GreenPolicyProf

George Hoberg

Canada's Environment Minister, Jim Prentice

February 4, 2010

On January 30, Canada’s Minister of Environment, Jim Prentice, finally announced the country’s commitment to greenhouse gas mitigation under the Copenhagen Accord. Its target for 2020 is a 17 percent reduction below 2005 levels. In a speech at the University of Calgary on February 1, Prentice provided a spirited justification for this target. While it is certainly welcome news that Canada has made a formal commitment to reduce greenhouse gases under the Copenhagen Accord, the target and the government’s justification for it are troubling.

1. Weakening. The new target represents a weakening of the previously stated government target of 20% below 2006 levels; 2020 emissions would be 6% higher under the new target than the old. Canada’s GHG emissions actually declined between 2005 and 2006, so not only is the per cent reduction lower but it is from a lower base.

2. Abrogation of climate policy sovereignty. The text of the Canadian submission is also remarkable because it explicitly ties Canada’s commitment to the actions of another country, the United States. Canada’s formal target is a 17% reduction by 2020 “to be aligned with the final economy-wide emissions target of the United States in enacted legislation.” Since the election of Barack Obama, the Harper government has abandoned its “made in Canada” approach and advocated harmonization with a North American regime with American leadership. In his Calgary speech, Prentice reinforced and extended this message: “Our determination to harmonize our climate change policy with that of the United States also extends beyond greenhouse gas emission targets: we need to proceed even further in aligning our regulations…[W]e will only adopt a cap-and-trade regime if the United States signals that it wants to do the same. Our position on harmonization applies equally to regulation… Canada can go down either road—cap-and-trade or regulation—but we will go down neither road alone.”

I am not naïve about the challenges Canada confronts as a small, open economy adjacent to the world’s largest economy – a substantial fraction of my academic work (e.g., Sleeping with an Elephant and Capacity for Choice) has been about this challenge. But I can never recall such a blatant and resolute proclamation that Canadian policy will be dictated by American policy.

3. Distortion. In his Calgary speech, Prentice showed his Harper Conservative credentials by ridiculing his critics with distorted facts. He mocked the opposition by pointing to their private members’s bill, Bill C-311, which he claimed “proposed a 40 per cent reduction in greenhouse gas emissions from 1990 levels.” But the bill calls for 25%, not 40%, reduction below 1990 levels. He attacked the Province of Quebec, a vocal critic of the federal government’s inaction on climate, for its new vehicle emission standards: “Let’s be clear: It’s absolutely counter-productive and utterly pointless for Canada and Canadian businesses to strike out on their own, to set and to pursue targets that will ultimately create barriers to trade and put us at a competitive disadvantage. One of the most glaring examples of the folly of attempting to go it alone in an integrated North American economy is the new, and unique, vehicle regulations introduced by Quebec. These ensure that consumers will basically have to leave that province to buy their vehicles, to avoid levies of up to five thousand dollars, because seventy-five percent of the latest car and truck models don’t conform to the new rules.”

His claim that the policy would increase the cost of a car by up to $5000 is, according to Quebec regulatory officials, a significant distortion. And while Quebec may have moved ahead of the federal government, it is hardly striking out on its own: According to a story in the Financial Post, Quebec has adopted the same standards as California and 14 Northeastern US states neighbouring Quebec. British Columbia is also adopting them. (And, oddly, even the federal government of Canada is planning to adopt them shortly.) Undoubtedly, regulatory diversity has a cost when product markets are highly integrated. This divergence has emerged in North America because the federal government in both countries have been much slower to respond to the climate imperative than subnational jurisdictions.

4. Lack of Preparation. Prentice also exaggerated his government’s preparation in moving forward with climate policy if the United States does act. In stating that his government could harmonize with either a US regulatory or cap and trade approach, he stated that “We’ve already completed much of the extensive analysis and consultation work required to prepare us for both of those options.” It is reasonable to say that the government has performed extensive analysis and consultation regarding the regulatory approach reflected in its “Turning the Corner” Regulatory Framework for Industrial GHG Emissions. That approach, however, is unlikely to be able to achieve Canada’s target, among other reason because it is designed on the basis of intensity targets rather than any broader emissions cap. But the government has not proposed, analyzed, or consulted widely about a cap and trade approach. (Or if it has, it is secret.)

