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Highway 63 curves past the Syncrude oil sands site, north of Fort McMurray, Alberta, May 6th, 2015. (Ian Willms For The Globe and Mail)
Highway 63 curves past the Syncrude oil sands site, north of Fort McMurray, Alberta, May 6th, 2015. (Ian Willms For The Globe and Mail)

Canada's carbon challenge: Turning promises into reality Add to ...

Provincial premiers boast leadership in the country’s effort to cut greenhouse gas emissions, but achieving their own lofty ambitions will require political courage and aggressive policies to drive fundamental changes in the way Canadians produce and consume energy.

Just to meet existing federal and provincial targets, governments will have to impose carbon pricing – either a direct carbon tax, a cap on GHG emissions or costly regulations – several times higher than those currently included in various provincial plans, experts say. The result will be higher energy costs for Canadian industry and consumers alike.

Prime Minister Justin Trudeau plans to convene a first ministers’ conference, tentatively scheduled for March 7, as part of an effort to forge a pan-Canadian strategy to accelerate action on climate change. Environment Minister Catherine McKenna is already conferring with her provincial and territorial counterparts and will meet with them collectively next week in Ottawa.

But don’t expect a national plan – or bold new targets – to emerge from the first ministers’ conference. British Columbia is still deciding on a response to its climate leadership panel, while Ontario and Alberta are working out details of new policies and Saskatchewan is waiting for more clarity from Ottawa on its intentions before committing to any carbon-pricing plan of its own.

“The first ministers’ meeting will serve as the forum for discussion and consensus on the way forward and the actions all parties will need to take to achieve sustainable growth,” said Caitlin Workman, spokeswoman for Environment Minister Ms. McKenna.

Last month in Paris, Mr. Trudeau and several premiers took the stage at the United Nations climate summit and vowed that Canada would not shirk its role in an all-out global effort to avert the worst impacts of global warming.

The Paris summit ended with a historic agreement on a common way forward, one that aims to limit the rise in global temperatures to two degrees C, or even 1.5 degrees. Global leaders heralded it as the dawn of a new era of international co-operation; environmentalists hailed it as the beginning of the end of the fossil fuel age.

But as with the countries that endorsed the UN accord, Canadian governments – federal and provincial – face tremendous challenges in turning the heady promise of Paris into a workable reality. Virtually every premier has unveiled a slate of new policies aimed at cutting emissions, or is promising to do so in the coming year.

Ontario, Quebec and British Columbia have aggressive targets over the near and long term that will require tougher policies to achieve. Alberta and Saskatchewan – with the most carbon-intensive economies – are looking to reverse the growth in emissions over the past decade that was fuelled by their booming oil industries and fast-growing populations.

Together with the federal government, provinces are looking for the right recipe that will drive societal change and encourage the development and adoption of clean-tech solutions, without imposing debilitating burdens on companies and consumers.

“It’s going to be a profound change for a country like Canada,” Sophie Brochu, chief executive officer at Montreal-based Gaz Métro, said in an interview.

Ms. Brochu served as co-chair of a national roundtable on the green economy that met last year in Quebec, and attended the Paris summit as an observer. She is pitching natural gas as a key transition fuel, while promising the steady addition into the fuel mix of bio-methane made from garbage.

She urged governments to be ambitious and pragmatic, as well as transparent so everyone knows the costs and benefits of climate policy.

The former Conservative government committed Canada to reducing emissions by 30 per cent from 2007 levels by 2030, a goal the Liberals described as a “floor” and environmentalists decry as weak. Even with the adoption of carbon pricing, Alberta and Saskatchewan – which depend heavily on oil and coal and together account for nearly half of Canada’s emissions – are not expected to reduce emissions below 2007 levels over the next 15 years. That means the rest of the provinces will have to pick up the slack.

Environmental economist David Sawyer calculates that just achieving Ottawa’s existing 2030 target would require a tax of $180 on a tonne of carbon dioxide in 15 years. The country’s highest carbon tax – implemented by B.C. – now sits at $30 a tonne. An advisory panel in British Columbia last fall urged Premier Christy Clark to increase that $30 levy in $10 annual increments until it reaches $150 a tonne by 2030, and to cut other taxes to soften the blow.

The magnitude of those recommended increases in carbon taxes has stoked fears in the business community, particularly if key trading partners such as the United States lag behind.

Provinces are adopting or expanding explicit carbon pricing – either through cap-and-trade plans or carbon taxes – in order to drive down GHG emissions and shift the economy away from its dependence on fossil fuels. Those efforts would put Canada in the mid to high end of the range among industrialized countries in terms of carbon pricing.

