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US and Canada's clean-energy alliance

The threat to Canadian producers of a US ban on imports of "dirty fuel" from the oil-sands has receded, for now. But the threat of a US carbon tax remains, writes WJ Simpson

President Barack Obama and Canada's prime minister, Stephen Harper, have sidestepped demands from some US politicians and environmentalists for an immediate ban on oil-sands imports, or a North American carbon cap-and-trade system.

Meeting in Ottawa, in February, the two leaders began a "clean-energy dialogue" aimed primarily at finding technological answers to climate change – such as carbon capture and storage (CCS). They established a deadline for progress by declaring they were "committed and ready" to take a joint proposal to the UN Climate Summit in Copenhagen in December, and in the process to repair the image of their countries as international climate-change pariahs.

Aiming for a truly global agreement at Copenhagen, Obama claimed that the more "two relatively wealthy countries [such as the US and Canada] can show leadership, the more likely it is that India and China will be part of the solution".

Obama told a brief news conference that the challenge of reducing greenhouse-gas (GHG) emissions from fossil fuels is daunting and there are "no silver bullets to solve all of our energy problems". Tacitly agreeing with Canada's position that coal-fired power plants in the US are a bigger source of GHGs than Alberta's oil sands, Obama said: "If we can figure out how to capture the carbon, that would make an enormous difference ... but right now the technology [CCS] is not cost-effective."

That put an end to any immediate prospect of the US scaling back its consumption of oil-sands crude (about 8% of its supplies) – an action US energy secretary Stephen Chu said could be very damaging to an already reeling economy. The Canadian environment minister, Jim Prentice, said the closeness of the countries' economies – which depend on the world's largest bilateral trade – requires emissions regulations, fuel standards and energy strategies to be aligned.

Too soon for harmonisation

But Harper showed a degree of wariness about the Obama administration's ultimate aims, insisting it was too soon to talk about climate-change harmonisation between the US and Canada. Canada favours "intensity-based" targets, lowering GHGs per unit of production, while the US would prefer caps on GHG output. "Our targets are more or less the same," Harper said, referring to Canada's promise to cut GHG emissions by 20% from 2006 levels by 2020, compared with the US goal of a 14% reduction in emissions by 2020 from its 2005 level. Harper said those similar objectives reinforced his belief that "we will have a great deal in common as we move forward."

For the Canadian oil industry and the Alberta government, it was a relief that the summit's emphasis was on technological solutions. Dave Collyer, president of the Canadian Association of Petroleum Producers (Capp), said nothing he heard from Obama and Harper pointed to "an immediate change in regulations, or anything that would cause concern about discrimination against oil-sands production". He expressed confidence that the joint approach "will find the right balance between economic growth, energy security and environmental protection in a manner that allows oil-sands growth to continue".

As well as addressing the high carbon output that results from oil sands production, the industry is mindful of the need to protect the local environment – in 2008, for example, 500 ducks died in a toxic waste pond, to considerable public disapproval.

Collyer said technology is the "largest lever we have ... it fits very well with our view that we're not looking for special treatment for the oil sands". Alberta's premier, Ed Stelmach enthusiastically said Obama was "clearly speaking Alberta's language ... balancing the environment and the economy and investing in CCS".

In the aftermath of the summit, Prentice met senior US government officials and Capp sent a delegation to Washington to continue discussions on future co-operation. But most importantly, Obama pushed ahead with more elements of his energy agenda, including the introduction of a carbon cap-and-trade system and a Low Carbon Fuel Standard (LCFS). As well as seeking $26.3bn for the Department of Energy in fiscal year 2010, much of it for "clean energy", Obama's budget request assumes revenue collections from a mandatory cap-and-trade programme by 2012 – by 2020, up to $300bn a year could be collected from power plants, oil refineries and other industrial sources.

The unspoken message to the Canadian petroleum industry, notably the oil-sands sector, is that there will be no exemptions if Obama implements a national LCFS. Vincent Lauerman, a consultant on Canada's energy sector, expects the LCFS will require a 10% reduction in carbon emissions from vehicle fuels by 2020, including upstream emissions associated with the production of those fuels.

Combined with a cap-and-trade system, an LCFS would compound financial risks for oil-sands producers, already driven into retreat by low oil prices and tight credit (PE 3/09 p26), says Lauerman. "It is time to face reality and adopt a pragmatic approach to protect Canada's oil-sands industry from US environmental legislation," he says, calling for the Canadian and Alberta governments to invest heavily in CCS research and make the country a world leader in the technology.

Prentice said the US and Canada are on the threshold of investing a combined $7bn of public money on CCS technology and pilot projects, and are prepared to collaborate to "ensure we don't duplicate those investments and that they are appropriate for CCS in the oil sands" as well as power generation. Canadian governments have pledged C$4bn ($3.2bn) – half from Alberta and the rest divided between the federal and Saskatchewan governments – for CCS development.

Alberta is determined to be in the vanguard of CCS technology. The province aims to have three to five pilot projects operating by 2015, each capturing 5m tonnes a year (t/y) of carbon dioxide (CO2) – a small step towards the province's target of storing 139m t/y of CO2 emissions through CCS by 2050 (see Figure 1).

A joint-venture by Enhance Energy and Fairborne Energy has already filed regulatory applications for Alberta's first CO2 pipeline. The venture aims to have its C$0.5bn, 14.6m t/y project on stream in 2011, collecting CO2 from Alberta's industrial heartland and delivering it to enhanced oil-recovery schemes in south-central Alberta.

But David Manning, executive vice-president and chief environmental officer for National Grid in the US and a former Capp president, says "nobody is very comfortable" about unproved CCS technology. He adds: "There's a real question within the US political sphere as to whether the stuff will stay in the ground." And some, including Manning, believe Obama may resort to a carbon tax, an idea Harper has dismissed as "economic catastrophe". Manning claims the tax has backing in the White House from Obama's main environmental policy advisers.

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