It is precisely this vacuum in policy formulation that produced the surprisingly heated conflict over an analysis commissioned by several environmental groups about the impacts of a realistic mix of policy instruments to meet the government’s prior “20% by 2020” target. Yes, the US Congressional process is notoriously slow. But the stunning lack of progress in Canada in designing a serious greenhouse gas reduction policy creates a real risk that Canada will be completely unprepared if the US finally gets its climate act together. Among other things, Canada will need to address the delicate issues around the oil sands and the related challenges around regional burden sharing. A meaningful national dialogue on climate policy design is long overdue.

In their book Hot Air, Simpson, Jaccard, and Rivers conclude with an 8-point “smell test” on whether or not politicians are serious about their commitment to climate action. Number 1 on the list is “If targets are proposed, but the politicians setting them do not detail how they will be reached, assume failure.” Canada has now revised its target and formalized it in a UN commitment. But it has no plan on how to achieve that target, and no process to develop a plan.

5. A Superpower without Sovereignty. In his Calgary speech, Prentice also chose to talk tough about the oil sands. In surprisingly strong language, he spoke of the need to improve the image of the oil sands or “we will be cast as a global poster child for environmentally unsound resource development.” To avoid that fate, Prentice stated that “we need to up our game, in terms of both environmental vigilance and in terms of our communication efforts.” While such commitments are welcome from Canada’s environment minister, the federal government thus far has done virtually nothing to address the environmental problems of the oil sands, and Prentice did not mention any new plans or initiatives. His statements on oil sands would thus fail Hot Air’s smell test number 1 as well.

In urging action to improve the reputation of the oil sands, Prentice revived Harper’s notion of Canada as a “clean energy superpower.” Harper Initially proposed the concept of Canada as an emerging “energy superpower” in a 2006 speech in London. The notion was dismantled by academics shortly thereafter – Canada does not have the economic and political means and will to be an energy superpower. When the “clean” adjective was added, the notion became even more farfetched. While Canada might have vast potential to export hydroelectricity, the geopolitical clout it does have is with its vast reserves in the oil sands. Barring unforeseen technological advances, it is hard to imagine how the oil sands will be able to legitimately claim status as clean energy.

Indeed, it is quite remarkable that Prentice could claim that Canada aspires to being a superpower of any kind at the same time as he abandons Canada’s climate policy sovereignty by tethering Canada’s climate actions to American policies in its Copenhagen Accord commitment.

The Up Side. There is a potential bright side to how the Harper Conservatives have positioned Canada on climate. Their submission to the Copenhagen Accord validates that international process and will increase moral pressure on Canada to act. More important, if the US does enact climate legislation, the pressure on Canada to follow suit will be immense. The Harper government may be hoping the Obama’s climate efforts will be stymied. But if not, they will be hard pressed not to live up to their commitments, and will have significant political cover to address the opponents to climate action in Alberta.

George Hoberg and Gordon McCullough

Canada is increasingly recognized as a laggard on policies designed to mitigate climate change. Recently, the Canadian government has been scrambling to respond to regulatory initiatives emanating from south of the border. The actions of California, the largest American state, seem to be having particularly powerful effects on the Canadian regulatory agenda.

These pressures seem somewhat ironic, given the persistent concern of environmental groups that trade liberalization creates downward pressure on environmental policies.  This critique assumes that with increased exposure to international trade, domestic governments will try to give their firms a competitive advantage by reducing regulatory costs, creating a regulatory chill that promotes a race to the bottom.

A Race to the Top? The California Effect

Researchers have identified a competing phenomenon, arguing that it can be in the strategic interest of governments and firms in heavily regulated markets to promote comparable standards for less regulated competitors. Instead of a race to the bottom, there is a potential for upward harmonization — a “race to the top.” UC Berkeley business professor David Vogel, the most prominent exponent of this view, has labeled this phenomenon the “California effect” after the state that has led the way in a number of environmental standards and managed to pull a number of other jurisdictions along with it.

The California effect has emerged because of the state’s market size and its leadership in environmental standard setting. If the state was a nation, its economy would be ranked 8^th in the world, slightly higher than Canada. Access to the California market is contingent on products being compliant with California standards, so the state’s standard setting can have a significant impact on industries selling into its gigantic market.

