When LNG Canada becomes fully operational this year, the liquefied natural gas (LNG) export facility in Kitimat, B.C., will be one of the largest sources of emissions in the province — but it likely won’t pay a cent for its carbon pollution for two full years.
That’s despite B.C. Premier David Eby’s promise his government will ensure “big polluters pay a carbon price.”
The LNG Canada facility will be powered by gas from the Coastal GasLink pipeline, producing an estimated 2.1 megatonnes of emissions annually. LNG facilities typically produce higher emissions during their start-up phase, which can last up to two years.
An internal government briefing note, obtained by The Narwhal through a freedom of information request, confirms B.C. is offering LNG Canada and other LNG export facilities the two-year grace period under a new carbon-pricing program for industry known as the output-based pricing system.
The briefing note was prepared in July 2024 for the finance, energy and environment ministers in Eby’s previous cabinet. It describes the new pricing system for large industrial operations, which took effect last April.
“All new operations, including LNG operations, will be eligible to participate as a ‘new entrant,’ the briefing note says. “New entrants are not required to pay for their emissions over two years [to] allow their emissions from start-up operations to stabilize over time.”
Before the output-based pricing system took effect, new industrial facilities in B.C. could still get a break on paying for their emissions, but it came in the form of a rebate on their carbon tax costs.
“I think it’s legitimate that these new facilities are going to take time to figure out what their emissions profile is,” Mark Zacharias, executive director of Clean Energy Canada, said in an interview. “When you plug and play new technology, particularly in this LNG space, you just don’t know how well it’s going to work, and you don’t know how long it’s going to take to actually get it to work properly.”
The two-year grace period for LNG export projects drew criticism from a member of the B.C. legislature’s opposition and a spokesperson for a conservation group, who said it will let the LNG industry off the hook for paying for its carbon pollution during the emissions-intensive start-up phase.
“It’s pretty alarming that a massive new fossil fuel industry would be exempt from paying a price on carbon even for a two-year period,” Sven Biggs, Stand.earth’s Canadian oil and gas program director, told The Narwhal.
Green Party MLA Jeremy Valeriote said the BC NDP government is “handing this industry a huge gift.”
“If we want to be competitive and give sweetheart deals to companies, then it should be in renewable energies — it should be in an economy of the future that’s low or no carbon,” Valeriote said in an interview. “We should be ahead of the curve, not falling behind and falling over ourselves to attract an industry that, at some point or another, if we’re serious with climate change, is going to be phased out.”
The two-year exemption applies to industrial operations producing more than 10,000 tonnes of carbon dioxide equivalent annually, although smaller operations can apply to join the program.
LNG Canada, a consortium of five multinational oil and gas corporations, including Shell Canada, will be the first LNG export facility to begin operations in B.C. As the most emissions-intensive LNG facility planned in the province, it also stands to be the biggest beneficiary of the new entrant exemption.
According to the briefing note, the exemption will also be available to the Kitimat-based Cedar LNG export project, Ksi Lisims LNG — a proposed export facility near the Alaska border which is currently undergoing an environmental assessment — and the proposed expansion of FortisBC’s Tilbury LNG facility on the Fraser River in B.C.’s Lower Mainland. The briefing note indicates projected emissions from the Woodfibre LNG export project, in Squamish, B.C., are expected to be lower than the annual threshold for inclusion in the new pricing system.
In a statement in response to questions from The Narwhal, the Energy Ministry confirmed it has so far approved one application for the exemption through new entrant status. The ministry did not say if the exemption is for LNG Canada. Nor did it respond to a request for an interview with Energy Minister Adrian Dix or answer other questions about the new entrant exemption for LNG facilities.
LNG Canada did not respond to an email asking if it had applied for the exemption.
B.C. has given large industrial emitters a break on paying for their emissions for years.
Under Clean BC’s industrial incentive program, new industrial facilities could receive a full rebate on carbon taxes during their first two years of operations under a similar “new entrant” designation. That program also offered established industrial facilities hefty rebates on their carbon tax costs, provided they met “world-leading or best-in-class emissions intensity” benchmarks set by the province.
LNG export facilities were not part of the previous industrial incentive program because none were in operation at the time.
Janetta McKenzie, the Pembina Institute’s oil and gas program director, pointed out the emissions intensity of LNG projects will depend on how the liquefaction process is powered — by gas or electricity.
“British Columbians should also keep an eye on those other LNG projects and the extent of electrification that’s going to be deployed right at startup because that will have an effect on the emissions from those first few years,” she told The Narwhal.
McKenzie said new entrant exemptions are standard for industrial carbon pricing programs, including those implemented by the federal government, Alberta and Ontario.
“One of the main reasons for it is the emissions for a new facility in its first couple years of operation aren’t likely to be reflective of its emissions after those first few years,” she said in an interview.
