Canada, Energy and Carbon: Finding the Balance

Published on: November 03, 2017

Address to The Petroleum Services Association of Canada (PSAC) Industry Insights Luncheon - November 2, 2016

I want to spend some time talking about how the energy system – and the energy supply industry that sustains it – might unfold over the near, medium and longer terms.
From there I want to talk about what the Canadian energy industry could be doing to help Canadian policy makers to secure our energy future - establishing a positive policy and regulatory environment that gets the balance right.

Energy has come and gone in public prominence over the years. During the oil supply crises of the 1970’s or the National Energy Program or the Canada-US free trade debate, energy was at the top of public consciousness. Most of the time energy has just been doing its job in the background, sustaining our communities with secure, reliable, affordable supplies and – especially in western Canada – with high quality employment and business opportunities.
But that has changed in recent years and maybe permanently.

The degree of attention that energy gets these days is pretty much unprecedented, driven in considerable measure by climate change but almost as much by local community concerns and by a growing mistrust of public authorities and energy decision processes.

A growing segment of the Canadian population has a view of what our energy future should be and wishes to have that view listened to. One could argue that that is a good thing, holding policy makers to account and ensuring that Canadian communities have a direct say in their energy futures.

But too little of the debate is well anchored in accurate information or in a solid understanding of how the energy system works or the forces that will drive it in the future. And the worst of it is that I am not talking just about the average citizen here but, just as much, senior leaders and opinion shapers, many of whom seem content for the energy debate to be dominated by wishful thinking and vague platitudes and for fundamental contradictions to be left unresolved in the hope that they will somehow solve themselves.
Well they won’t solve themselves.

They will continue to fester and grow and play themselves out in individual project approval processes or in the form of sudden, communications-driven government actions where good policy is at best an afterthought. The result is that the Canadian energy investment environment is becoming one of ever higher political risk.

The point I want to make is that the energy industry – all of it – has a common interest along with the broader public in urging energy policy makers to move beyond the platitudes and come to grips with some of the contradictions that bedevil us.
I am not saying that that is easy to do.

With the public insisting on a more active role, energy decision making has become more complicated. It increasingly has to account for many contending and contradictory views.

  • The views of citizens – demanding action on the environment and especially climate change;
  • The views of customers - demanding low prices;
  • The views of neighbours – demanding nothing in their back yards or at least not without protracted discussion with very uncertain outcomes.

And those three people – citizen, customer and neighbour – are as often as not the same person. If policy decision makers are to find the political room to make tough energy decisions it will not come about unless those multiple-minded Canadians have a better understanding of the beast we are dealing with and have their faith restored in the decision makers who deal with it day to day.

And that is where the energy industry comes in. Not so much the big oil and gas players and the big power companies – because they are not widely trusted, but the smaller players, the ones that we all find in our communities.

The Unfolding Energy Future

Let me outline what I think are the principal factors that will shape the future of energy in Canada. I think there are four: climate and carbon; world demand growth; public confidence; and technological change.

Climate and Carbon

Almost thirty years after the emergence of the climate debate, the public discussions on energy and climate continue as if they were being conducted on different planets.

At the international level we have, on the one hand, an outlook from the International Energy Agency (IEA) that sees world GHG emissions growth of 16 percent from 2013 to 2040 even under a mid range scenario of reasonably aggressive policy action. On the other, the same governments who are members of the IEA have adopted a goal of holding warming to less than 2.0 degrees Celsius by 2050 which would mean a drastic reduction in emissions worldwide, not growth of 16 percent.

In Canada the contradictions of competing realities are just as stark.

In fairness, Canada’s federal and provincial governments have made progress in connecting the dots, acknowledging that the underlying trend in Canadian emissions implies growth, not decline, as well as making some policy choices which were consequential if not always wise. But what our political leaders have not yet summoned the courage to say is that to meet the 2030 national targets which we have now ratified under the Paris accord implies a change which may well be impossible under any circumstances. At the very least Canada would have to immediately adopt policy action of much greater weight than we have seen even from BC and Alberta with their carbon taxes or Ontario – and now Alberta - with their coal phase out policies.

