The role of environmental tax incentives to promote innovation and improve the management of groundwater: a case study analysis of the unconventional natural gas industry in Alberta

Water accounts for more than seventy percent of the earth’s surface, yet less than three percent of this water is freshwater fit for human use, and of this three percent, less than one percent is readily accessible – most of which is ‘groundwater’. This thesis argues that regulation for the protection of groundwater is long overdue for renewal. Examining the literature and conducting a case study, it assesses whether the greater use of tax incentives (TIs) to encourage environmental technological innovation (ETI) can improve that regulation. The thesis proposes an ‘opening’ of the system to allow for tax mechanisms to improve on existing regulations. Often, the largely static “command and control” mechanisms, which aim to force compliance, do not adequately account for the complexities and uncertainties involved in environmental protection and they typically lag behind the pace of technological change. To provide the flexibility and finance for firms to develop new technologies, these traditional regulations should be supplemented by market instruments and in particular by tax incentives. The thesis analyses the effectiveness of the current regulatory framework in protecting groundwater from contamination and consumption in the unconventional natural gas (UNG) industry. It also considers the role that new tax incentives might play within this regulatory framework to promote innovation for the protection of groundwater in this sector. The study involves a case analysis of the regulation of the UNG industry in Alberta, Canada. Specifically, it explores the possible role of tax incentives for fracking firms to innovate in their management of the quantity and quality of water used in energy production (“the water-energy nexus”). Part 1 of the thesis examines the literature on regulatory theory and environmental tax policy regarding incentives for technological innovation, water management, and ecosystem resilience. This part also explains the methodologies employed in the thesis including literature search, grounded theory and a case study approach. Part 2 is an analysis of interviews sounding out experts from the fields of oil and gas operations, oil and gas taxation and law, and water science and policy in Alberta. From this analysis, four key themes emerged supporting the careful use of tax incentives for environmental technological innovation: 1) Gaps were found in the current water governance structure as seen, for example, by the rapid granting of temporary water diversion licenses to meet unprecedented demand; 2) A systems approach to managing groundwater is recognized as critical, yet a province-wide shift to such a framework has not occurred due to the many complexities; 3) Awareness and information of many issues critical to management in a water-energy nexus is lacking. To cite one example, the cumulative impacts on the ecosystem from UNG production are not given full consideration; and 4) There are significant gaps in the science and technology required to effectively manage for the resilience of groundwater (aquifers). For example, the science regarding groundwater is largely in its infancy, and aquifer mapping cannot yet provide fully conclusive evidence as to the whereabouts of freshwater. Greater science is also required to maintain well bore integrity. The shortcomings of governance, awareness, systems, and science and technology prevent policy makers, industry, and the public alike from making fully informed decisions concerning both important protections and the overall picture within the socio-ecological and economic system of fracking regulation. It suggests a role for positive tax incentives. Part 2 draws conclusions from these findings including a proposal for an enhanced Framework for the Management of Groundwater Resilience. The Framework builds on the current regulatory and legislative framework for water management, incorporating TIs-ETI for advancements in groundwater science and technology during energy production, drawn from the current provisions for the Scientific Research and Experimental Development direct expenditures and investment tax credits, and the Accelerated Capital Cost Allowance (ACCA) within the Canadian Income Tax Act and the Alberta Corporate Tax Act. The Framework also incorporates legislation from the Federal Sustainable Development Act (FSDA), the Alberta and Canada Water Acts, the Responsible Energy Development Act (REDA), and the Environmental and Protection Act (EPEA). The thesis concludes that there is a role for tax incentives to encourage environmental technological innovation in groundwater management, but that these incentives must be carefully considered, designed, and implemented by policy makers to take account of such challenges as the diversity of fracing firms, the business cycle of investment and earning, and the cumulative process of technological innovation.