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Greenhouse Gas Policy in Alberta: conflicting motivations

Brendan McCaffery

March 10, 2014

Alberta is at the crossroads of economic growth and environmental stewardship. The development of the greenhouse gas (GHG) intensive oil sands poses extreme hurdles in combating climate change on provincial, federal and even global levels. As a Canadian I can appreciate the economic role of the oil sands but also realize the shared global importance of reducing GHG emissions to prevent the irreversible damages caused by warming planet.

Around the world governments of all levels are beginning to take steps to reduce GHG emissions in order to help combat global climate change. In this blog post I aim to explore the measures currently being implemented by the Albertan government to help alleviate the direct impact of oil sands production on climate change. First, let us better understand the economic role of the Albertan oil sands. Accounting for 14% of total global oil reserves it is undeniable that the Albertan oil sands will continue to play a role in global energy markets in today’s world of “high oil prices, growing demand, geopolitical tensions, energy security and diminishing conventional reserves”(Charpentier et al. 2009 p.2). As of 2006 the oil sands produced 1.2 billion barrels of crude oil per day and is only forecasted to drastically increase (Charpentier et al. 2009). By 2030 that 1.2 billion barrels per day is expected to increase nearly five times in size to a staggering 5 billion barrels a day and will supply North America with 16% of it’s oil needs (Charpentier et al. 2009). In 2006 the oil sands represented 43% of all Canadian oil and is expected to represent 90% of all Canadian oil by 2025 (Charpentier et al. 2009). Beyond supplying Canada and other trading partners with sources of energy, the oil sands are estimated to have “supported more than 478,000 direct, indirect and induced Canadian jobs in 2012 (3 percent of all jobs in the country) and contributed $91 billion of Canadian gross domestic product (IHS, 2014). These abovementioned statistics clearly portray the importance of the Alberta oil sands to not just the Canadian economy but also global energy markets as a whole, however, as the next section will describe, it does not come without a cost.

The unprecedented levels of investment currently being experienced in Northern Alberta’s oil sands are due the effects of increased demand and the depletion of more conventional sources. As the price of oil increases, so does the feasibility of extracting oil from reserves that have traditionally been labeled as non-viable. It is these same expensive extraction processes that were once deemed too intensive that make the oil sands such heavy GHG polluters. Compared to alternate sources of crude oil, oil sands production requires much higher levels of energy. Some estimates put oil sands extraction at 3.2 to 4.5 times as energy intensive as other extraction processes (Pembina Institute, 2014). Knowing this, it is to no surprise that the oil sands contribute 23 percent to Alberta’s 242 Mt of GHG emissions and 3 to 4 percent of Canada’s entire GHG emissions (Government of Alberta, 2011). It is important to note that these extremely high levels of pollution have not gone unnoticed; citizens, from both Canada and abroad, environmental groups, governments and media attention have made oil sands development an extremely contentious issue.

Even though efficiency improvements have resulted in a 51% reduction in the GHG intensity of oil sands production from 1990 to 2006, these reductions will be offset by the compounding effects of the higher levels of expected expansion as described above (Charpentier et al. 2009). It is clear that government imposed regulation is needed to steer the oil sands in a sustainable direction. Various forms of regulation are available to governments to help reduce emissions, each with their own pros and cons. Currently the Albertan and Federal government has implemented a GHG intensity target for facilities that emit more than 100,000 tonnes of GHG’s which is currently set at 12% (Government of Alberta, 2014). At a first glance this regulation may seem like a straightforward method to reduce provincial GHG levels, however as we delve deeper into the functioning’s of Alberta’s GHG Reduction Program some complications are revealed. First and foremost, as the reduction program only targets emissions intensity, the actual levels of GHG emissions can still increase. Further, under this program firms are able to reduce GHG intensity levels not just by making improvements to their operations, but through the purchase of Alberta-based offset credits, contributions to the Climate Change and Emissions Management Fund and through the purchase of Emission Performance Credits.

