By Shawn Halter & Bijon Brown
Editor’s note: Shawn Halter is Manager, Industry Development & Analysis at Sask Pork. He can be contacted at email@example.com. Bijon Brown is the Production Economist for Alberta Pork. He can be contacted at firstname.lastname@example.org.
Flash back to early February: the annual polar vortex had just descended upon the prairies, shrouding much of the landscape in a blanket of extremely cold air approaching wind chills of minus-50 degrees Celsius in some cases. Just the thought of those temperatures is enough to chill any person – or animal – to the bone.
Western Canada’s millions of hogs are thankfully able to brace for those potentially lethal temperatures by using barns, heated with energy sources derived from fossil fuels. Few, if any, other practical options exist, as alternative heating systems and non-petroleum fuels are virtually unobtainable, highly cost-prohibitive or simply ineffective.
Despite this overwhelming reality, the carbon tax has hammered at pork producer profitability for several years now. Just how much? Data from the prairie provinces is being evaluated to weigh the burden on hog farmers, while other sectors have been spared much of the pain. As carbon pricing in Canada seems to have become a political inevitability of late, its existence has raised the cost of doing business, and hog barn operators – without readily available alternatives at their disposal – are left footing the bill.
The Government of Canada’s price on carbon, in principle, is designed to encourage consumers to consider the environmental degradation caused by their day-to-day carbon emissions, resulting from gasoline and diesel for transportation, natural gas and coal for power generation and heating, or even propane for firing up barbecues.
The carbon tax is intended to reduce consumption and spur investment into alternative forms of energy. But how can petroleum product use go by the wayside when these products remain vital for survival in our climate and necessary for figuratively and literally ’putting food on the table?’ At the moment, it is unfeasible.
Mapping the on-farm carbon landscape
Twenty pork producers in Alberta and seven in Saskatchewan were recently surveyed to estimate the impact of the carbon tax on their farms. The survey asked producers with metered barns to share the usage for electricity and heating, along with any propane usage and the distance traveled to market hogs, during the 2020 calendar year.
While there are other sources of carbon emissions that can be linked to hog production – such as feed mill operations or off-farm feed purchases that require pick-up or delivery – and since hog market destinations differ from one farm to the next, only the fuel cost to transport hogs to market is captured in that part of the overall estimation.
In Alberta, usage varied greatly depending on the farm type. For example, farrow-to-finish operations used substantially more heating fuel than grow-to-finish, farrow-to-wean and nursery operations. On the other hand, farrow-to-wean operations used considerably more electricity than the other previously noted types.
Breaking down carbon tax costs for hog farmers
When comparing Alberta and Saskatchewan, separate coefficients are used for electricity, as the provinces’ electricity markets are different. Provincially owned SaskPower sources electricity from independent producers and then retails it to end-users, while the electricity market in Alberta consists of privately owned wholesale buyers (energy suppliers like ATCO, Enmax or Fortis) and producers of electricity interacting by bidding on the price and quantity of electricity each hour of the day. Where supply meets demand, the market clears, and the wholesale price of electricity is realized. Retailers then sell electricity to end-users, including farmers. This disparity between the provinces makes it difficult to track the carbon composition of electricity at any point in time, as successful sales to the grid may consist of electricity from fully renewable sources, fully fossil-fuel-generated sources or a blend of the two.
It is indicated from the estimates that the carbon tax on electricity in 2020 ranged between $0.19 and $0.48 per marketed hog. For natural gas, the carbon tax was between $0.38 and $0.47 per marketed hog. The carbon tax on propane was around $0.10, while the carbon tax on diesel for transport vehicles was between $0.04 and $0.12 per marketed hog.
Overall, the carbon tax for the survey respondents, on average, was between $0.79 and $1 last year. Based on data from Commodity Professionals Inc., it is estimated that producers in western Canada lost about $12 per hog in 2020, not including the carbon tax. Factoring in the carbon tax, that added expense served to drive another nail into the coffin of some operations, making them financial unviable, and even forcing some producers of varying size to go out of business.
In the coming decade, the price on carbon is expected to jump to $170 per tonne of CO2 equivalent. If consumption patterns remain the same, then the carbon cost would jump to between $4.50 and $5.62 per marketed hog. Placed in context of the most recent cost of production study conducted by Alberta Pork for the 2019 calendar year, heating, electricity and transportation costs amounted to $7.63 per marketed hog; this represented only five per cent of operating costs. Nevertheless, producers who volunteered their information for the cost of production study experienced an average loss of $5.30 per marketed hog.
In 2030, if everything else is held constant and carbon taxes amount to $5.62 per marketed hog, then losses would balloon to almost $11 per marketed hog. That may be a tough pill to swallow for some producers, especially when, over the past five years, they have experienced double-digit losses on most hogs marketed, only now beginning to recover as prices experience a summertime boost.
