Angry in the Great White North

Liberal MP Paul Zed has come out to say that Stephane Dion's carbon tax plan is not going to apply to oil refineries in his province of New Brunswick.  In fact, he goes as far as to say that he would not support the carbon tax if it did.  I guess it's one of those "tax polluters in someone else's province" taxes:

[Conservative MLA Margaret-Ann Blaney] claims a carbon tax would be "detrimental" to a second refinery and other energy projects.

She reckons the Dion plan, in its first year, would add $30 million in taxes on refinery operations. That would grow to $120 million after four years, she said.

"You've got to wonder if that's feasible for a second refinery," she said. "Those are big numbers."

But Saint John Liberal MP Paul Zed said Conservative concerns are nothing more than "fear-mongering."

According to Zed, the refinery's emissions won't be taxed.

"The Conservatives are alleging that the Green Shift taxes (emissions). That's not true. That's the lie and the falsehood," Zed said.

Well, the tax is targeting emissions by taxing wholesale fuel:

The price will begin immediately at $10 per tonne of greenhouse gas emissions and steadily rise by an additional $10 per tonne each year, reaching $40 per tonne within four years.

The carbon tax plan is riddled with statements like this.  Despite the wording, the emissions are not taxed, the wholesale fuel purchased is taxed. 

But that doesn't mean Paul Zed is right.  Oil refineries are giant furnaces.  Crude oil goes in, is boiled inside of tall columns, and different products are removed at different points in the column.  That's because crude oil is heavy diesel and light diesel and gasoline and so on all mixed together.  Since these materials have different densities and boiling points, they are separated in the process of boiling, rising to different points in the column based on those physical properties.

Yeah, it's more complicated than that in detail, but that's really all there is too it, in essence.

But what runs the furnaces?  No surprise, but it's the by-products of its own operations can be used -- refinery gas, natural gas, and fuel oil:

Oil refinery is not only a major energy generator, but is also a significant consumer of energy. A refinery can utilize a part of its products generated as a result of crude-oil processing to support its operations.

Well, that has a cost too.  The fuel that the refinery burns represents revenue not being realized for a portion of the crude oil being refined.  How much?  That's defined by the market value of fuel.

So the refinery takes a hit when it effectively sells itself the fuel it needs to operate, and that would be at wholesale prices.  Indeed, the definition of "wholesale" price of fuel is the price charged by refineries to retailers.  In other words, a refinery is its own wholesale supplier, and so it would hard to argue that the carbon tax does not apply to it.  Indeed, I expect that the refineries declare the cost of the fuel sold to itself as a business expense and so claim a tax break.

If refineries sell fuel to themselves at wholesale prices (that is, they book the equivalent cost of the fuel pumped back to the furnace in their operating cost column) then it seems to me that the carbon tax applies.  Indeed, the whole point would be to make oil refineries more fuel efficient by making them pay.  If you didn't, oil refineries would not be pushed to become more fuel efficient.

But here's the rub.  Let's say Paul Zed is wrong and the fuel refineries consume is charged a carbon tax.  Then that cost is passed on by the refinery to the retailer as a higher cost for the fuel products.

But that is also a wholesale point, so the carbon tax is applied to that fuel, which is already higher in cost because of the higher cost in the fuel used to make it.

Of course, it takes fuel to transport this fuel, like the diesel in trucks that move gasoline to the stations, so the carbon tax is applied again and is incorporated into the cost of the fuel when it is finished being transported.

The gas station consumes energy (electricity and natural gas) like any building.  The carbon tax would increase operating costs, and so eat into profits.  That loss is covered by increasing the cost of the products being sold, and that is the fuel that has already had a carbon tax applied directly to it, indirectly because of transportation costs, and yet again because of the increased cost of operating the refinery.

By the way, refineries run 24 hours a day, 7 days a week.  That's a lot of wholesale fuel getting burned to make more fuel.

And that means a lot of tax that you and I will eventually pay.

Of course, it could be that Paul Zed is right.  if that's the case, I'd like to see how Stephane Dion explains to Canadians that oil refineries, with all the emissions they produce, don't have to pay a carbon tax, but that average Canadians do.