If governments do find the political will to act in ways commensurate with their aspirations then we are looking at radical increases in carbon costs either directly through carbon prices or indirectly through regulation with all the economic costs and unintended consequences that would entail.

Over a longer horizon more can be done but there the conversation runs to much more ambitious targets such as 80 percent reductions from 1990 levels by 2050. Even a relatively aggressive scenario such as that framed by the Trottier Energy Futures Project could not find a plausible technological pathway to reductions that ambitious. And what their models do manage to achieve is done only with carbon pricing into the 100’s of dollars per tonne.
More than twenty years of debate around carbon pricing suggests that governments are far short of the necessary political will to go down that road.

Even the federal government’s proposed $50/tonne across the economy falls well short of achieving the 2030 target and getting that proposal actually implemented is going to prove difficult to say the least. Ontario and Quebec’s emission trading systems which will take precedence for political reasons will have a modest impact at best – and Ontario is right at the political limits of what it can do on energy pricing, at least with respect to electricity. Some other provinces are resisting carbon pricing altogether and, if they wish, can probably mount political and legal opposition that fends off federal government plans for many years to come.

Some analysts have proposed doing it all with regulation as if that can hide the pain from consumers. This is both a morally and practically questionable proposition. Apart from anything else it ignores the many constraints on governments when it comes to regulating anything, not the least of which is that it is difficult to predict the full impact of regulations on the economy, especially draconian regulations such as would be needed to reach the 2030 goal.
What this all means is that Canada could find itself still stuck in the position it has been in since Kyoto. The continuing effect on our international reputation and on the ability of world environmental groups to target us should make us very worried indeed. Recall the EU campaign to label oil sands oil “dirty” a few years ago. Recall the war in the woods in the 1990’s in BC and the impact on the forest industry. Reputation matters.

Of course the other side of this is how we reconcile being an energy intensive energy resource producer and exporter with greenhouse gas aspirations more akin to those of a European economy. Our national and provincial governments have skipped over this contradiction for over twenty years and we need to get them to do their homework and back up their policies based on facts and on a clear understanding of Canada’s energy economy. Canada is not Denmark.

World Energy Demand

Of course in some minds we will not continue as a hydrocarbon exporter because forces in the world energy economy will drive us out of the business anyway. Reports of the imminent death of the Canadian oil and gas industry seem greatly exaggerated and I will come back to that in a minute. That said, I think there are reasons why we should be cautious about future growth prospects.

World demand growth is steadily slowing. In western developed countries, energy intensity – in other words the amount of energy used for a given unit of economic output - has declined by more than one-third over the past three decades and that trend shows no signs of stopping. The International Energy Agency 2015 outlook in its New Policies scenario suggests that energy demand in the countries that make up the Organization for Economic Cooperation and Development will in fact decline slightly between now and 2040.

Canadian suppliers of energy face slow growing and well supplied markets in Canada and North America. There may be better prospects if we can get access to markets outside North America, particularly in Asia and that should continue to be a policy priority. But there are many reasons to be cautious about any potential bonanzas.

We face lots of competitors including other abundantly resourced and low cost oil and gas producers as well as a growing set of local renewable energy options in many countries. In any event, if the world is to come even close to its greenhouse gas reduction aspirations, hydrocarbon demand growth will have to slow and eventually reverse itself. In that case even Asian markets will not bring us back to the heady growth days, not to mention the heady prices of the past decade.

Several questions come readily to mind.

What if economic growth in emerging markets turns out to be slower than we had been expecting?

What if countries like China, India and many others follow through on their newfound commitments to act on climate change? They could do so in many cases at net economic benefit and if they do, that will reduce energy demand growth and cause a shift away from petroleum products, although probably toward natural gas.

Urban air quality in places like China and India is a cause of enormous health and productivity costs. What if the urgent need to address urban air quality forces radical changes in both the power generation and transportation sectors in places like China and India? Doing so will require reducing both coal and petroleum product use.

