The world is currently facing a significant challenge in meeting growing demand for safe, reliable and affordable energy while responding to the need for lower carbon emissions over the next several decades. Canada can and should seize this opportunity and continue to play an important role in meeting this demand and reducing energy poverty in emerging economies.

 

Tim McMillan

Renewable energy is not on track to displace traditional forms of energy in the next two decades. Instead, an evolution of ever-cleaner forms of oil and natural gas will meet global demand, estimated by the International Energy Agency to be the dominant form of fuel to at least 2040. Canada can become the world’s energy supplier of choice—responsibly producing oil and natural gas, reducing GHG emissions at home and around the world, while continuing to generate economic benefits across the country.

Yet, much needs to be done to make this a reality. There is an immediate need for industry and governments to address significant competitiveness gaps relative to other oil and natural gas producing regions, particularly the United States.

While the U.S. remains Canada’s biggest customer, we can’t be complacent in this relationship or forfeit the spirit of competitiveness and productivity that drives our economic growth. The U.S. is aggressive in its drive to be a net energy exporter by 2022, shipping a significant amount of oil and natural gas to the same emerging markets Canada is seeking to serve. Increasing shale gas production in the U.S. has resulted in less reliance on Canadian natural gas exports and the more favourable regulatory and tax system in the U.S. has reduced the amount of investment directed toward Canada’s energy sector.

While capital investments in oil and natural gas increased globally in 2017, investment in Canada was lagging. The Canadian Association of Petroleum Producers (CAPP) estimates total capital spending in 2017 was $45 billion—a 44 per cent decline compared to $81 billion in 2014. Meanwhile, capital spending in the U.S. rose about 38 per cent to $120 billion in 2017.

Rectifying this imbalance through regulatory reform will encourage long-term investment in energy infrastructure and in the type of research and technology development that is key to the sustainable growth of the industry.

This vital link between sustainability, innovation and investment is outlined in the Competitive Climate Policy report released earlier this year by CAPP. 

The lens through which all policies are viewed in the report sees the economy and the environment as global ecosystems that need to function effectively together to meet sustainability goals. 

In CAPP’s vision, Canada is—now and in the future—a global environmental leader positioned to reduce GHGs on an international scale if the right policies are put in place to maintain competitiveness, spur innovation and attract investment.

Central to this vision is the prevention of carbon leakage, the circumstances that see high costs in one region drive investment, jobs and GHG emissions from one highly-regulated country to one with weaker rules.

Current policies in Canada have already kick-started this phenomenon, with energy investment redirected from Canada to places with lower environmental standards and costs—Saudi Arabia, Russia and big oil- and natural gas- producing districts such Texas, Oklahoma and North Dakota in the U.S. 

For example, Alberta’s implementation of the Carbon Competitiveness Incentive has not been efficient and is already impacting investment decisions, challenging the economic viability of existing projects and limiting investment in new developments. In addition, multi-national firms with opportunities outside of Canada are choosing to grow their production in other parts of the world. In 2017, several companies divested holdings in Canada and made capital allocations elsewhere, although this is not attributable solely to climate policies.

Duplicative and inefficient policies in Canada are one of several factors driving global energy capital to places where it can get a better financial return. Yet adjustments to the emerging policy environment can still be made to improve Canadian competitiveness.

CAPP presents four key recommendations in its competitiveness report to enable the oil and natural gas industry’s commitment to innovation and technology before other suppliers—with weaker environmental standards—capture global markets without addressing environmental concerns.

The first involves bolstering Canada’s oil and natural gas sector as an emissions-intense, trade-exposed (EITE) industry to balance effective environmental policy and competitiveness. 

Protection mechanisms for EITE sectors are key to minimizing carbon leakage—without them EITE industries such as the upstream oil and natural gas sector may choose to leave Canada or decrease investment.

Currently, many different GHG management regimes around the world, in California and the European Union, for example, use an EITE methodology to protect industries’ competitiveness.

A CAPP analysis estimates that Canada’s upstream oil and natural gas sector will pay $25 billion over the next decade to the combined current provincial and federal policies designed to mitigate the impacts of climate change.

The federal government is itself raising the alarm about environmental policy impacts to the economy overall. In April, the Parliamentary Budget Office (PBO) released its Economic and Fiscal Outlook, which says the federal carbon tax will generate a headwind for the country’s economy over the medium term as the levy rises to $50 per tonne in 2022. Based on analysis conducted by Canada’s Ecofiscal Commission, the PBO projects that real GDP will be $10 billion lower in 2022.

Improvements to the EITE mechanism, along with a recognition of the cumulative burden of other policies, regulations and taxes, will help reduce emissions while still allowing for continued growth of the sector.

CAPP’s second recommendation applies to the proposed Clean Fuel Standard (CFS). This new policy seeks to establish life cycle carbon reduction requirements to all fuels combusted for the purpose of creating energy, including vehicles, home heat and major industrial processes.

In our view, the CFS policy is highly duplicative, overlapping with existing policies created to drive emissions reduction. In its current form, it offers no protection for EITE sectors such as the upstream petroleum industry.

Limiting the scope of the CFS to exclude upstream oil and natural gas, including offshore production avoids this duplication and improves industry competitiveness.

A third pillar of the CAPP competitiveness report recommends the creation of domestic and international offset programs. Such programs would allow industry to invest in alternative compliance options that enable low-cost emissions reductions.

A well-designed offset system provides high-quality compliance options to regulated sectors and incents non-regulated sectors to participate in project-based emissions reductions. Vital to the success of any offset program is to have an open, flexible system with robust, credible markets and flexible compliance mechanisms.

Norway is an example of a country that uses United Nations-approved international offsets to create credits that can then be used to meet domestic GHG reduction goals. Another example of international offsets is the potential for using Canadian-produced liquefied natural gas (LNG) instead of higher carbon intensity fuels in China, India and other markets —essentially a carbon offset.

Finally, CAPP advocates for turning a substantial portion of carbon pricing revenues from oil and natural gas toward enabling innovation within industry. This could significantly boost the overall impact of carbon pricing on long-term emissions reduction while mitigating the effects of carbon leakage and reduced competitiveness.

Further, a revenue-recycling approach is an excellent basis for establishing a carbon pricing re-investment strategy that eliminates the effects of short-term political priorities. Ultimately, ensuring carbon pricing revenues from the upstream sector are paid into a government fund that returns revenue to enable GHG abatement specifically in the sector is key to creating effective, long-term benefits from carbon pricing.

Investment is a critical component of the research and innovation needed to reduce the carbon footprint of every barrel of oil produced. This work is already in overdrive in the sector. Through Canada’s Oil Sands Innovation Alliance (COSIA), companies have invested more than $1.4 billion to develop and launch nearly 1,000 new innovations and technologies in the last five years. These companies are creating and harnessing new technologies to help ensure the Canadian industry can compete in a carbon constrained world.

We live in a growing, urbanizing world that will need more energy in every form, including more Canadian oil and more Canadian natural gas. In this global future, investment to improve environmental performance makes sense. Other regions have recognized this and are putting policies in place to ensure their economic and environmental policies work hand-in-hand. 

Canada needs policies that enable the industry’s commitment to innovation and technology before other countries—with weaker environmental standards—capture global energy markets without meaningful action to achieve our environmental goals.  

Tim McMillan is President and CEO of the Canadian Association of Petroleum Producers.