While there would be clear benefits from the development of major LNG plants in British Columbia for workers and businesses directly involved in project construction, operation and upstream gas industry activity, and for First Nations and communities with business partnerships or benefit agreements, the net effects for the general public are less certain.
Though originally promoted as a great windfall for taxpayers, LNG development would provide a more modest amount of revenues to government. The recently announced tax concessions, as well as the gas royalty and other concessions previously offered to attract these projects, make clear that there is not a lot of residual value -- resource rent in economic terms -- that government could capture from even the largest of these projects.
The government has estimated that the LNG Canada project in Kitimat would generate $22 billion in tax revenues over 40 years of operation -- some $500 million per year. It is not clear that estimate correctly indicates the incremental net revenues government would in fact receive. The economic impact studies government often relies on to develop these estimates do not consider the taxes the government would have received in any event (for example from the workers employed elsewhere or the gas shipped to other markets). And almost certainly this tax estimate does not indicate the net gain after deducting the incremental expenses that government would face, whether for the project itself or for the infrastructure and services required as a result of any project-induced influx of workers and families.
In any event, though there would be some benefit for taxpayers, it would not be a bonanza. And against that benefit one has to recognize the potential for significant costs. There are potential financial losses that BC Hydro and its customers would face as a result of the government's offer to supply electricity to LNG projects at the standard industrial tariff. And there are the costs associated with project-related greenhouse gas (GHG) emissions -- estimated at some 4 million tonnes of CO2e per year for LNG Canada operations and upstream gas production.
There would be potential losses for BC Hydro because the standard industrial tariff is less than its estimated cost of new supply. The current industrial rate for energy averages $46/MWh. However BC Hydro's estimated cost of new supply delivered to industrial customers is $92/MWh, as indicated in the BCUC-approved two-step industrial customer tariff with its second tier rate intended to signal the long run marginal cost of new supply.
In the first five to ten years of operation of a new LNG plant and with Site C coming onstream, BC Hydro would not have to develop new sources of supply. It would be able to use the surplus it would otherwise sell in export markets to supply the plant. For that period of time there would be no loss -- in fact there could be a small gain. However, even without any use of electricity for the liquefaction process itself, the ancillary electricity requirements for a major plant like LNG Canada are very large -- they could amount to some 500 to 1000 GWh per year (up to one fifth the output of Site C). With growing provincial requirements absorbing the surplus, BC Hydro would sooner or later have to develop new supply to meet the LNG load. And it would do so at some considerable financial loss.
The difference between the industrial rate and the cost of new supply is likely to fall, both as a result of rising rates and falling costs of new supply. But the discrepancy could still be considerable, resulting in losses of tens of millions of dollars per year.
With respect to GHGs, it is not clear to what extent LNG plants in British Columbia would contribute to an increase in total global emissions. There would be a significant increase in emissions in British Columbia, but those emissions would be offset by the reduction or avoidance of emissions elsewhere. Unless British Columbia's supply of LNG were to affect the world price and demand for natural gas, LNG from B.C. would in all likelihood displace the supply of gas from other sources. The net impact on global emissions would therefore depend on the carbon intensity of B.C. supply as compared to the displaced sources. Independent experts would be required to develop specific estimates but suffice to say the net impact, positive or negative, would likely be relatively small.
The cost of the GHG emissions from new LNG plants would not, therefore, derive from the social costs of global warming. If the plants' contribution to global emissions is small, so too would its contribution to global warming. Nonetheless, there would still be significant costs for British Columbians if the province were to maintain fixed total provincial emission reduction targets without any recognition and credit for the impact of B.C. LNG sales on emissions elsewhere.
If, as the Premier seemed to suggest, British Columbians would have to tighten their belt -- further reduce their own emissions -- to offset the GHGs from a new plant, the costs would be very high. One way to gauge this cost for LNG Canada is to consider what level of carbon tax would be needed to reduce GHG emissions by 4 million tonnes per year over and above the reductions British Columbians were already going to have to make in accordance with provincial emission targets. Many experts suggest that carbon tax would have to be over $100/tonne, possibly $200/tonne. On that basis, the cost to British Columbians to accommodate (make room) for the GHG emissions from LNG Canada would be over $400 million, possibly $800 million per year.
The government, of course, could choose to achieve those GHG reductions with regulations and other measures as opposed to a markedly higher carbon tax. But that wouldn't change the magnitude of the cost borne by British Columbians, just the manner and transparency of achieving it.
As stated at the outset, there would be clear benefits of LNG development for those directly involved. But if the government wants the support of the general public it must recognize and address the significant costs it could entail.
With respect to electricity, the government should limit the offer of BC Hydro supply at the standard industrial rate to a period of 5 to 10 years after which the plant would have to develop or acquire from independent power producers its own new sources of supply, or enter into a contract with BC Hydro for continued supply at prices that reflect the costs BC Hydro would face to make that supply available. BC Hydro and its customers should be protected from the losses it would otherwise face.
And with respect to GHGs, British Columbia should develop a new framework for establishing emission reduction targets. We need targets that are based on our net contribution to global emissions, not simply the amount of emissions that take place in British Columbia. That requires establishing emission reduction targets that take into account the impact of our exports on GHG emissions elsewhere. Otherwise we will either be imposing major costs on British Columbians to offset the carbon content of our exports, regardless of the impact of those exports on carbon emissions elsewhere. Or we will feel compelled to forego major projects in order to avoid their GHG emissions in B.C. even though that will simply result in greater emissions elsewhere.
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