Many emerging market countries are trapped in a fiscally and environmentally unsustainable consumer energy subsidy nightmare. What if ways are found to pull those subsidies back as some countries have done of late? One of the important effects would be to reduce demand growth.

What if, over the longer term, emerging markets follow a very different demand growth trajectory than did western developed countries, more rapidly deploying readily available efficient end use technologies as well as renewable energy sources?
The future could unfold in many different ways. But any suggestion of a high growth world demand future for hydrocarbon fuels is subject to many risks and most of them are on the down side.

Public Confidence

In the meantime, we have to contend with the third of the four factors that I mentioned earlier, public confidence.

The Canadian public in growing numbers seems to be unconvinced that Canada should be developing new energy infrastructure, often including so called clean infrastructure. A series of case studies of several Canadian communities recently completed by the University of Ottawa and the Canada West Foundation is revealing and suggestive of an energy decision making future very different than we have been used to. The lack of public confidence in the good faith and competence of public authorities and the increasing insistence by local communities that they be part of the decision making process will fundamentally reshape the way we get things done in the Canadian energy business.

The old way of doing things necessarily had to change. Many Canadian communities had clearly reached the point where they would not be passive hosts for energy projects whether pipes, power lines, power plants (of any sort) or oil and gas operations. More particularly, Canada’s indigenous communities have, with strong support from the Supreme Court asserted their rights and their interests in energy decision making and there is no going back from that.
But a necessary corrective risks turning into a rout in which “communities”, however defined, become the granters of “licence”, however defined. Meanwhile, traditional permission granting authorities – governments and regulatory bodies – risk being reduced to the role of observers or at most, simply one of the steps along the way to a wildly risky future.

Meanwhile the centrifugal tendencies in Canada seem to be growing.

Several provincial and municipal government leaders have made pronouncements about energy infrastructure that appear to belie any familiarity with Canada’s 1867 constitution, or sometimes, it seems, basic economics.

The bargain of Canadian confederation includes the proposition that there should be free movement of goods across provinces but we treat that like some quaint idea that has been succeeded by something much more fashionable called social licence. If every province and every “community”, including several hundred increasingly independent-minded First Nations governments all find themselves with an effective veto on energy projects then we are hardly a country any more.

Our challenge is to restore confidence in the institutions that actually make this country work.

Among other things that means finding mechanisms to engage local governments and First Nations governments as constructive partners working under systems of democratic accountability and the rule of law, all the while keeping processes functional and efficient.
All energy regulators in Canada know this and most are hard at work looking for solutions. Policy makers are following tentatively behind.

Regardless, for the imaginable future most energy decision processes will be slow, costly and uncertain. That will make Canada slow at building infrastructure for domestic use and slow and less competitive at reaching new markets even where the prospects are good.

Technological Change

But the world of technological change is not slowing down which is the fourth factor on which I want to focus.

Truly transformative technological change in energy is actually kind of rare. Since about 1900 we have seen enormous numbers of incremental technological changes that have made energy cheaper, more accessible, more reliable and cleaner. But we heat ourselves, move ourselves and light the way pretty much as we did 100 years ago.

The interesting question is whether the many incremental technological changes that we are witnessing today will generate a more fundamental transformation.

As I said, it seems a fair bet that hydrocarbon energy will be with us for a long time to come. But the long term trend is pretty clear. The combined effects of normal technological change as in all other industries, cost management, pollution management, greenhouse gas management and public resistance to traditional energy developments will tend to work in one direction.

For several decades we have seen a decline of energy intensity in developed countries and to a growing degree we see the emergence of renewable sources.

What this means is that the energy service package will derive ever more from capital, technology and know-how and less from primary commodities.