“With all of these LNG projects that are proposed, I think it’s going to be really critical to ensure that the oil and gas standards in the output-based pricing system are able to bring down emissions, even with these new projects online. B.C. needs to get oil and gas emissions down and emissions down generally.”
The B.C. government has approved a second phase for LNG Canada. According to the briefing note, the second phase would increase the project’s estimated annual emissions to about 4.2 megatonnes if the consortium decides to proceed.
McKenzie said giving industrial facilities a grace period to stabilize their emissions is part of a tricky balance between encouraging companies to take steps to reduce their carbon footprint, and ensuring their products can still compete in international markets.
While the B.C. government has framed the output-based pricing system as a way to ensure B.C. remains competitive with other jurisdictions while still putting pressure on industrial operations to reduce emissions, Marc Lee, a senior economist with the Canadian Centre For Policy Alternatives, sees the new system as part of the ongoing backlash to carbon pricing — allowing companies to sidestep paying for their emissions.
“It made a convenient economic argument that companies would still have an incentive to reduce emissions, but they wouldn’t have to pay the full price in order to preserve their international competitiveness,” Lee said in an interview.
The new pricing system is likely to diminish government revenues at a time when the provincial government is attempting to rein in spending. Last year’s provincial budget projected a 3.2 per cent drop in government carbon tax revenues in 2024, from $2.6 billion to $2.5 billion, partly as a result of the new system.
In Eby’s recent mandate letters to his new cabinet, the premier directed every minister to look for efficiencies — a term that often means seeking ways to reduce costs.
“This is important in the context of current provincial budget constraints and overall efficiency,” the premier wrote.
Valeriote, from the BC Greens, noted the government is “forgoing a huge amount of revenue that could pay for a lot of things that British Columbians need” by giving industrial emitters a break on emissions pricing at the same time as it aims to reduce costs.
The new pricing system also allows companies to earn credits that could be used to meet targets if their performance is better than expected, but those granted the new entrant designation cannot earn credits during the two-year window, according to the briefing note.
It also offers companies generous breaks on emissions generated by manufacturing operations, such as carbon dioxide released during cement production and aluminium smelting. Known as process emissions, they are difficult for companies to reduce because measures “are prohibitively costly or impossible to reduce with available technology,” according to a guidance document from B.C.’s Energy Ministry.
Depending on the industry, 65 per cent to 95 per cent of process emissions will cost companies nothing at all under the new output-based pricing system, according to the document.
On top of that, a significant portion of the emissions companies will still have to pay for can be covered by credits — earned by emitting less than industry benchmarks set by the government — or through carbon offsets.
In 2024, the B.C. government allowed half of priced emissions under the output-based pricing system to be covered by offsets and credits; by 2030, the system will allow only 30 per cent to be paid for this way.
McKenzie said one drawback of output-based pricing systems is that it can be difficult to predict how much revenue they will generate for governments, as well as the scope of emissions affected, compared to other carbon pricing programs.
“It’s hard to predict with 100 per cent accuracy how different facilities will choose to comply, what sort of combination of compliance mechanisms they’ll use, whether they will use more or less offsets, whether they will do more or less on-site emissions reduction.”
The grace period for big emitters “speaks to the importance of having other supportive climate policy that gets at oil and gas emissions,” McKenzie said. That includes the oil and gas emissions cap the B.C. government announced in 2023.
“Ensuring that that is finalized and addresses these emissions will be really critical,” she said.
The economist, Lee, said the complex system of exemptions makes it hard to believe the government’s claims that climate action is a priority.
“The government needs to decide whether it actually wants to do climate action or not,” he added. “It just seems silly right now that they’re trying to create these elaborate systems that make it look like they’re doing stuff when they’re not really.”
Despite launching almost a year ago, some aspects of the output-based pricing system appear still to be under development.
The briefing note obtained by The Narwhal said specific parameters for the LNG industry — including which proportion of process emissions will be exempt — had not been determined. Sections of the document, including one titled “Next Steps,” and another that references the program’s parameters for the LNG industry, are redacted under freedom of information law exemptions related to policy advice and recommendations to government and disclosures that could harm intergovernmental relations or negotiations.
The Energy Ministry did not respond to questions about whether the LNG industry will be included under the broader oil and gas sector, which enjoys a 65 per cent exemption from process emissions, or carved out separately.
Lee wants to see proof the output-based pricing system incentivizes industrial operators to reduce their emissions, as the provincial government claims.
“All of my critiques notwithstanding, if we were seeing emissions shrink three or five or 10 per cent per year, then you could say, ‘okay, the system’s working,’ ” Lee said. “But we don’t see that happening.”
B.C.’s total greenhouse gas emissions increased by 2.3 megatonnes between 2021 and 2022, according to the provincial inventory, and are up three per cent since 2005.
“The next year will be really critical to see are the emissions actually coming down,” McKenzie said. “Are they coming down enough to offset the new entrant exemptions of something like LNG Canada Phase 1?”
“And if they’re not,” she asked, “where should that burden be placed?”
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