The Alberta-based offset credit system allows firms to purchase GHG reductions accomplished by non-regulated parties. In a sense this policy allows for firms across sectors to match marginal costs of abatement. For example a firm with high costs of abatement will be willing to pay a firm with lower costs of abatement for their contributions towards GHG reductions. Offsets can be purchased from a wide variety of sources across numerous sectors, such as changes to tilling practices in agriculture, biofuels, biomass and so forth (Government of Alberta, 2013).

The option to contribute to the Climate Change and Emissions Fund is an attempt by the Government to put a price on GHG emissions. Currently a fee $15 per tonne of emissions can be paid out by firms to help reach their target (Government of Alberta, 2013). The contributions are to be reinvested into the research and development of GHG reducing technologies (Government of Alberta, 2013). Research in carbon capture seems to be the largest receiver of this fund as it has received substantial support from both the Albertan and Federal governments. Compared to the $30 per tonne carbon tax rate being implemented in the neighboring province of BC, it could be easily argued the $15 per tonne contribution does not accurately reflect the damages of GHG emissions felt globally.

Emission Performance Credits work in a very similar to the Alberta-based offset system, except that the emission performance credits are created by regulated firms who have already have achieved their 12% reduction (Government of Alberta, 2013). Firms are able to bank these credits or sell them to firms who have not yet met their obligations. Once again, this is encouraging the equalization of marginal abatement costs across firms.

The economic theory supporting Alberta’s GHG Reduction Program is sound, however I believe there are some serious flaws. Firstly, I believe by targeting the GHG intensity of firms instead of regulating straight GHG emissions Alberta is sidestepping having to reach a well-defined goal. Further, I believe the complicated nature of the program will create severe GHG emission accounting problems. Compared to the universal flat tax rate implemented in BC, the Alberta GHG Reduction Program may be too convoluted to create any observable and meaningful changes. As public opinion continues to turn against Albertan oil sands, I believe it to be imperative Alberta continues to explore for more meaningful ways to do their part in combating climate change.

Reference:

Canadian Association of Petroleum Producers.” CAPP. CAPP, 05 Jun 2012. Web. 11 Mar 2014. <http://www.capp.ca/aboutUs/mediaCentre/NewsReleases/Pages/2012-Oil-Forecast.asp&xgt;.

Charpentier, Alex D., Joule A. Bergerson, and Heather L. MacLean. “Understanding the Canadian oil sands industry’s greenhouse gas emissions.”Environmental Research Letters 4.1 (2009): 014005.

“Canadian Oil Sands INvestments Supports More Than 478 000 Jobs Today; Will Support more than 753 000 by 2025, IHS Study.” IHS. IHS, 11 Feb 2014. Web. 11 Mar 2014. <press.ihs.com>.

“Regulating Greenhouse Gas Emissions.” Environment and Sustainable Resource Development. Government of Alberta. Web. 11 Mar 2014. <environment.alberta.ca/0915.html>.

“Oil Sands 101.” Pembina Institute. Pembina Institute. Web. 11 Mar 2014. <http://www.pembina.org/oil-sands/os101/climate>.

The above time series of my portfolio performance says it all. This past week of trading was clearly my worst week of trading yet. My complaining over my earlier losses of 4-5% were nothing compared to the whopping -19% I am currently sitting at.

I was relatively inactive in trading this week. My tactic was simples I was to keep my 13 short positions in wheat as I was confident the high price of wheat that was seen last week were not sustainable. Unfortunately I was wrong, wheat prices continued to rise until Wednesday evening. Luckily, they have started to lose some value. Hopefully I can gain back these losses by the end of next week and finish our trading game without having lost almost 20% of my starting cash value!

Reading through the other blogs it is clear technical analysis is the superior tactic when it comes to speculating in the commodity futures market, which I think may actually explain why I would never make a good speculator. I decided to pursue a Master’s in Food and Resource economics because of how tangible the agriculture industry is. Predicting the future price of food based on “double shoulders” and “shooting stars” is not something of interest to me. That being said it is clear that tangible events, such as supply shortages are clearly reflected in the futures market, demonstrating the vital role future markets play in many industries in which futures are traded.

