Terence corcoran soaring gas prices blow a hole in canada’s carbon-tax climate crusade electricity sources uk


The politics of fossil fuels just got a lot more treacherous for politicians who make a living playing games of chicken with market forces and prices. For example, now that the price of oil is creeping back up to US$70 a barrel, sending gasoline to levels that promote consumer outrage at the pumps, voter enthusiasm for rising carbon taxes is unlikely to run high.

At stake is one of the key issues that divide Prime Minister Justin Trudeau’s Liberal party and Opposition leader Andrew Scheer’s Conservative party. If the Liberals insist on imposing carbon taxes on top of a market-driven increase in gasoline prices — a tax increase Scheer opposes — there could be trouble ahead.

That’s half the story in Canada. The other half concerns the implications of rising oil and gasoline prices for the country’s Constitution-busting pipeline crisis. British Columbia voters, now facing gas at $1.60 a litre, might become more supportive of a Trans Mountain pipeline when they realize that it has the potential to bring increased gasoline supply to their province — and lower prices.

The two halves are the combined result of an intellectual standoff between conflicting economic ideas about how markets work and clashing policy objectives. There are proponents who favour more taxes and higher prices to reduce demand to save the planet from carbon emissions. Others favour pipelines and argue that higher prices provide a clear market signal to build a pipeline that will increase supply and lower prices.

On the carbon-tax issue, the debate is over how much Canadians are willing to pay for gasoline to reach the unreachable targets set in the Paris climate agreement. In Toronto, the price of gasoline this week is up 30 per cent to $1.30 from average levels in 2016. Are voters ready for more?

Special circumstances make B.C. an interesting lab test for Canadian energy policy and carbon-tax policy. It gets much of its gasoline from the United States, where prices are rising with world markets and where refineries are going through seasonal refurbishments that reduce supply.

B.C. currently also has a $35-a-tonne carbon tax in place, which works out to about eight cents a litre. Premier John Horgan’s NDP government, following Ottawa’s plan, will raise the carbon tax to $50 a tonne, about 11 cents a litre, by 2021.

But that tax is insignificant compared with the recent increase in Vancouver gasoline prices. A litre of gas in Vancouver averaged $1.10 during the spring of 2016. At $1.60 today, the 50-cent increase is equivalent to imposing another carbon tax of about $160 per tonne. In other words, Vancouver drivers are already paying a market price for gasoline that includes the rough equivalent of a $200-per-tonne carbon tax relative to 2016.

Now comes the carbon-tax policy test. A carbon tax is all the rage within Canada’s economic and media intelligentsia, so maybe they can explain how all this works. The claim is that a tax on carbon emissions is like a free-market price signal to consumers to stop using fossil fuel products such as gasoline. With gas prices already reflecting a carbon tax of up to $200 per tonne, the job would seem to be done.

But it is far from clear this new high price will promote the kind of reduction in consumption promised by carbon-tax theorists. Much evidence around the world suggests that drivers will continue to drive their SUVs with high gas prices, mainly because automobiles are such an important, convenient, enjoyable, liberating and essential form of transportation.

While the carbon tax is designed to skew the market for gasoline with artificially higher prices, pipelines are designed to do the opposite — to increase supply and keep prices down — which is exactly what Kinder Morgan’s Trans Mountain pipeline is designed to accomplish.

Dan McTeague, resident gasoline tracker at GasBuddy, points out that part of the Trans Mountain expansion contains two elements with a combined capacity of 890,000 barrels a day. The first element is a new Line 2 with a capacity of about 540,000 barrels of diluted bitumen a day. But Line 1 would be expanded from 300,000 to 350,000 barrels a day, and would be capable of shipping refined product, including gasoline, from low-cost Edmonton to consumers in B.C.

It is also possible, if not likely, that the oilsands production moving through the new Line 2 will not end up in China but instead will mostly find its way into the U.S. Rather than load tankers heading to China, Kinder Morgan might find it more advantageous to load tankers heading for the U.S. West Coast, where there is a growing demand for heavier oil in refineries that are not designed for the current surge in lighter shale oil.