​Ottawa pushes ahead with emissions reduction schemes despite concerns on cost and effectiveness

Prime Minister Justin Trudeau. Flickr/Justin Trudeau

Set standards, and let the provinces find ways to meet them.

That’s the federal government’s plan for reducing both CO2 and methane emissions to meet its international commitments, reveals two technical papers released this summer.

But industry leaders are worried about how the implementation of the proposed greenhouse gas (GHG) reduction legislation will allow Canada to compete with the U.S., which recently pulled out of the Paris Agreement and delayed its own methane reduction scheme. Others are also worried that Canada going it alone could do more to damage the climate than to help. And yet others are worried the legislation won’t meet the country’s emissions goals and more policies will be needed.

The federal government’s carbon tax structure and pricing unveiled earlier this year didn’t contain any surprises for the oil and gas industry, says Gary Leach, president of the Explorers and Producers Association of Canada (EPAC).

“The technical paper released by the federal environment ministry does not change what we already knew since last year about the broad outlines and carbon-pricing targets of the federal plan, which would apply in so-called ‘backstop jurisdictions’ that do not set up a provincial regime [tax, cap and trade or combination] that meets the federal carbon tax equivalency test,” Leach says. “All the major provinces [Alberta, B.C., Ontario and Quebec] are expected at this point to meet the equivalent target on so-called carbon pricing so the federal rules will not apply in such provinces.”

Leach notes that Saskatchewan, which like Alberta has far more of its economy exposed to this carbon pricing regime than other provinces, appears determined to challenge the federal government in court on constitutional jurisdiction grounds.

“Interestingly, Alberta’s two conservative parties who announced plans to merge, both said a repeal of the Alberta carbon levy is their first order of business if they form the next government,” Leach says.

Under the Liberals’ plan, carbon pollution would cost $10/tonne in 2018, rising by $10/year until it reaches $50 in 2022. The provinces can either implement a carbon tax or a cap-and-trade market, and eight have already announced plans to go for one of the options.

“Making polluters pay is a critical part of any climate plan,” Catherine McKenna, minister of environment and climate change, says, adding every penny raised would be returned to the provinces.

Saskatchewan’s Premier Brad Wall, who has steadfastly denounced a carbon tax, says he’s prepared to fight the federal government tooth and nail.

“This federal government white paper is frankly more like a ransom note. It is the federal government saying, ‘Here is what you are going to do from a public policy perspective or this is what will be forced on the economy and the taxpayers in Saskatchewan,’ and we’re going to fight it in court,” he says.

“The reality of our economy is long distances. The reality of our economy is that we are trade-exposed,” Wall adds. “And so, if we have a tax that penalizes those trade sectors that are most exposed—agriculture, mining, and oil and gas are three at the top—that’s just not very good policy for Saskatchewan.”

Wall also notes that Saskatchewan has invested large amounts of money on carbon capture and storage but isn’t getting credit for that in the federal plan.

When asked about the possibility of a legal threat from Saskatchewan during a technical briefing prior to McKenna’s media conference, a ministry official said there’s a “strong legal basis” for the backstop system because it’s “not a revenue-raising tax.”

Despite Wall’s comments, McKenna’s not backing down.

“We certainly hope that Saskatchewan will develop a plan that makes sense for Saskatchewan,” she told reporters. “But let me be absolutely clear that it is well within the federal government’s right to take action to protect the environment.”

Interested in the Canadian energy conversation ? Read Oilweek.

Aaron Wudrick, the Canadian Taxpayers Federation federal director, says that by signalling its intention to impose the “so-called Alberta model of carbon taxes on provinces which fail to impose their own carbon tax,” Prime Minister Justin Trudeau’s government has “abandoned even the pretence of this tax being revenue neutral.”

Wudrick adds that it also contradicts Minister of Public Safety and Emergency Preparedness Ralph Goodale’s previous assertion that all revenue would stay in the hands of provincial governments.