Despite beginning week four up 1.93%, a series of unfortunate events brought me down to -3.50%.

Strategy

With the Republican-Democrat debt ceiling stand-off still unresolved I decided it most responsible to take an overall bearish position in the commodities markets.  In the event of an American debt default the effects would be felt across countries, industries and markets. Even though I believe it is unlikely Republicans will continue the fight to the point of a default, I thought even just the possibility of an American default would be reflected in downward trends in the commodity markets. Unfortunately I was not correct.

Corn

I had originally shorted 10 contracts at $4.39 on Monday morning, but a quick rise had me doubt my decision. I shortly thereafter covered my position, at a price of $4.42. I lost $1,375.00 in less than an hour. Not a very impressive statistic. On Tuesday, the price of corn began to decrease again, so I shorted 5 contracts, a position that I am still holding and has resulted in some marginal returns.

Wheat

I did everything wrong with regards to wheat. My bearish sentiment resulted in me selling my long position and shorting a whopping 16 contracts.  Although I could of made a good profit if I had covered my position Friday morning, my short position costed me $1400, as the price jumped 6.5 points over the week.

Soybeans

Of course the one commodity that followed the trend I predicted is the one whose short position I decided to scrap. I covered my short position in soybeans at the high on Thursday. Seems I can’t get a break. If I had kept my short position I really would have enjoyed the decreasing prices seen below on all 11 of my soybean contracts.

Conclusions

Just as the past few weeks, I need to be more confident in my decisions. In all of the commodities I too often flip flop on my decisions based on quick jumps without looking at the daily trends. Perhaps I should start using some technical analysis to protect myself from the ups and downs experienced during the day.

I was curious as to why wheat jumped 6.5 points over the week. Some online sources revealed some new demand springing up this week. It would be interesting to know if the increase in demand for American wheat has anything to do with the American dollar being the weakest in 8 months. Even though a depreciating currency is generally viewed as a negative economic indicator, a week currency can encourage exports of commodities. Perhaps the depreciating currency can be credited with the increase in demand for wheat.

Just as texting while driving may leave you stranded in a ditch, trading commodity futures while completing a master’s degree may leave you in debt. Being three hours behind the market you are trading on doesn’t make things any easier either. Once again, good thing it isn’t real money.

Week three was not a good week. Not only did I lose my week two earnings, I find overall portfolio value down 4.4%. My current open positions are as follows:

Action	Symbol	Description	QTY	Curr.	Price Paid	Last Price	Margin	Day’s Chg	Profit/Loss Local/FX	%
S	ZW/Z3	WHEAT DEC 13	14	USD	6.769643	6.865000	37800.00	-0.022500	6,675.000000	1.41%
C	ZK/X3	SOYBEANS NOV 13	-1	USD	13.107500	12.960000	4050.00	0.102500	737.500000	1.13%

It was an interesting week of trading for me. Trying to balance my other work loads while keeping on top of the markets proved difficult as my flip-flopping from a long to short position on corn implies. Further, my bullish view on wheat came back to get me. I must start selling my long positions when returns are good and not let greed get in the way. Many of my decisions this week were based from online readings, however, unfortunately, many of them proved wrong, or perhaps I did not spend enough time digesting the info before applying it to the markets. I also ran into much difficulty trying to get some early morning trading in. I am confident if I am able to analyze my resources before markets meet midday in Chicago I will drastically be able to improve my portfolio. I also believe if I begin using stop orders I will be able to mitigate some of the problems I have been facing due to the difference in time zones from Chicago. I look forward to trying them out in Week 4!

Week one was a great learning experience. My understanding of agricultural commodity markets has already grown immensely since we began trading. Despite having read and watched countless tutorials on futures trading prior to the MFRE program, it is clear the futures market is something best learned by doing.  Over the past two weeks I have began to develop a rational process when choosing how to position myself in the futures market. My process includes the review of reliable sources and determining their validity by comparing their predictions to daily market trends.

Feeling more confident, I went into week two feeling ready to further my cash exposure to the futures market.