The archetypical California effect has been on automobile emission standards. Since the problem of smog in the Los Angeles basin was first linked to growing automobile use in the 1960s, California has led the way in regulating tailpipe emissions in the United States. The Clean Air Act, first enacted by the US Congress in 1963 and amended a number of times since then, has created a special exemption for California, allowing it to enact standards more rigorous than US federal standards so long as federal regulators give them permission. The history of US automobile emission regulation has been one of California adopting a standard, and then, after a delay, the federal government catching up and adopting the California standard as the national standard. Just as the federal government would catch up, California would lurch out ahead again, creating a ratcheting up effect. This dynamic spilled over into jurisdictions, as Canadian, Asian, and European automakers adopted standards similar to those in the US once their technical and economic feasibility had been demonstrated.

At present, this California effect seems to be pressing on Canada in both direct and indirect ways. The latest round of ratcheting up automobile emissions standards is playing out, with the Obama administration recently adopting the latest California standards, putting pressure on Canada to harmonize upward to the new, more stringent standards. A second dynamic has been created by California’s low carbon fuel standard; its primary impact is to impose costs on the Canadian oil industry. A third dynamic is created by California’s emerging renewable portfolio standard for its electrical utilities. In the case, the impact is to create the potential for new markets for Canadian electricity exports.

Auto Emissions and Efficiency Standards: Pressure on Canada to Harmonize Standards

Historically, the auto emissions standards set by California and adopted by the US federal government have had a significant impact on Canada and its own regulations (Hoberg 1991). Pressure to harmonize with the United States came in 1988 when at that point Canadian standards were “3-7 times less stringent, depending on the pollutant” (Hoberg 2002, p.273). Canada increased its standard to match the US federal level of 1990 in 1998, when during that time several states had moved beyond the US federal requirements and adopted the more stringent California standard.

The recent Obama administration’s increase to existing auto emission standards creates new pressure on Canadian standards. The new US federal policy mirrors the California clean car standard which calls for cutting global warming emissions 30 per cent by 2016. Because of the standard’s stringency, Canadian manufacturers will have to assume higher costs in order to compete in the US market. Canadian auto industry analysts have raised concerns about the economic and technical feasibility of meeting the new standards. Nonetheless, Canada’s Minister of the Environment, Jim Prentice, has acknowledged to the media that Canada will need to harmonize with the American standard. A definite advantage to a uniform North American standard is that automakers will not have to customize exports for each different state.

Low Carbon Fuel Standard: Imposing New Costs on Canada

While the new California-led auto emission standards create pressure for Canada to harmonize its standards, other California initiatives have different effects. California’s new low carbon fuel standard (LCFS) will impose new costs on the Canadian energy sector, particularly the oil sands.

In early 2009, the California Air Resources Board implemented a low-carbon fuel standard (LCFS) program which calls for a reduction of at least 10% (or 15 MMTCO2e) in the carbon intensity of California’s transportation fuels by 2020.  The LCFS is designed to reduce California’s dependence on petroleum while creating a market for clean transportation technology, and increase the use of alternative, low-carbon fuels.

The LCFS framework uses carbon intensity as its standard, which is a measure of greenhouse gas emissions per unit of fuel energy delivered. Referring specifically to the Canadian oil sands, the program defines crude oil produced from oil sands and oil shale as being “high-carbon intensive” (>15 g CO2e/MJ). The LCFS requires fuel providers to ensure that the mix of fuel they sell in California’s market meets, on average, a tightening standard for greenhouse gas emissions.

With 97% of Canada’s oil reserves located in the oil sands, significant costs would be imposed on Canadian producers to comply with the LCFS as currently proposed. It would require them to reduce upstream greenhouse gas emissions by significantly modifying current extraction technology, or implementing a carbon-capture and storage system.

The Minister of Natural Resources, in a letter addressed to the Governor of California, argues that the LCFS should assign all mainstream crude oil fuel pathways the same carbon intensity, rather than distinguish among different sources of crude oil. Canadian representatives emphasize that the overwhelming majority of greenhouse gas emissions (as much as 80%) come during fuel combustion in vehicles, and that some more conventional sources of crude oil (including California’s own heavy crude oil) are more carbon intensive. By distinguishing fuel on the basis of its origin rather than its carbon footprint, Canada argues that the California standard may violate trade obligations.

At the US federal level, the Waxman-Markey Bill, also known as “The American Clean Energy and Security Act,” initially contained a LCFS mechanism, but it was removed to increase prospects for speedy passage. Canadian reaction to removing the LCFS from the bill was positive, but concerns remain about other effects of tightening carbon policies. For example, a regional consortium p. ES-5 of eleven northeastern and mid-Atlantic states has committed to developing an LCFS that is similar to California’s.