“Carbon taxes, whether existing or proposed, mean higher taxes for Canadians and their families and harm to the Canadian economy, especially if jurisdictions we compete with do not have a carbon tax. Any reduction in emissions would be tiny on a global scale and have zero impact on global climate change,” Wudrick said. “The fact is carbon taxes in Canada will simply not impact global climate change. This is a lesson other countries, such as Australia, have already learned, which is why they have scrapped their own carbon taxes.”

In fact, argues Michael Binnion, president and chief executive officer of Questerre Energy, Canada’s carbon tax could make things worse.

Stringent Canadian carbon emission standards could result in higher global GHG emissions with the loss of production to jurisdictions with less-ambitious standards, and carbon leakage is a very real concern for sectors, such as natural gas, petrochemicals and aluminum manufacturing, Binnion told the Canadian Energy Research Institute (CERI) 2017 Petrochemical Conference in Calgary.

“I am absolutely not with the people who say, ‘Do nothing,’ but I also think that if we want to do the right thing, then we have to ensure we do things right,” he explained. “I am very deeply concerned that our climate policies are not addressing some very fundamental issues of carbon leakage.”

Binnion recalled his company’s issues when pursuing natural gas development in Quebec, which he said would have been some of the lowest-carbon-intensive hydrocarbons available and relatively close to market. Environmentalists in the province, he said, strongly opposed the development, which he acknowledged would have increased Quebec emissions while significantly lowering Canada’s overall GHG emissions.

“They only cared about meeting the Quebec targets,” he said.

This is similar to the approach Canada in general takes toward the environmental performance of its industries. While production within Canada affects the country’s carbon emissions, the results of that production moving to other parts of the world would result in even more global GHG pollution, Binnion argued.

For example, he noted, it takes two tonnes of emissions to produce a tonne of aluminum in Canada. Australia, by comparison, has about 15 tonnes of emissions for each tonne of aluminum, while the U.S. is at about 11 tonnes. Therefore, if a carbon price in Canada results in production moving to a less-expensive jurisdiction, the result will be higher global emissions.

“We could lose a tonne of aluminum here, and that would be a tonne of aluminum produced somewhere else, and while those would be the economic impacts, the carbon impacts can be five to seven times that,” Binnion said.

“To put this in context, if we produced just 100,000 more tonnes of aluminum in Canada, then that would be approximately a megatonne of emissions saved globally,” he added.

Petrochemicals produced in Canada are among the lowest in the world in terms of carbon intensity with Canadian production of petrochemicals actually reducing overall global emissions, Binnion said.

“Here are the unintended consequences: we all want to do value-add in this country, and chemistry is a big value-add to the natural carbon cycle business that I am in. And yet it turns out that if we have a carbon tax, if we export our gas where it gets burnt someplace else, then we don’t pay that carbon tax—there won’t be a carbon tax on that export. However, if we instead use it here and convert it into products or other processes, then there will be a carbon tax, and so it is a net disincentive to value-add,” he explained.

What is the solution?

Binnion said Canada must study and plan to avoid carbon leakage. There must be a global approach to Canada’s GHG impacts and any policies must recognize there are no closed environments.

“I think the petrochemical industry in particular should be looking and showing exactly where Canada has a comparative advantage in carbon due primarily to policy differences,” Binnion said.

He told the CERI conference governments should be considering tax incentives to encourage petrochemical developments.

“Pragmatically, what I really think you should do is you should use this global argument to get in and make sure you get your share of the output-based allocations and then shift that carbon burden to other Canadians,” he explained.

Unless government action is pursued cautiously and thoughtfully, there could be negative environmental results worldwide as Canada’s resource-based trade economy takes a major hit.

Making matters even worse, a new report from Canada’s Ecofiscal Commission suggests that the federal carbon tax won’t be enough to meet Canada’s goals.

