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Canada's climate-change wait

Forget Copenhagen. The climate-change decisions that will affect Canada's oil and gas industries will come from another capital – and it isn't Ottawa, writes Derek Brower

IN THE minds of green activists Canada is one of the big threats to any lasting agreement that might emerge from last month's negotiations in Copenhagen. Despite Canadian efforts to reassure the conference, activists awarded the country their "fossil of the day" prize, in recognition of the nation doing most to hinder the fight against climate change.

Canada is a soft target, because the reality is different. Although its per capita emissions are 22 tonnes a year – second only to the US' and almost four times the global average – its share of global emissions is just 1.8%. Greening Canada will not save the world from climate change. Greening the US, however, would be different. And for Canadian oil and gas producers, the efforts of Barak Obama's administration to push through climate-change legislation will be decisive.

Canada already has targets in place, which are roughly comparable with those proposed by the US. The Canadian government wants a cut of 20% in its emissions by 2020 against emissions in 2006. The US target is 17% by 2020 against 2005. (By comparison, the EU is targeting a 20% cut by 2020 against 1990 levels, a more ambitious goal.)

Yet neither of the North American countries' targets is particularly meaningful, say environmentalists. First, because Canada's emissions continue to rise (by about 26% since 1990) and will grow still greater, in small part because of pollution from the oil sands. Second, until the US Congress approves its own climate-change legislation, both countries will remain in limbo on their emissions targets.

Indeed, Alberta, the energy powerhouse province that most piques the green lobby, has for the time being adopted a more pragmatic solution. On the one hand, its emissions-targets are weak, requiring only a 12% cut in carbon intensity – meaning total emissions can still rise, provided pollution per unit of production falls by the required amount. On the other hand, its programme includes a C$15-a tonne ($14.22/t) levy on carbon, with the penalty being paid into coffers for later spending on green technology. The province's environment minister, Rob Renner, said in Copenhagen that Alberta would be happy for this levy to be three times higher, which would put it in line with the price demanded by some of the province's green groups.

Political circumstances

Under the political circumstances, these are reasonable goals, for several reasons. First, Canada's energy sector is the engine of its economy. Second, while the economy is weak, asking for sharper unilateral climate targets that could cost jobs is unrealistic. Public opinion is far more divided over climate change than it is in Europe, home to the world's historical polluters. Fourth, Canada remains undecided on environmental policy until it sees the shape of future US legislation.

That last factor is why decisions in Washington, and not anything achieved in Copenhagen, will determine Canada's climate-change strategy and the effect it will have on its energy sector. "The Canadian government has taken a position – and we agree with it – that it is important to understand what the US does before we lock in a climate policy in Canada," says David Collyer, president of the Canadian Association of Petroleum Producers, which represents the oil patch.

He and others in the sector could be waiting for a while. The Waxman-Markey bill (the American Clean Energy and Security Act of 2009, introduced last summer), named after the US congressmen who proposed it, is facing serious opposition in Washington. It may, say analysts, take until 2012 before the legislation appears for the presidential signature. Before then, it will probably have been hammered into very different shapes, accounting for targets in Copenhagen and the lobbying of interest groups in Washington, not least from the coal sector.

One aspect likely to survive, however, is the adoption of cap-and-trade as the mechanism to reduce overall emissions. Collyer says Canadian energy producers remain ambivalent about the method of abatement – whether cap-and-trade or a carbon tax – but are concerned that the policy could be "discriminatory" against Canada. "Competitiveness matters," Collyer tells Petroleum Economist, "and the policy must consider the economy as well as the environment."

One provision in Waxman-Markey, aimed at China, could hurt Canada. This provision says only imports from a country with an emissions programme as ambitious as the US' would go unpenalised. "Canada would be hit hard if its national greenhouse-gas emissions system is seen to be less demanding than the US programme," says the Conference Board of Canada. Environment minister, Jim Prentice, says the border provisions in Waxman-Markey would be a "prescription for disaster". Prime minister Stephen Harper says it would become a "front for protectionism quicker than you can say 'hello'." Canada is lobbying frantically in Washington to prevent such a development.

The industry's response has been to remind the US of where it sources so much of its oil. Synthetic crude from the oil sands continues to flow south in greater volumes. The Oil Sands Developers Group says that by 2015, refineries in the Midwest states will have doubled their syncrude intake to 2m barrels a day. The US seems to have got the message: the approval in August of Enbridge's Clipper pipeline to carry more syncrude to the US was welcome in the oil patch. The US can choose Canadian syncrude or imports from nations considered less friendly.

There are, however, two other forces to contend with. First is legislation in several US states to apply low-carbon standards on fuel used in the transport sector, with the production cycle of the oil the target. Oil-sands developers have taken that to be a strike by states such as California against them. Canadian producers' answer is that on a well-to-wheels basis syncrude from the oil-sands is scarcely more carbon-intensive than other crudes imported in the US (although the oil-sands extraction process emits far more carbon dioxide). Recovery rates from the oil sands are also about double those of other reserves globally.

Winning that argument is as much about Canada's public relations as it is about its emissions standards, because the facts are more complex – and more favourable to Canada – than many green campaigns against the oil sands acknowledge. Emissions from each barrel produced in the oil sands are now 30% lower than they were in 1990, says Collyer, although greens say the development's emissions will continue to rise.

The second threat is the price on carbon that will emerge from whatever legislation is passed by Congress. Collyer says fluctuating carbon prices are one of the "variables" Canadian producers will have to get used to. But with the long time-frame needed to make investments in Canada's upstream, the risk will be higher, especially if the price is unknown. The difference in price between what environmentalists wish for and what industry says is feasible are considerable.

Combined with the green onslaught on Canada in the international press, the uncertainty about US climate legislation has put the Canadian energy industry on the defensive. But it does not have to be that way. One thing is certain: if carbon-trading mechanisms and other strategies are to work in North America, they will be continental. Canada will have to develop a comparable strategy to the US. The country is not the eco-monster of its critics' imagination. Like the rest of the world, it is simply powerless to act on its own when the powerbroker to the south is yet to make up its own mind.

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