Week 2:

Week 2 started with a review of my ‘go-to’ online resources (see below). In general I was able to conclude the big events of the prior two weeks (USDA Crop Report & the Fed’s decision) were now fully realized into current commodity prices. I was left with the task to determine what factors will be driving this weeks fluctuations.

Wheat

An article published by Agrimoney.com (http://tinyurl.com/kqljlgt)  speculated increases in demand for American origin wheat will limit and potentially reverse the downward trend that was being experienced by wheat prices. This information was enough to justify covering my short and even going long on December wheat futures. As the week progressed my decision to go long proved profitable as further data supported increasing demand for US wheat, encouraging to further my long position by another 5 contracts. Over week two I have been enjoying the slow and steady upward trend experienced by wheat demonstrated below.

(click images to enlarge)

Corn

Unfortunately my successes with wheat did not transpire with corn. Going the hunch that corn may follow the upswing demonstrated by wheat and the , I furthered my existing long position in corn by 13 contracts. To my surprise my hunch was partially correct, on Wednesday, corn experienced a dramatic increase during Wednesday, however, also to my surprise, by the time my order went through, the price of corn was at 4.56/bu, pretty much at the high experienced late Wednesday. Today corn is at 4.53/bu…… Had I placed my order only hours before my corn story would be different. I will be looking out for some new information regarding corn over the weekend so I can reevaluate my position Monday morning.

(click images to enlarge)

Soybeans

I decided to leave my short on soybeans as is. It was a mistake. Soybeans experienced some incredible gains throughout the week. At least I didn’t further my short on soybeans.

(click images to enlarge)

Portfolio Summary

(click images to enlarge)

Conclusions

As mentioned above, I feel my understanding of the commodity markets is growing. That being said, there is absolutely no way I would start investing my own money into trading futures. The difficulty and riskiness of betting on commodity prices explains why investors refer to price swings as bears and bulls rather than bunnies and butterflies. To better my performance next week, I plan to monitor the markets more frequently and earlier in the day in order to take advantage of daily highs and lows.

Resources:

http://www.grainews.ca/

http://www.agrimoney.com/1/commodities/

Although past work experience involved frequent dealings with commodity futures, my current understanding of futures, and how they react to various market events is quite weak.  My previous experience with futures was only to determine the final sales price (price discovery) of a particular commodity. For example, a vessel, which would transport a range from 50,000MT to 90,000MT, of No.1 Canada Western Red Spring would be sold at a per bushel rate over CME Wheat Futures. The final price was determined either before or during loading, depending on the particular contract stipulations. The basis, which would range between $1.50/bu – $2.00/bu was calculated by summing the various costs incurred during the life cycle of a trade, which would include transportation (rail, vessel & truck), documentation, terminal and infrastructure fees, labour and vessel demurrage (overtime), plus/minus a per bushel rate determined by the head office. This rate provided by the head office would reflect the company’s overall position regarding the specific commodity and would have a greater relation to the futures markets. As you can see, returns to the Vancouver trading office were not based on the performance of commodity futures but our ability to keep our costs within the predetermined basis.

I hope the above helped you understand a little more what my past work experience involved and didn’t just confuse you!

Now, onto my first experience trading futures. Using two words I would generalize my first week as bearish and conservative. Knowing I knew almost nothing I decided to limit my potential week one losses by only trading a few contracts. Currently I am short 1 Wheat and 1 Soy and long 1 Corn. My reasoning is mainly based on the latest USDA crop report which in short, confirmed better than expected harvests (http://www.agrimoney.com/marketreport/evening-markets-ags-get-caught-up-in-commodities-retreat–2308.html). This outlook has put downward pressure on Wheat, Soy and Corn, hence my decision to short Wheat, Soy and woops, I went long on corn. My position on corn has put me out $600.00, good thing it isn’t real money. I made the decision to bet against the USDA report because of some speculation regarding the USDA’s outlook on corn (http://www.agrimoney.com/news/usda-overly-optimistic-on-corn-crop-forecasts–6292.html). I am going to hold out on this position for the time being to see if the giants such as Commerzbank prove to be correct.

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