Clearly, a carbon tax is not in the interest of hog farmers, nor is the impact on the hog sector proportional to other agricultural commodities, which may have fared better over the same period and into the future.
Not all commodities are treated the same
Canadian consumers value choice. Even in the dead of winter, product offerings at the retail level remain consistent, even if somewhat seasonal. This includes items like fresh produce, dry goods and meats that are imported from parts of the world with fairer climates or other production advantages.
Some carbon-intensive agricultural sectors in Canada are eligible to recuperate carbon tax expenses, but livestock producers have not yet been afforded the same luxury. In the Government of Canada’s 2021 budget, $100 million was set aside for producers to help offset rising costs due to the carbon tax. However, the details on which types of farms and activities qualify are still to be determined and can be expected this fall, according to the government.
On many farms, the current carbon tax increased costs and decreased farmers’ ability to be more productive and proactive by bringing more jobs to rural communities. On top of the current pain, this tax is set to increase five-fold over the next decade, exacerbating the problem.
When it comes to imported goods, such products are not subject to the same standard of taxation, despite the comparatively large carbon footprint associated with international trade. And because no carbon tax is levied against these imported products, Canadian farmers are invariably harmed in the process, while foreign exporters are not. Easily overlooked by the consumer, not so easily overcome by the domestic producer.
And, still, a much bigger question remains: how does any part of this situation promote lower carbon emissions? Essentially, for livestock producers, it does not.
While taxation appears to be a punitive measure against producers, some incentives do exist on the provincial level to encourage reduced fossil fuel consumption, such as carbon credits and other funding for projects that seek to reduce carbon intensity. Federally, a recent proposal to offer a credit-based program is also taking shape, but some farm groups, such as the Ontario Federation of Agriculture (OFA), worry that criteria for such a program may not recognize much of the progress that has already been made.
“Farmers have been doing a lot of good environmental work for a number of years. This didn’t just happen overnight,” said Drew Spoelstra, Vice President, OFA. “We’ve been doing things like following no-tilling and best management practices for a generation almost.”
Any solutions that may be forthcoming are desperately needed – and needed promptly – for the sustainability of many farm businesses and to defend food security for Canadians.
Political support could be on the horizon
In February 2020, Phillip Lawrence, Member of Parliament for Northumberland-Peterborough South (Ontario), introduced Bill C-206 in the House of Commons, an amendment to the Greenhouse Gas Pollution Pricing Act, which would extend the existing carbon tax exemption on farm gasoline and diesel to include natural gas and propane. The bill passed third reading and adoption in June 2021.
“Our farmers are struggling out there. They are now facing multiple blockades in addition to pricing instability and trade disruptions. The pressures on our farmers today are innumerable,” said Lawrence. “One of the things I heard when I was travelling my riding, from farmers and non-farmers, is that the carbon tax is impacting the way they operate their businesses. In fact, the carbon tax is taking away up to 12 per cent of their net income, so this is having a significant impact.”
Canada’s provincial and national pork producer organizations have previously called upon the Government of Canada to create a carbon tax exemption. Shortly following the introduction of Bill C-206, Rick Bergmann, Chair, Canadian Pork Council (CPC) sent a letter to Marie-Claude Bibeau, Minister, Agriculture and Agri-Food Canada (AAFC) urging her government’s support for such an exemption, citing economic impact studies generated by Manitoba Pork in 2019.
“To efficiently produce pork and manage the welfare of their animals, pork producers use natural gas or propane to heat their barns. There are no other practical alternatives,” the letter reads. “It is projected that, by 2022, fuel costs will increase by 150 per cent and cost pork producers $10 million per year. The carbon tax costs faced by producers cannot be recouped from the marketplace, as we face daily competition from American pork imports.”
In addition to alleviating the pain caused by the carbon tax, governments at all levels must consider their role in establishing the relevant legal framework to facilitate the development and expansion of infrastructure for the adoption of low- or no-carbon technologies. Such investment should also prioritize research and development of alternative energy, providing a clear pathway for making a smooth transition. Canada is a leader in innovation, but our privileged position depends on governments to play a large supporting role by attracting private investment, paving the way for economic growth.
Canadian power supply composition is changing, albeit slowly
If Canadians are permanently saddled with a price on carbon – which appears increasingly likely as time goes on – what kinds of solutions are available? Most directly and obviously, innovation in the area of power supply composition.
Canadian provinces have largely built their energy infrastructure around the natural resources available. This means that, with Niagara Falls in Ontario, hydroelectricity factors greatly in energy consumption, while in the prairie provinces, which are endowed with fossil fuels, carbon-emitting energy is featured disproportionately more.
There have been considerable strides to shift the carbon composition of electricity generation. In Saskatchewan, the composition of the electricity grid declined from 84 per cent coal and natural gas in 2018 to 72 per cent in 2020. In Alberta, the carbon-intensive share declined from 92 per cent in 2018 to 81 per cent in 2020.
