What does a $170/tonne CO2e carbon price mean for electricity prices across Canada?
On December 11th, the Federal Government announced some big news in the world of carbon management and policy: an increase in the price of carbon from 2020's $30/tonne CO2e to $170/tonne CO2e by 2030.
Increases had already been planned for 2021 ($40/tonne CO2e) and 2022 ($50/tonne CO2e) but the new announcement means a steady ratcheting of the price by $15/tonne every year from 2023 onwards, as shown below.
This is a hugely significant policy move which will place Canada at or near the top of global carbon pollution pricing schemes. According to the World Bank, the highest price per tonne CO2e in the world is currently in Sweden, which has a price of $119 USD/tonne CO2e (around $150 CAD/tonne CO2e). By choosing a long-term, market-based approach to pricing pollution, this policy should provide the certainty to unleash a torrent of low-carbon investment and innovation across the economy. Without doubt, the ramifications of this decision will be felt by all businesses and individuals in the country. Much has been made in the media of how this will impact the pump-price of gasoline - but as that's covered elsewhere, let's chat instead about how it will impact the price of electricity.
The price of electricity is important, particularly as electrification is key to many proposed de-carbonization efforts. The cost per kWh plays directly into the economics of low-carbon generation systems such as solar PV and wind power, into electrical energy efficiency systems, such as high efficiency fans, pumps, motors and lighting and into electrified transportation.
Unlike gasoline, electricity is not homogeneous across the country. While BC, Québec and Manitoba have grids that draw most of their power from large-scale hydro, Alberta, Saskatchewan and Nova Scotia still rely heavily on fossil fuels (coal, gas and oil). This means the carbon emissions intensity of electricity is highly variable from province to province - the lowest is Manitoba, at only 1.4 g CO2e/kWh, and the highest is in Nunavut, at 890 g CO2e/kWh.
As shown in the chart below, the impact of a carbon price on electricity is therefore also highly variable. Indeed, it will have almost no impact - less than $0.01/kWh - on electricity prices in BC, MB, ON, QC and NL.
By comparison, by 2030 it will add around $0.15/kWh in NU, $0.13/kWh in NS and $0.12/kWh in AB and SK. This does, of course, assume that the high-emissions grids of these provinces don't change to become cleaner over time, which will not be the case. However, even with the planned retirement of its coal fleet by 2023, AB will still see an increase of around $0.07/kWh.
Complicating matters further is the fact that the cost of electricity itself varies across the country. The chart below shows current energy prices, courtesy of energyhub.org, and what the cost will be in 2030 (assuming no changes other than the added cost of the increased carbon tax).
Taken together this means the impact of this policy may move different provinces in different directions. For example, in provinces such as BC and QC the combination of low-emissions electricity, low (and unaffected) electricity prices and significant increases in gasoline prices means that promotion of Electric Vehicles - and fuel-switching to electrification in general - is likely a sensible approach for both economic and environmental reasons. For provinces such as AB and NS, the case for electrification may not be as strong as the cost differential between gasoline/diesel and electricity will not be as large given that the cost of electricity will also rise significantly over time. However, for these provinces the increasing cost per kWh of electricity will improve the economics of improved electrical energy efficiency and self-generation/storage of power, so we may see comparatively strong increases in activity in these areas of the low-carbon economy.
Assuming that the carbon tax survives both the remaining court challenges and the next Federal election, it is clear that this announcement means a) significant changes to how the economics of clean energy projects are assessed across the country and b) that such assessments will vary considerably from province to province.