta to make up for lost time in collecting this security.
The second lesson is in how asset sales and bankruptcies can be used to offload liabilities, ultimately onto the public, even when such liabilities are legally a company’s responsibility and even when that company has funds that could be used to pay for cleanup. To protect the public, these loopholes must be closed.
The current liabilities management system will leave Albertans on the hook for a multi-billion-dollar cleanup that should be paid for by the companies who made the mess. The boom–bust cycle of the oil and gas industry exposed these risks previously, but the current global energy transition risks making this problem unsolvable if our government continues to do nothing.
The challenge before Alberta is no small task: to navigate a massive change to global energy systems and the accompanying volatility, a disruption that—due to the nature of our economy—hits our province particularly hard. Our government can look to its past for policy solutions to deploy today in new ways. But in a period of rapid change a narrow focus on the past can also lead us astray through assumptions that things will continue much as they have (“Please God, let there be another oil boom. I promise not to piss it all away next time”).
Significant cultural and political barriers remain to implementing the solutions Alberta needs. It’s easy to fight policies such as higher carbon taxes with false narratives about their unaffordability, or to resist federal just-transition efforts by misrepresenting their purpose or calling them “extreme environmental[ism].”
Our government must instead create a compelling narrative of a positive future and build coalitions of support. Success in navigating this transition will require confronting the issues of a changing global energy sector head-on and redeploying the province’s resources to meet the challenge, while ensuring everyone is brought along. We simply have no other option.
Sara Hastings-Simon is an assistant professor at the U of C and hosts the Energy vs. Climate podcast.
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