While the Canadian federal government is lobbying against California’s LCFS, two Canadian provinces are in the process of adopting it. Ontario and British Columbia have both committed to the same emissions reduction of 10% by 2020.

As the market for low-carbon fuels increases, Canadian oil producers face increased costs of production and risks to market share.

Renewable Portfolio Standard: Creating Market Opportunities for Canada?

A third avenue of California influence on Canadian energy and climate policy might be market opportunities for lower carbon electricity. With abundant hydroelectric resources, Canadian provinces like British Columbia might be able to increase power exports.

In 2008, California issued an Executive Order requiring its utilities to obtain 33% of their electricity supply from renewable sources by the year 2020. Senate Bill 14 (S-14-08) is the proposed legislation that outlines the steps required to meet the standard, as well as what qualifies as a renewable source of energy.

The proposed legislation defines an eligible hydroelectric generation facility as “an existing small hydroelectric generation facility of 30 megawatts or less.” New hydroelectric facilities would not be eligible renewable energy resource if they “will cause an adverse impact on instream beneficial uses or cause a change in the volume or timing of streamflow.”

A report (pg.7) by Pacific Gas & Electric Company (PG&E) found that as of 2008, BC run-of-river hydro facilities “would not be qualified as RPS eligible resources.” With a $4-billion British Columbia/California transmission system upgrade being implemented to export energy to the state by 2016, PG&E lobbied for a change to the Senate’s exemption of certain hydroelectric projects. The amendments were rejected on the grounds that British Columbia hydroelectric projects were too large and had too many adverse effects to be considered renewable. The BC Minister of Environment criticized the hydro prohibition, arguing that BC small hydro operations undergo strict and rigorous environmental assessments and that power from BC could meet California’s needs.

31 states have some version of renewable portfolio standards. While we were unable to find an analysis of their treatment of hydroelectric power, if they are similar to California’s, Canada’s ability to become a significant “clean energy” exporter will be constrained. The climate bill going through the US Congress, the Waxman-Markey Bill, contains its own renewable portfolio standard (called a Renewable Electricity Standard) of 25% by 2025. Its current definitions of renewable would exclude any significant hydropower.

The initiatives by California and other states to reduce greenhouse gases by requiring electricity producers to rely increasingly on renewable energy sources would seem to be a golden opportunity for Canadian provinces with surplus hydropower. But the current definition of renewable in California and elsewhere are ruling out virtually all Canadian hydropower.

Even if renewable portfolio standards don’t create new opportunities for Canadian power exports, California’s size and policy innovativeness ensure developments there will have profound effects well beyond the state’s borders. Canadians on the lookout for emerging environmental policy trends should keep their eye on the Golden State.

Print Resources:

Hoberg, George. 1991. “Sleeping with an Elephant:  The American Influence on Canadian Environmental Regulation.” Journal of Public Policy 11: 107-131.

Hoberg, George, ed. 2002. Capacity for Choice: Canada in a New North America. Toronto: University of Toronto Press.

Vogel, David. 1997. “Trading Up and Governing Across: Transnational Governance and Environmental Protection.” Journal of European Public Policy 4: 556-571

George Hoberg and Gordon McCullough

Can the oil sands be made environmentally sustainable? Environmentalists have labeled the oil sands a source of “dirty oil” because of their considerable environmental impacts on land, water, and air. Internationally, greenhouse gas emissions have been the most significant concern about the oil sands.

One attempt to define an approach to “greening” the oil sands is a report released in April 2009 by the Canadian Energy Research Institute titled “Green Bitumen” which analyzes different alternatives to reducing carbon emissions from the oil sands. The standard for “green” oil sands used in this report is defined as the same level of greenhouse gas emissions per unit of energy as conventional oil. This standard was chosen to deflect the criticism that oil sands products are more greenhouse gas intensive than conventional oil. According to CERI, the greenhouse gas problem “is a drawback that will hinder future oil sands development.”

The Oil Sands’ Greenhouse Gas Problem

The rapid development of Alberta’s oil sands has resulted in a considerable increase in that province’s greenhouse-gas emissions. Since 1990, Alberta’s greenhouse gas emissions have increased 44%, contributing to Canada’s inability to reach Kyoto targets. With the oil sands already accounting for 5% of Canada’s greenhouse gases, there is serious concern that as oil sands development increases using current extraction methods, the greenhouse gas consequences will be unmanageable.