A Canadian energy future sometime around 2050 might look like the following:

  • The power generation sector will be almost completely “clean”, based on some mix of renewable sources, nuclear, carbon capture, high efficiency gas, storage, and distributed power assets.
  • (Parenthetically it is worth noting the great range of realistically possible technology pathways, most obviously in the power generation sector but in other sectors as well, and the critical importance of governments avoiding technological determinism in their policy thinking)
  • The transport sector will be much more efficient, likely based more on hybrid technologies and with a large and ever growing stock of electric vehicles in urban settings. Long distance transport will be high efficiency with a diverse fuel mix.
  • The industrial and resource sectors will be smaller shares of the economy. They will be continually driven by competitive pressures and carbon pricing to reduce costs, find new efficiencies and find lower carbon fuels.
    • Cities and communities will manage their energy needs in ways much different and much smarter than today.
  • Denser, more mixed use community form will make smarter energy more feasible.
  • Buildings will be much more energy efficient.
  • Urban energy systems will become more “integrated” with combined heat and power systems and lots of potential for local renewable sources, use of waste, and heat management as growing complements and competitors to natural gas.

For many environmentalists this is a very cautious vision. It is certainly one that falls short of carbon management aspirations voiced in Paris. But for others it is unrealistically green. So let the debate continue, provided only that it is anchored by facts and common sense and accompanied by less shouting and acrimony.

Moving to a Truly Sustainable Future

So what does all this mean for the future of the oil and gas industry, particularly over the next two decades or so?

Most of us hardly need to be reminded that the oil and gas industry continues to be an economic mainstay for Canada, accounting for over 20 percent of our exports and a similar share of capital investment. Closer to home it is a mainstay for a large number of communities particularly in western Canada. I want to stop at the word “communities”. It seems clear that new mechanisms are needed in order to better account for local level interests and values.
But it has become fashionable in some circles to suggest that “communities” have some new and unique role in approving or disapproving energy projects. The difficulty, as suggested earlier, is that such a notion begs all sorts of questions.

This includes practical questions about getting things done in a timely fashion and within reasonable bounds of cost and political risk. And it also includes more philosophical questions about the rule of law and democratic accountability. More to the point, it tends to elevate people who are opposed to development to a privileged position where their – inevitably loud – voices can drown out the rest.

The rest as it turns out are also members of communities including a large number of indigenous communities for whom energy development is a potential base of employment, business opportunities and community investment.

How to rebalance the conversation?

Start with carbon. It doesn’t end there but a coherent approach to carbon is an essential foundation.

Premier Notley has - rightly in my estimation - tied support for the federal carbon pricing plans to federal support for pipelines. But maybe its time for a bolder vision.

Our national government needs to state unequivocally that a growing oil and gas industry is in Canada’s interest and that for the industry to grow requires pipeline access to all world markets as well as Canadian domestic markets. And if that growth implies some upward pressure on greenhouse gas emissions then so be it.

To put the moral question in perspective, if Canada were to eliminate its oil and gas industry tomorrow, the savings in greenhouse gas emissions would be made up by growth in world emissions by sometime next spring. Canada’s sacrifice would be empty symbolism, allowing climate activists temporarily to avoid the inconvenient truth that carbon is not primarily about producers but consumers.

Provincial and city governments in turn need to get a grip on the most basic principles that have kept this country united and prosperous. And no principle is more important than the right of free passage of goods needing to reach markets.

As long as the world needs oil and gas resources, as it will for many years to come, and as long as Canada can produce such resources competitively and responsibly we should be in the game and our governments should be unambiguous about their support for that.

Governments are hearing the voices of a very select sample of communities. It is time that they heard more clearly from some of the others.

But, to re-emphasize the point, there is no free ride on carbon. If Canada cannot meet its 2030 emission commitments as I believe to be true, what it can do is demonstrate commitment to action. Alberta’s carbon price will place it among the leading jurisdictions in the world on carbon pricing, less than some of the more ambitious Nordic countries but ahead of most Europeans and well ahead of the US. We don’t have to apologize to anyone.

But if we want to change the narrative and escape the reputational drag that began with our Kyoto policy failure then the continuing resistance in some circles to the idea of carbon pricing will not help.

Paris made it clear that pretty much every country in the world accepts the need to act on greenhouse gases. Action will be slow in coming and uneven but Paris was, nonetheless, a watershed.

