The “California Effect” on Canadian Energy and Climate Policies

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