Currently, oil sands production produces more greenhouse gas emissions than conventional oil production because methods for extracting the bitumen, a thick, sticky form of petroleum, from the sands and upgrading the product to synthetic crude oil are very energy intensive. At present that energy is provided almost exclusively by natural gas. The natural gas is used both to create steam to separate bitumen from the sands and also as a source of hydrogen for upgrading the bitumen into synthetic crude oil.

How much more greenhouse-gas intensive oil sands are depends on how you define the product life cycle. According to a recent comprehensive study, when examining the “well to refinery gate” life cycle, producing a barrel of synthetic crude oil from the oil sands produces about 3 times more greenhouse gases than conventional oil. However, when examining the broader “well to wheels” life cycle that includes the combustion of fuel in automobiles or elsewhere, the production of synthetic crude oil from the oil sands is only 5-15% more carbon intensive than conventional oil. The difference is accounted for by the fact that the overwhelming majority (60-80%) of the carbon emitted during the fuel cycle occurs in the “vehicle use phase,” that is, combustion of refined petroleum products, mostly gasoline in automobiles.

Alternatives for reducing greenhouse gases

The CERI report analyzes the projected impacts and costs of three alternative approaches to greenhouse gas emission reductions: using nuclear power instead of natural gas as a source of steam, coal gasification combined with carbon capture and storage, and carbon capture and storage on its own.

Nuclear power could be used to fuel the extraction process by producing steam and potentially electricity. CERI assesses the potential for “small-scale nuclear facilities.” The study concluded that a nuclear facility, such as the ACR-700, could potentially produce the steam required, but the technology’s application to oil sands is “still early in development”. Of the three options, nuclear power would be the most expensive – CERI’s model projects an additional cost of $19 US/barrel. As a result, the benchmark price for oil would need to be approximately $105 US/barrel to justify this option.

The second alternative evaluated by CERI is the gasification of coal (or coke). Gasification is the process in which the coal is not burned but instead converted into a “syngas.” Syngas, some of which can actually be produced by byproducts of the oil sands process, replaces the need for natural gas. The syngas is less carbon intensive, but producing it generates large quantities of carbon, and as a result would need to be combined with carbon capture and storage. Under a gasification system combined with carbon capture and storage, achieving the “green bitumen” standard would cost an additional $13.50 US/barrel, requiring oil to be roughly $95 US/barrel to be economic.

The final alternative evaluated by CERI to transform the “dirty oil” industry into “green bitumen” is implementing a comprehensive carbon capture and storage system. The carbon capture and storage process captures carbon dioxide from gas streams emitted from development sites and stores it in reservoirs and deep rock formations permanently. The carbon capture and storage model is the most economic. It would add an additional cost of $2.25 US/barrel, requiring oil to be $85 US/barrel to be economically viable.

Policy Levers to Achieve “Green Bitumen”

Each of these alternatives would increase the costs of oil sands production, and CERI argues that the current regulatory approach does not provide sufficient incentives for firms to invest in using any of these approaches to reduce their carbon footprint. Alberta currently has a $15/ton levy for industrial producers who emit more than 100,000 tonnes, but CERI believes it would need to be about four times larger (p.47) in order to create sufficient incentives to meet the green bitumen standard.

How Green is Green Bitumen?

While this report received some media attention, it is important to note that its standard for greening the oil sands is quite limited. It is based on reducing emissions to the equivalent of conventional oil. While this would represent some progress for the oil sands and would undercut some of the “dirty oil” rhetoric, it would still involve reliance on highly carbon intensive fossil fuels with considerable greenhouse gas emissions to the atmosphere. It falls far short of the standards others have developed to eliminate or virtually eliminate greenhouse gas emissions from fossil fuels (such as that developed by Mark Jaccard in his award winning book, Sustainable Fossil Fuels, Cambridge, 2005).

The proposal to green the oil sands by increasing reliance on nuclear power has its own environmental, health, and safety risks that require careful consideration. In addition, the “dirty oil” critique by environmentalists goes beyond climate impacts to address concerns about boreal forest habitat destruction and impacts on water quantity and quality.

Bringing the greenhouse gas emissions of oil sands into line with conventional oil would represent progress, but meeting the Alberta government’s own objective of “developing the oil sands in an environmentally responsible way” requires much more. Given the planned expansion of the oil sands, their carbon emissions, even if brought in line with conventional oil, will continue to threaten Canada’s ability to achieve any meaningful greenhouse gas reduction target. Pursuing a more demanding standard for sustainability in the oil sands requires a more dramatic overhaul of regulations.