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The Future of Canada’s Carbon Policy

 Dennis McConaghy, Niskanen Center | December 14, 2016

If there was ever a country that needed to define its carbon policy in terms of carbon pricing rather than implausible carbon reduction targets, it is Canada. But that is not how Canada has defined its national carbon policy to date. Since its inception, the UN convention process has compelled Canada to embrace emission reduction targets. Such pledged emissions reductions are a dilemma for the country, requiring carbon prices much higher than its trading partners are capable of  imposing on themselves, and coexisting uncomfortably with the production of its hydrocarbon potential.

Over the last month, the Trudeau government delivered a series of pipeline infrastructure decisions. For the Canadian hydrocarbon industry, (which represents roughly 25% of Canadian GDP and contributes close to 50% of export revenue), and those that support it, these were signs that the Trudeau government can be a reliable partner.

Of the aforementioned pipeline infrastructure decisions, the following are positive for the hydrocarbon industry:

  • A clarification that peaceful protests during the construction process will be acknowledged, but acts of unlawful civil disobedience or outright criminality will be met with the full force of the law.
  • Two pipeline approvals: Kinder Morgan’s TransMountain Expansion and the Enbridge Line 3 upgrade.  Kinder Morgan will bring Albertan oil sands to port in British Columbia, while the Enbridge upgrade will modestly improve the existing pipeline system which delivers Alberta crude oil to Ontario and the Upper Great Lakes refineries. Combined, these approvals will provide an additional 1.0 million barrels of pipeline capacity per day.
  • A statement of support for a revived Keystone XL pipeline.

Unlike the Kinder Morgan and Enbridge projects, the Northern Gateway pipeline project (which would have spanned from Alberta to the north coast of British Columbia) was rejected. The rejection had nothing to do with carbon emissions. Rather, it was rooted in the Trudeau government’s singular determination—despite a 2014 conditioned approval from the federal regulator and substantial stakeholder engagement in the interim—that the region near the tanker terminal connecting to the pipeline was too precious to bear the risk of a potential oil spill.

Importantly, the Trudeau government clearly asserted these approvals are not at odds with the emissions pledge it made as part of the Paris Climate Accord.

It’s no surprise that the recent pipeline approvals evoked vituperation from most Canadian environmental groups, and others on the Canadian left. But the approvals demonstrate the Trudeau government’s path forward, one that will balance the country’s economic self-interest and its credibility on climate.

These approvals were made in the context of other recent initiatives by the Trudeau government to restore Canada’s climate bona fides:

  • The formal ratification of Canada’s involvement in the Paris climate accord via a vote of the Canadian parliament reaffirmed its goal of reducing GHG emissions by 25% reduction from current levels by 2030.
  • The Trudeau government announced its plan to impose a national carbon pricing standard of $50/tonne by 2022— as substantial a carbon price  yet imposed by a comparable developed country.
  • It declared its intention to set a national prohibition on coal in the electric generation sector within Canada by 2030 (coal was already declining to less than 10% of the Canadian electrical generation capacity).,
  • It is supporting the Alberta government’s intention to impose an emissions cap on oil sands production.

But these pipeline approvals betray an inconsistency that the Trudeau government should address directly. That is, if carbon pricing is to be the primarily element of Canadian carbon policy going forward, then the country’s climate credibility should hinge on that—rather than on concrete emission reduction targets that imply carbon prices well in excess of what Canada’s major trading partners are prepared to impose on themselves.

Despite the Trudeau government’s assurances that Canada’s INDC can still be met, achieving the emissions reductions targeted in the INDC with the newly approved pipeline infrastructure will be challenging. The new pipeline capacity will enable Canadian oil sands production to exceed 4 million barrels per day. Associated emissions from that production will increase emissions over the next decade from that sector, likely proportionate to the ultimate production increase.

At the press conference following the pipeline approvals, Trudeau essentially conceded that Alberta’s current intention to impose a cap on future oil sands production-related emissions was a matter of Albertan provincial jurisdiction—and therefore vulnerable to a future Alberta government that may not sustain the cap as a practical constraint on oils sands production, especially if real economic value was being lost.

Trudeau should be clear that meeting the INDC is not a given. Canada’s emissions abatement curve, i.e. the cost of meeting its INDC target, means it is costlier to achieve emissions reductions than in other countries, most notably the United States. Simply compare the amount of coal in the electricity sectors of the two countries. To achieve its INDC, Canada would likely have to impose national carbon prices in excess of $200/tonne. Such prices do not exist internationally. It is unreasonable to think they will be imposed unilaterally by Canada.

Nevertheless, Trudeau should clarify that primarily through carbon pricing, his government is defining a credible—even leading—carbon policy, even as the country’s required pipeline infrastructure is constructed and ultimately operated. But most importantly, that Canada’s carbon pricing has to be conditioned by what Canada’s major trading partners, most notably the United States, is concurrently doing on carbon pricing, either explicitly or implicitly. This condition has never yet been enunciated as a key element of Canadian carbon policy.

This  past  week the Trudeau government met with the other first ministers of the Canadian provinces to progress how Canada will meet its INDC commitment. Most of the Canadian provinces agreed to accept Trudeau’s national pricing standard. As for how that standard, ( $50/tonne by 2022), will actually achieve Canada’s INDC , the government offered only a vague pathway bar chart. A “pathway” that seemingly relies as much on acquisition of foreign offsets, various regulations and mandates as much  on carbon  pricing,. No analysis of where the emissions reductions are coming from—pricing or regulations? No analysis provided how much such  non-pricing policy instruments would cost relative to the carbon pricing standard. No detailed analysis of how increased emissions from oil sands growth will be offset by other sectors. Or whether oil sands output would be compromised by the invocation of the Alberta oil sands emissions cap. And no explanation to Canadians of the cost of compliance to the current Canadian INDC compares to the cost to be incurred by other it trading partners.

Finally, the Trudeau government is seemingly still in denial about the reality of what transpired on November 8. Does a Trump presidency mean that the U.S. bowing out of climate policy at the federal level, whether legislatively, diplomatically, or administratively. Does a Trump presidency see the U.S. withdraw from the Paris accord, and even the UN process entirely? Yes, and these are real possibilities that Canada cannot ignore.

Trudeau defiantly asserted last week that Canadian carbon policy would be determined within Canada by Canadians. But how can a Canadian government sustain the competitiveness of its economy if it still trying to impose carbon taxes  that are significantly  inconsistent with U.S. carbon policy under a a Trump presidency? Doubtless pressure to scale back carbon policy, primarily via reducing the stringency of carbon pricing, will mount from the resource sector and other energy intensive sectors will mount on the Trudeau government.

But for now, the Trudeau government has approved new pipelines, achieved significant provincial support for its national carbon pricing standard, and seemingly convinced itself that its INDC commitment still has credibility and affordability. We’ll see.