News has hit recently that the Federal government will be requiring provinces to institute a carbon tax (or some form of equivalent) equal to $10 per tonne in 2018 and $50 by 2022. This news seemed to be applauded outright by no one as the environmentalists don’t view it as going far enough while the provinces seem to see it as a change being forced upon them without consultation and potentially harmful to the economy. Without getting into the politics of the issue, we wanted to see who is likely to be most impacted by this tax. While the floor price in 2018 will only be $10, we are going to use the $50 target for 2022, since markets look to the future, in an attempt to see the costs involved here.
Provincial level carbon tax impact:
As should be no surprise, Alberta looks to pay the largest absolute cost here with 273.8 megatonnes of carbon dioxide equivalent (GHG) being emitted. Ontario is next in line at 170.2 with Quebec following at 82.7. On a dollar basis, by 2022, this would result in a cost of $13.7 billion, $8.5 billion and $4.1 billion respectively. These numbers, however, are so large that it becomes a bit tough to conceptualize. If we take a per capita point of view, the results are a bit more interesting and highlight why the energy provinces are less than happy about this. Using 2014 GHG emission numbers and 2014 populations, Alberta has the second highest per capita cost at $3,332. Interestingly, Saskatchewan comes in first at $3,366. The next largest cost per capita is a fraction with the Northwest Territories at $1,708 and Newfoundland at $1,003. The average for the country is $1,030. So it is pretty clear here that Alberta and Saskatchewan are the most effected on a per capita basis. Quebec gets honourable mention here for having the third highest absolute cost but third lowest per capita cost.
Industry level carbon tax impact:
The industries that are most impacted by these changes are the oil and gas industry and transportation, with a 2020 cost (based on 2014 emissions) of $9.6 billion and $8.6 billion respectively. Within the oil and gas sector, Natural Gas is the largest emitter, making up just under 30% of total O&G emissions. Conventional oil follows at 18.5%. Within the transportation industry, freight trucks make up 32% of emissions while passenger cars and trucks make up 50% of emissions. The industries that investors can expect to be the most impacted by any carbon tax look to be oil and gas and transportation, specifically the natural gas sector and passenger vehicles.
Company level carbon tax impact:
The usual suspects make the list here but TransAlta tops the list at a potential cost of $1.3 billion (TransAlta does include TA Renewables) a year with Suncor, Imperial Oil and Capital Power following at $896 million, $534 million and $466 million respectively. Capital Power could find this charge onerous considering the debt load and transition phase the company is going through as they attempt to phase out coal power. The data is not perfect, as we had to sift through various companies subsidiary names to come to a total company cost, so there may be some amounts missed, but as a minimum cost for the companies, the data should be accurate. Sign in or join to get the complete list of Canadian public companies that are impacted by the Carbon tax. When looking at the list, we think the absolute cost matters less than the cost relative to the company’s size, leverage, cash flows and overall financial flexibility. It is also important to note that a lot of uncertainty still exists around this whole issue so we would not view the cost per company numbers as gospel, but rather as a ballpark number on potential annual cost to a company.
Our take on the carbon tax:
Environmentally, it is hard to argue a move like this as being a ‘bad’ thing but it is hard not to feel a bit of sympathy for the energy patch getting kicked while it is down. With energy being such a big part of Canada’s strength over the last decade, contributing to the whole country’s growth to some degree, a tax that effects these same companies and provinces in multiples more than others seems to be a bit of a punishment for doing good by the country in the past. But alas, there is unlikely to be any solution that works for everyone. What will be a key is how the tax revenues are spent. If they are simply rebated to the citizens or companies, it is hard to envision this being anything other than an inflationary event. If the funds are devoted to or encourage alternative energy use and research, there could be some real net positive impact here.
Sources:
https://www.ec.gc.ca/indicateurs-indicators/default.asp?lang=en&n=F60DB708-1
http://maps-cartes.ec.gc.ca/indicators-indicateurs/TableView.aspx?ID=1&lang=en
https://www.ec.gc.ca/indicateurs-indicators/default.asp?lang=en&n=18F3BB9C-1