Market News

 November 23, 2011
Alberta's carbon-cutting programs failing, watchdog reports

 Alberta is failing to properly police energy and agricultural greenhouse gas reductions, raising questions about the legitimacy of a carbon-cutting system the province regularly touts as evidence of environmental good behaviour.

A new audit has found problems with verifying farmers' claims for changes to agricultural practices, and the way oil sands companies measure emissions from their large effluent lakes, called "tailings ponds."

Not one of the agricultural credits it checked could be sufficiently verified, Alberta's Auditor-General said in a report. It also pointed a finger at Suncor Energy Inc. (SU-T30.910.361.18%), which has submitted tailings pond-emissions estimates that don't include carbon dioxide at all, and are based on old measurements at a pond that no longer exists.

The Alberta government called the problems growing pains, and says it is improving a relatively new program that is creating real green gains. The first of several changes has been drafted, and the province is considering ending some hard-to-verify agricultural credits.

But the report comes at a critical time for a province battling to persuade the world that its oil sands aren't dirty, and that it is committed to improving its performance. It also points to the difficulty in creating and trading legitimate emissions credits, even as other parts of North America -- in particular the U.S. -- abandon the idea in favour of other carbon-reduction strategies.

"Alberta's pushing the envelope. It's out in front and so I think one has to recognize that there are going to be some hiccups in the process," said Robert Mansell, academic director of the University of Calgary's school of public policy.

But the international spotlight on Alberta means it "really can't afford hiccups," he said. "If this goes off track, obviously the reputational cost is great. Because Alberta has so much skin in the game."

The province may also be paying the price for crafting policy for popular gain. The decision to allow farmers to generate credits, for example, was a political one, made by the government to build support for the carbon-market plan.

"The Alberta regulatory system is moving to a higher level of assurance next year," said Christine Schuh, who leads PricewaterhouseCoopers LLP's climate services practice in Calgary. "So there is an implicit understanding that the level of rigour does have to increase, and that they are doing something about it. But some of the issues are not about rigour but about policy decisions."

The primary issue identified by the auditor-general involves the trade of "tillage credits," which have formed more than 40 per cent of the offset market. Such credits are granted to farmers who switch agricultural practices to "no-till" or "reduced-till" work -- which means less disturbance to the land, resulting in fewer emissions. The credits can be purchased by anyone, including oil sands companies and electrical generators.

The Alberta system allowed farmers to gain credit for any no-till switch made dating back to 2002. That has created numerous problems with obtaining suitable records. Of all the tillage credit records examined by the auditor-general, "none of the evidence ... collected to verify individual offset claims was sufficient to prove" no-till or reduced-till farming.

"The evidence we saw didn't support any conclusion that it was being done," said Ed Ryan, an assistant auditor-general in Alberta.

The other problem involved measuring so-called "fugitive emissions" from tailings ponds. Three oil sands operators used three different methods to measuring them. Suncor used a 2001 study at a tailings pond that no longer exists to estimate its 2009 emissions. Suncor also didn't include carbon dioxide emissions in its estimate. That's a problem, because with other oil sands operators, "those emissions represented roughly 90 per cent of all fugitive emissions associated with the tailings ponds."

Suncor declined to comment on Wednesday.

Alberta Environment, however, says the auditor-general's report is "beating up" on problems that have already been identified, with fixes on the way. The tailings ponds measurements, for example, may be different, but "they're all legitimate," and based on science, said Bob Savage, acting director for the province's Climate Change Secretariat.

New oil sands guidelines are due next year. A draft document fixing some of the problems with tillage has already been posted. Alberta Environment does review carbon offsets, Mr. Savage pointed out. All credits must be verified by an independent third party, whose work is then further examined by a government-hired auditor.

In tillage, nine companies selling aggregated credits have all been audited; one, four times.

"We're pretty confident that the tillage system is working, and we're tweaking and enhancing the system to address the risks that are there," Mr. Savage said.

Still, he acknowledged the tillage credits may need to be ended. The new, draft policy does away with all historical credits, meaning only future tillage changes can be eligible. And Alberta is considering ending those credits altogether. If the department concludes that no-till agriculture has become standard practice, it won't allow credits -- and that decision is looming, he said.

"We're getting close to the point where we say it's a business as usual practice," Mr. Savage said.