There has been little change in the heating and transportation fuels over the same period. This may be partly due to infrastructural and regulatory policies that fail to facilitate meaningful change. Many farms have already made the transition from coal boilers for heating to natural gas and blended fuels with ethanol or biodiesel under policies that preceded carbon pricing.
One of the potentially viable alternatives that is becoming more and more popular is hydrogen. Hydrogen can be used for electricity, heating and as a transportation fuel. It can be produced using natural gas or renewable electricity. The major constraint to making considerable change is the lack of infrastructure support. In April 2021, the Edmonton region was identified as Canada’s first hydrogen hub. This new approach is expected to help to bring down the price of hydrogen by developing infrastructure to expand the use of hydrogen as fuel. While this recent shift away from fossil fuel over-reliance should be praised, it seems as if the cart was put before the horse. For any alternative to be fully useful, infrastructure must be widely developed and implemented prior to the use of carbon pricing as an incentive to transition to the cleaner alternative. Currently, pipeline and service station infrastructure are some of the greatest challenges to seeing hydrogen adopted in the mainstream.
Significant investment will no doubt be required to either bypass or replace existing natural gas infrastructure. In the U.K., as an example, the cost for getting all homes hydrogen-ready is estimated to be around £140 billion (or CAD $240 billion). Clearly, if the cost is so much to cover a land mass the size of the U.K., it may be significantly more for Canada. Such an investment would require both public and private partnerships, as well as clear transition targets. For instance, the U.K. is working towards having all boilers sold for home heating to be hydrogen-ready. Many home boilers currently operate on natural gas, but with changes to a few parts, by 2025, units can run entirely on hydrogen while costing no more than £100 (or CAD $170) to upgrade. Such a model sets a precedent for how to possibly handle a workable transition from natural gas to hydrogen.
In addition to power generation, the transportation industry must also be cast into the spotlight as the largest contributor, proportionally, to total carbon emissions. Within this industry, heavy-duty freight is the second-largest carbon emitting sector in the world, yet carbon-free alternatives are not scheduled to come online until after 2024. Furthermore, the cost of such trucks is predicted to be around USD $250,000 (or CAD $300,000), which would certainly be outside the range of affordability for most hog farmers in Canada.
Placing a price on carbon without providing clear leadership or opportunities to make the transition to alternatives effectively places a tax on productivity and creates a competitive disadvantage for Canadian hog farmers. Foreign suppliers in the pork sector and elsewhere in agri-food have recognized our impediment and exploited it, as a result.
The European Union (E.U.) will, by the end of 2021, institute a carbon border adjustment mechanism to address loss of competitiveness due to carbon pricing. The mechanism will adjust the price of all E.U. imports for the carbon emitted in its production process, thereby leveling the domestic playing field. Canada has yet to propose something similar, but such a mechanism is essential to have in place before carbon pricing. Unlike the E.U., the Government of Canada’s decision not to be prudent in this area will negatively impact Canadian production in our own domestic market.
However, Canada is a net exporter of many commodities, including hogs and pork. This means that, while something like a carbon border adjustment mechanism would strike a better balance between foreign and domestic products in Canada, it will do little to improve our standing in the international marketplace. That is bad news for pork producers. What is needed is a review of agreements like the Canada-United States-Mexico Agreement (CUSMA), Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Comprehensive Economic and Trade Agreement (CETA) to ensure that any carbon border adjustment mechanism offers a fair deal for Canada in North American, European and Asian markets.
The future of fossil fuels in farming
For fossil fuel alternatives to be taken seriously, no individual industry – and certainly not agriculture – should be singled out and demonized. Even the most die-hard environmental advocate likely does not hunt and forage for his or her own food, which almost definitely arrived through means that are reliant on fossil fuels.
Canada’s carbon tax is not a credible, effective or fair initiative to lead positive change, but it is one of many tools that could be used to drive the transition to greener alternatives. Emphasis ought to be placed on bringing alternatives online as soon as possible for the sake of availability and affordability.
Across the world, in virtually every industry, the push to reduce fossil fuel consumption seems to have been a driving force for not only environmental policy but also political and social change. At this point, the discussion is inescapable, and as time goes on, the calls to ‘go green’ will likely only continue.
For the agriculture industry, there is a great deal of opportunity to innovate and institute new best practices that not only welcome this shift in thinking but also showcase Canada’s leadership in this regard. But this transition can only take place if producers are free of the burden that additional costs –such as the carbon tax – place on investment.
Carbon pricing seems to be here to stay, and our industry needs to continue to adapt as it has always done. With appropriate and swift government support through proactive regulations and programs that attractively promote the transition to cleaner sources of energy, the industry can potentially weather the carbon pricing storm. In the meantime, farmers may have to wait a little longer, hoping for improvements that enhance their ability to operate in an ecologically responsible but also financially sustainable way.