In the meantime, both BC and Alberta have shown that a carbon price can be reconciled with a growing hydrocarbon industry. Of course adding costs at a time when the western economies are under stress is not exactly top of mind as a good thing to do. But keep things in perspective.

There is no reason why governments cannot largely mitigate competitiveness effects by recycling carbon tax proceeds, ideally through reduction of other taxes. Distributional effects, especially on economically vulnerable consumers, can be dealt with through more targeted measures. There will necessarily be some rough justice, as with any policy measure, but claims of the apocalypse from dealing with carbon are quite unjustified by the facts.

But oil, and to a lesser extent gas, face more challenges than carbon. Some may recall the couple of decades from the 1970’s to the 1980’s when the news was frequently dominated by stories of oil spills from the Torrey Canyon to the Exxon Valdez. And then it went away and it went away because oil spills became extremely rare.

For reasons that are not clear, despite the fact that pipeline breaks and associated spills are also extremely rare, it has become commonplace in local communities in Canada that oil pipelines and oil and gas development more generally pose grave risks to water supplies, wildlife habitat and the health of local residents.

Strikingly, in the case studies that I referred to earlier, local communities were not particularly exercised about the climate change effects of pipelines, natural gas development or gas fired power plants. They were concerned about local effects, albeit sometimes disproportionately to the actual risk - as is common with all sorts of technologies. The important point here is that the focus is local and it is on practical things that we all care about such as the health of our families. There is basis for a real conversation here.

As it turns out the climate activist community that makes such effective use of Canada’s reputation as a climate shirker has an interest in conflating the risks of local effects with the climate consequences of energy development. This is why I argue that it is in Canada’s interests to shift the narrative by acting more forcefully and visibly on carbon.

But at the same time we need to revisit the social contract that governs the pace of development, the management of cumulative effects at both local and regional scales and methods of mitigating impacts including the risks of system failures. Above all, and again this is consistent with our recent case study work, we need to rethink the decision making mechanisms and especially the way policy makers and regulators interact with local authorities and the specific roles of local authorities in those processes.

All of this will add costs and time, something that industry for understandable reasons tends to resist but the alternative, in my estimation, is not the good old days but growing political risk.

A Way Forward

Let me conclude by coming back to the point that Canada has already become a high political risk environment for energy decisions. The critical strategic question concerns the pathway toward reduced political risk.

We have a problem of trust. Some useful insights can be found in public opinion research done in 2014 for the Canada West Foundation. That work showed that western Canadians understand the importance of the energy industry and are generally supportive of its expansion. So far so good. But in terms of trust, oil and gas along with mining ranks near the bottom of the list, well behind farming, alternative energy and forestry. And as far as trusted messengers are concerned governments are generally no better placed.

So how to restart the conversation? I won’t claim to have the answer but let me repeat some possibilities that we can debate.

  • It needs to include a plausible strategy on climate and carbon; such a strategy can include growth for the oil and gas industry if it is accompanied by real action on emissions management across the economy.
  • It needs to include a new deal with our indigenous fellow citizens who stand to benefit from development provided it is done in ways that respect tradition, the environment and their role in decision making.
  • It needs a rethink of decision processes more generally to better engage local authorities and ensure their ongoing ability to maintain some measure of control of their energy future.

Above all it needs to include a broader spectrum of voices arguing the case for a truly sustainable energy future, voices that include many Canadians who know something about the energy industry on the ground and are known and trusted in their communities.

The oil and gas industry overall, and most of the energy industry for that matter, has a steep hill to climb in terms of trust. The industry is unavoidably associated with environmental effects that contribute to an ever more complex political environment for most governments; the industry needs to acknowledge and respect that reality. But our case study work makes pretty clear that the voices that are trusted are the voices of people who are part of local communities, the ones that have a stake in those communities and understand and support their values.

I think that PSAC members are just those sorts of voices. I suggest to you that many politicians will recognize and respect that fact. And that in turn will help them make decisions guided by common sense and that instinct for the right balance that has shaped Canada for 150 years.

- Michael Cleland, Chairman of the Canadian Energy Research Institute