CLIMBING COSTS for forest industry

Going by B.C.’s experience with a provincial carbon tax, the Canadian forest industry is looking at higher costs with a national carbon tax proposed by the Trudeau government on the way.

By Tony Kryzanowski

In recent years, the Canadian forest industry has two new words in its vocabulary; they are either ‘carbon levy’ or ‘carbon tax’, depending on who’s speaking.

Either way, based on B.C.’s experience to date since it introduced its carbon ‘whatever’ in 2008, it looks as if a new federal carbon tax will have a negative impact on the cost of business and the forest industry’s contribution to the country’s gross domestic product.

While B.C. and Alberta already have a carbon tax, the federal government will launch its own carbon tax scheme next year and it will eventually become the national standard.

British Columbia and Alberta already have a $30 per tonne levy on greenhouse gas (GHG) emissions, but all of Canada will pay $50 per tonne by 2022 based on the federal government’s plan to take the reins with a national program starting in 2018. It starts at $10 per tonne in 2018 and escalates by $10 per year till 2022.

The carbon tax money collected in each province or territory will be returned to them for use in GHG reduction projects and programs. The national carbon tax will apply in all jurisdictions not adopting an alternative cap-and-trade GHG reduction program, which is the approach taken by Ontario and Quebec.

Taking the cost of fuel as just one example, the current $30 per tonne carbon tax in B.C. has added 6.67 cents per litre to the cost of gasoline and 7.67 cents per litre to the cost of diesel.

Some groups are getting a break, depending on the jurisdiction. B.C. has exempted certain sectors of its agriculture industry and Alberta has included a small business tax reduction to counteract how much more these businesses will pay in extra carbon taxes.

The selling point for governments, though, is that the carbon tax is supposed to be revenue neutral, with funds collected directed toward financing GHG reduction schemes, countered with certain tax reductions and direct rebates targeted at those identified as needing relief, such as low income wage earners..

What the carbon tax hasn’t impacted in Alberta is slash burning. The government has no plans to include this activity as part of its carbon levy.

“In terms of the question about pile burning, the carbon levy will not apply, because this is not considered a fuel,” Oneil Carlier, Alberta Minister for Agriculture and Forestry told the Logging and Sawmilling Journal. “Our government encourages timely burning of logging slash piles as a way to reduce the amount of potentially large amounts of trees on the ground which could fuel wildfires.”

One fact is clear: higher income earners and most bigger businesses, including forest companies, loggers, and log haul contractors, will pay the tax and it will cost more to do business.

According to Susan Yurkovich, President and CEO of B.C.’s Council of Forest Industries (COFI), what forest companies and those supplying them can expect once a national carbon tax is in place is a period of adjustment, recognizing that there are tradeoffs, and there is a desire by governments to address the climate change challenge.

What COFI is particularly pleased about is that there will be a national carbon tax introduced to level the competitive playing field for B.C.’s forest industry.

“When British Columbia was the only one with a carbon tax, it was a relative competitive disadvantage for us,” says Yurkovich. “But if everyone operating has a carbon tax, then everyone is playing with the same set of rules.”

She adds that because the forest industry is very much dependent on trade, “then it’s all about which other jurisdictions are you competing against on the globe, and what’s their circumstance.”

For Canada’s forest industry, the cost of fossil-fuel based power consumption, lumber drying using fossil fuels like natural gas or heating oil, operating yard equipment, producing heat using fossil fuels for pulp and paper processes, production and transportation of tree seedlings, logging, and log transportation will increase, if they haven’t already.

“We have already begun to see an impact, especially in terms of suppliers and contractors beginning to pass along the cost,” says Brock Mulligan, spokesman for the Alberta Forest Products Association (AFPA).

No one will escape, but the AFPA expects that certain sectors will be harder hit than others.

“Parts of the sector that are energy intensive, like mechanical pulp mills, could be especially affected,” says Mulligan, pointing out that it all seems a little unfair considering that, “our sector has already taken significant steps to reduce our carbon footprint”. Canadian pulp and paper mills have reduced GHG emissions by 66 per cent since 1990. Looking ahead, forest companies have pledged to remove 30 megatonnes of carbon dioxide from the atmosphere by 2030 through the Forest Products Association of Canada’s “30 by 30 Challenge”.

Yurkovich says that COFI has heard from its energy intensive and trade exposed members about how the carbon tax is putting them at a competitive disadvantage, and those concerns have been taken to government.

“For those businesses who are going to pay high carbon taxes and are trade exposed, where they are dealing in commodity products that are priced in the global marketplace, there has to be consideration of that,” says Yurkovich. “Otherwise you can really disadvantage your industry.”

The B.C. example is the best predictor of the path going forward for Canada related to the impact on the forest industry of a carbon tax. While the B.C. government is keen to tout noticeable outcomes since the carbon tax implementation, there is scant research showing exactly what impact the carbon tax has had on the province’s gross domestic product and the cost to businesses.

The government’s ace in the hole is that introduction of the carbon tax has worked to reduce GHG emissions in the province. According to the David Suzuki Foundation, economic modeling it chose to highlight concluded that, “the B.C. carbon tax will reduce B.C.’s emissions by three million tonnes annually by 2020.” Although they add that it, “represents just eight per cent of the effort required to reach B.C.’s goal of reducing greenhouse gas emissions 33 per cent below 2007 levels by 2020.”

Speaking of economic modeling, University of Ottawa Masters degree candidate Seher Zubair put his own modeling skills to work in a paper to the university’s Department of Economics. It’s called, “Impact of the B.C. Carbon Tax on Sectoral GDP and Emissions.” It was submitted at the end of 2013. His model reinforces the principle that what goes up, must come down. In this case, as B.C. forestry costs have gone up with implementation of the carbon tax, its contribution to the province’s overall GDP has gone down.

Zubair concluded that forestry and logging reduced its contribution to the province’s GDP by $396 million up to that point. That was an 11 per cent reduction. Zubair noted that a number of sectors experienced a decline in their contribution to GDP with the introduction of the carbon tax, forestry being one of them.

“The factors behind the decline experienced by these sectors could stem from reduced competitiveness and profitability as costs of production rises due to higher energy prices,” he concluded.

B.C.’s business community is well aware of the negative impact of the carbon tax and escalating power costs, so much so that according to the publication, Business BC, a consortium of eight mayors, Unifor, the Mining Association of British Columbia and a number of small business were lobbying the provincial government to have the 7 percent provincial sales tax (PST) on power sales to industry scrapped in the provincial budget. The B.C. government listened, and announced plans to phase out the PST on electricity sales, starting in October 2017, when it plans to reduce the PST on power sales from 7 per cent to 3.5 per cent.

The report noted that three pulp and paper mills closed in the province in 2015, in Chetwynd, Port Mellon and Port Alice, and that companies like Catalyst Paper pay $11 million annually just in PST on their power bills. Power makes up 30 per cent of their costs.

The problem, they point out, is that if pulp and paper mills start to shut down, this has a ripple effected on the sawmilling sector, as they lose the outlet and income from the sale of their wood chips. This could result in sawmill closures and even more job loss. And as Mulligan pointed out, the forestry sector most likely to feel the biggest impact from the carbon tax are certain types of energy-intensive pulp and paper mills.

It seems that the forestry sector understands the motivation behind the carbon tax, and while no one likes more taxes, they are prepared to adjust. Alberta’s key forest industry players recently met with Minister Oneil Carlier and Premier Rachel Notley, prior to her departure on a trade mission to the United States. When asked if industry used the opportunity to express their concerns about the impact of the recently introduced carbon tax, Mulligan responded, “no, this issue did not come up at that meeting.”