Canada paying higher cost for climate change policy than U.S.
U.S. oilpatch stands to gain
As Alberta struggles with its most devastating recession ever, a new study highlights why different climate change policy choices made by Canada and the United States point to continued hardship for Canada’s top oil producing province.
The two trading partners are focusing on different areas for GHG reductions and are using different policy tools because of their unique resource endowments, geography, climate, history and politics, according to the study by IHS Energy, led by Kevin Birn.
In the U.S., the front line is power generation from coal, because that is its largest source of emissions.
In Canada, the bull’s eye is on oil and gas, and particularly the oilsands.
The upshot is that the policies go easy on and even benefit the U. S. oilpatch because of the key role played by shale gas, and come down hard on the Canadian oilpatch, heavily concentrated in a single province, Alberta.
“This is a concern for Canada’s large oil and gas sector, which competes globally for investment and export markets,” says the newly released report. “Unilateral climate policy adds cost that could move investment, activity, and associated emissions from Canada to regions with less- stringent policies, with little or no net reduction in global emissions.”
The exodus of capital is already well under way. The Alberta government’s fiscal update this week said energy investment is forecast to be about half 2014 levels, and non-energy investment is also in decline as the oilpatch recession that started with the drop in oil prices spread to housing, retail activity, labour markets and manufacturing.
Canada and the U. S. have similar GHG reduction targets — a 30 per cent reduction by 2030 in Canada and a 26-28 per cent cut by 2025 in the United States, over 2005 levels.
That’s even though the U. S. was the world’s second largest emitter in 2013, responsible for 15.9 per cent of global emissions, while Canada was the eighth largest, with 1.7 per cent of world emissions. Also, Canada is a major oil exporter, while the U. S. is an oil importer despite growth in its own production.
In the U.S ., coal accounted for about 34 per cent of electricity generation in 2015, despite declines in recent years. Natural gas provided 32 per cent, and nuclear around 20 per cent.
It is achieving emissions reductions by switching to more gas- fired generation, which benefits its shale gas production industry.
The shale gas revolution dramatically improved the economics of natural gas power generation, reducing the cost of shifting from coal to gas and the cost of emissions reductions, the report says.
“Without shale gas, the U.S. transition from coal power generation would likely have come at higher costs and at a slower pace,” the report says.
But Canada’s power generation is already one of the lowest carbon- intensive sectors in the world, since a lot of it comes from hydro and Ontario retired its coal plants in 2014.
So Canada is chasing reductions in other areas at a higher cost. The axe is falling hard on the largest emitter of greenhouse gases: the industrial sector, which accounts for 44 per cent of national emissions, and particularly the oil and gas sector, which generated 26 per cent, with the oilsands alone responsible for 9 per cent.
“The comparatively small size of the Canadian economy contrasted against its large oil production, which competes in the global market, poses a challenge for Canada,” the report warns.
In contrast, electrical power generation is more insulated from competitiveness concerns because of technical and economic limitations to large-scale power transportation, the study says.
The policy tools used by the two countries are also penalizing Canada’s oil and gas.
Due to political gridlock in Washington, the Obama administration has been unable to push through carbon pricing and has instead leveraged existing legislation and regulation, particularly through the U. S. Environmental Protection Agency under the Clean Air Act. The result is that only seven per cent of national emissions are subject to a carbon price.
Canada is instead is embracing carbon pricing, which raises its cost of doing business.
In 2015, about one- third of Canada’s total GHG emissions were covered by some form of provincial carbon pricing. Additional initiatives mean up to two- thirds of Canada’s emissions will covered by carbon prices in 2017, the report says.
To top it off, Alberta is pursuing unilateral initiatives penalizing its oilsands industry, such as putting a cap on emissions, while t here are no s uch constraints in the U. S.
The major areas where the two countries are moving together are: reducing methane emissions from oil and gas operations, increasing funding for renewable energy and improving vehicle fuel- economy standards.
The oilsands have experienced the first big hits of the elevated climate efforts in North America’s upstream oil and gas industry, the report said.
Should such policies encourage i nnovation and i ntensity i mprovements in Canadian oil and gas, it may end up as a more competitive industry, the report says.
“However, should policies push too far ahead on their own, Canada could risk displacing economic activity and emissions to other countries with less- stringent climate policies.”
Indeed, the sacrifice expected from Alberta — by its own provincial government and by the federal government — to meet Canada’s climate change objectives raises questions about fairness, judgment and attainability. Canada’s climate change commitments under the Kyoto Protocol and the National Energy Program were similarly heavy handed against oil and gas. They didn’t last.