“What is really new in this report is that it admits carbon pricing probably cannot do it all,” says Chris Ragan, the commission’s chair. “Most carbon prices are designed to actually not apply to all emissions.”

According to Supporting Carbon Pricing: How to identify policies that genuinely complement an economy-wide carbon price, complementary policies fill a role carbon pricing may not do alone. For example, gap-filling policies apply to GHG emissions not covered by a carbon price, signal-boosting policies address market problems and thereby enhancing carbon pricing, and benefit-expanding policies achieve both GHG mitigation and other objectives.

If and when climate policies are required alongside carbon pricing, Ragan says, those policies should be cost-effective. “Our research provides a framework to identify these complementary policies. Only those policies that do something the carbon price can’t do—and that are low-cost—should be implemented,” he says.

The report makes six recommendations pertaining to policies that may accompany carbon pricing:

  1. Governments should make carbon pricing with steadily increasing stringency the core of their climate policies. The price of carbon in Canada, which goes nationwide in 2018 and rises until 2022, should continue to increase beyond 2022 and well past $50/tonne—doing so steadily, consistently and predictably.
  2. Policymakers should focus their efforts on policies that clearly fill gaps in carbon pricing policies, boost the signal of the carbon price or generate significant co-benefits.
  3. Governments should coordinate carbon pricing and complementary policies across the country, cooperating to ensure policies work coherently as all levels of government continue to share jurisdiction over climate policy.
  4. Governments should regularly review and assess both individual climate policies and the larger policy package.
  5. Governments should rely on integrated modelling to assess the overall effectiveness of proposed and existing policies.
  6. As the carbon price goes national, governments should phase out and avoid redundant, high-cost and ineffective policies.

“We think there is a case for governments to actually design complementary policies. We think it is not an easy thing to do, and we think they need to be very careful in how they rationalize these policies—not everything works—and so this should be a gap-filler, signal-booster or benefit-expander,” Ragan says. “Once you have that, you can then do the work, do the analysis, make sure it’s cost effective, and then you can add it to the overall policy package.”

Mark Jaccard, economist and professor of sustainable energy in the School of Resources and Environmental Management at Simon Fraser University, says carbon pricing alone might work in a perfect world, but the real world requires different approaches to combating climate change.

“You could do it all with a carbon tax, and the only reason you wouldn’t is because humanity can’t handle this global collective action problem and make decisions within jurisdictions,” he says.

Feds follow Alberta on methane emission reduction plan

In May the federal government rolled out its nationwide plan for methane emission reductions, which follows a similar format to its carbon reduction plan.

The framework is a default regime that will bind Canada’s petroleum-producing provinces only if they fail to enact similar regimes or do so without meeting federal standards, feedback from industry executives suggest.

McKenna introduced the proposed federal regulations aimed at cutting methane emissions in the oil and gas sector by 40–45 per cent by the year 2025. Later, industry executives commented on the federal plan, which assumes individual provinces will move to enact their own rules to cut methane emissions and control volatile organic compounds (VOCs).

“The expectation is that Alberta—through the Alberta Energy Regulator—will establish its own regulatory framework for these same emission sources and that they will negotiate an equivalency agreement with Ottawa,” says Leach.

“If that’s successful, the federal regulations won’t apply in Alberta,” he says, adding that industry should not underestimate the work involved in crafting Alberta’s regulatory response. If Alberta is successful in that effort, it will “essentially keep the federal regulatory camel out of the provincial tent.”

McKenna argues that the U.S. has taken the lead when it comes to methane and VOC emissions. “They’re ahead of us. They announced federal regulations in 2012, and some states—Colorado, Ohio and North Dakota—have gone further. When it comes to [VOCs], we’re really playing catch-up. In the U.S., they’ve been regulating them since the 1980s,” she says.

Yet U.S. President Donald Trump has delayed implementation of U.S. methane emission reduction rules.

For its part, the Canadian Association of Petroleum Producers (CAPP) took issue with the idea that Canada is playing catch-up. In fact, the association argued that Canada has shown leadership on the methane emissions file.

“Canada is a leader in reducing methane emissions in the oil and natural gas sector. We are in a position of strength to move ahead by advancing cost-effective technology to reduce emissions,” says Terry Abel, CAPP’s executive vice-president.

If anything, he says, Canada’s oil and gas sector has outperformed other jurisdictions, including North Dakota, Colorado and California, when it comes to cutting methane emissions.

“We are confident that we will reduce emissions by 45 per cent from 2012 levels by 2025,” he says.

Ottawa’s proposed regulations on methane emissions, which will be passed under the Canadian Environmental Protection Act, will target methane emissions from five key sources: fugitive equipment leaks, venting, pneumatic devices, compressors and well completions.

Of the five sources, Environment and Climate Change Canada officials say fugitive leaks were responsible for 34 per cent of the oil and gas sector’s methane emissions, venting for 23 per cent and pneumatic devices for 20 per cent.

Speaking for CAPP, Abel says the industry’s aim is to cut the intensity of emissions over time through innovation and consistent development of technology.

“We recognize the opportunity for more methane reductions and have been addressing this by working with government and regulators to improve performance on new and existing facilities,” he says.

Experts from Environment and Climate Change Canada attending McKenna’s press conference in Calgary highlighted what they termed was a significant difference between Ottawa’s approach to emissions reduction and Washington’s. In particular, Canada is taking a performance-based approach in contrast to the U.S.’s prescriptive.

In theory, at least, the same experts argue Ottawa’s approach to emissions regulation should make industry’s task of compliance less challenging, in that Ottawa would set the targets to be met and leave industry to decide how to get there.

The effect Ottawa’s regulations could ultimately have on the industry is something Leach has considered. He says the industry would comply with the regulations, but there will be a cost to doing so.

“In today’s world, there’s a limited amount of dollars,” he says. “There’s not a lot of excess capital. A lot of companies are barely profitable. To the extent that these rules impose additional costs, it’s not so much the average costs to the industry, but the outsized impact on mature industry assets and facilities that’s of concern.”

He believes U.S. producers are not “at this point looking at the same kind of regulatory compliance costs, and we’re already a jurisdiction that has higher operating costs than our friends across the border.”

An analysis from the Methane Emissions Leadership Alliance (MELA), an industry association for Canadian methane management technology and service providers, projects job growth for local companies providing methane management solutions to the oil and gas industry.

“Many businesses in this sector plan to increase their total number of workers to meet an uptick in demand from oil and gas producers when the Canadian federal and Alberta methane rules are released,” the group says.

Almost 180 companies in Canada provide methane management products and services, according to the analysis. Of those companies that responded to the survey, 80 per cent expect job growth in the next 12–18 months due to methane regulations and 40 per cent anticipate their headcount will grow by more than 100 per cent.

“This industry is clearly readying itself to expand capacity and headcount to provide its customers viable and affordable solutions to meet new federal and provincial regulatory requirements,” says Jackson Hegland, executive director of MELA.

To meet new government regulations, producers will have to deploy methane management technologies across the value chain and enlist the services of local businesses to support methane reduction management activities.

“With more than 70,000 well sites in Alberta alone, oil and gas producers will be looking for solutions to eliminate methane leaks and return this gas to the pipeline, and this presents a tremendous opportunity for Calscan to grow,” says Henri Tessier, operations manager at Calscan Solutions. “We expect to triple our staff and expand our facilities to meet the needs of our customers striving for zero methane emissions.”

Hegland adds, “Our analysis shows there is a real opportunity for business growth and job creation in the emerging methane management sector, contributing to Canada’s leadership in the race to reduce methane emissions.”

The study contains a review of companies with offices located in Canada and the associated number of jobs within each of those organizations related specifically to methane emissions reduction activities.