Once Ontario and Alberta implement their respective plans, the country’s four largest provinces – representing fully 80 per cent of Canada’s GHG emissions – will levy some form of broad-based carbon price. That includes an emissions cap in Quebec and Ontario, a carbon tax in British Columbia and a hybrid system of tax and cap in Alberta. Saskatchewan, which accounted for 11 per cent of Canadian’s GHG in 2012, says it will unveil plans for a levy after seeing what the federal government proposes for a national carbon price.

Those direct levies are complemented by indirect carbon costs contained in a raft of regulations as well as subsidies for clean-tech companies. Various provinces are boosting the deployment of electric vehicles and natural-gas-powered trucks and ships, pursuing tougher energy efficiency standards for vehicles, buildings and appliances, and adopting regulations requiring oil and gas producers to reduce methane emissions.

As they ratchet up carbon costs, provinces are looking to soften the blow for those companies – often, but not exclusively, foreign multinationals – that can move investment and jobs either across the border or across the world in search of the lowest costs and best returns. Economists call the phenomenon “leakage” – global emissions aren’t reduced when companies merely shift activity from a higher-carbon-price jurisdiction to a competing one that features lower carbon costs.

With hundreds of employees in Ontario and Alberta, Nova Chemicals Corp. – which is owned by Abu Dhabi’s International Petroleum Investment Co. – operates in what economists call an “energy-intensive, trade-exposed industry.” As with other EITE firms in petrochemicals and steel and cement making, energy is a significant portion of Nova’s production costs and competition for markets and capital is intense.

Nova Chemicals’ petrochemical complex in Sarnia’s Chemical Valley is one of Ontario’s largest emitters of greenhouse gases at more than one million tonnes a year, and faces a new provincial cap-and-trade plan that will add to its operating costs. Nova has invested at that Corunna plant to process natural gas rather than crude, and is considering further expansion but is assessing the impact of the province’s carbon pricing before proceeding.

The company is also in the late stages of a $1-billion (U.S.) expansion of its Joffre polyethylene plant near Red Deer, Alta., which is being completed just as NDP Premier Rachel Notley rolls out her government’s economy-wide carbon-pricing plan that she says will establish the much-maligned province as a climate leader.

“In any of our capital investments, there are many factors that we consider as we develop the projects,” Nova spokesman Pace Markowitz said in an e-mail. They include “electricity costs, changing environmental regulations including direct and indirect impact of carbon prices, logistics infrastructure and potential financial incentives,” he added.

But all Canadians – companies, institutions and households – face higher energy levies that will flow through the economy as governments tackle climate change. Provinces are looking to ease the pain by subsidizing efficiency efforts and clean-tech alternatives, and by providing direct assistance to lower-income households.

Some experts worry that the premiers are creating a balkanized climate regime, particularly in the electricity system where provincial governments have long isolated their markets to favour government-owned or local utilities. Ontario and Quebec and Manitoba are co-operating under the cap-and-trade plan, and all premiers agreed last summer on a Canadian energy strategy that pledges co-operation. But provinces are still prone to protectionism and acting in isolation, Jock Finlayson, executive vice-president at the British Columbia Business Council, said in an interview. Premiers agreed on a Canadian energy strategy but he said there are still far too many barriers.

“I call it climate mercantilism at the subnational level,” Mr. Finlayson said. “We need to link these markets. Everybody who can count to 10 recognizes that you can lower abatement costs by co-operative effort involving multiple jurisdictions rather than having little markets [on their own] trying to find the most cost-effective ways to get emissions down.”

However, Gaz Métro’s Ms. Brochu said provinces still require the flexibility to address their particular situations, given the dramatic differences in industrial mix, emissions profiles and historical action on climate. “Each province has a mountain to climb, but each mountain is a different shape.”

Alberta

Emissions in 2013: 267 MT, up 57 per cent since 1990.

Emissions by leading sectors: oil sands, 22 per cent; other oil and gas, 24 per cent; electricity, 17 per cent; transport, 11 per cent.

Targets: The NDP government has not updated the existing target of 50 MT below the “business-as-usual” projection by 2030. The forecast – given a low-oil-price scenario and new government policies – is for emissions to peak around 2020, and then fall to 2015 levels by 2030.

Between 1990 and 2013, Alberta saw its GHG emissions soar – fuelled by a fast-growing economy that featured booming oil exports, the fastest population growth in the country and a reliance on coal-fired power to feed all that rising demand. Now the NDP government is determined to rein them in with a suite of policies including a cap on oil sands emissions and an economy-wide carbon tax set initially at $20 a tonne of carbon dioxide and rising to $30 in 2018. It will also impose regulations to reduce methane emissions from the oil and gas sector by 45 per cent over the next 10 years.

The principal architect of that plan, University of Alberta economist Andrew Leach, forecasts that provincial GHG emissions will peak around 2020 and then gradually decline to 2015 levels. That forecast is based on the National Energy Board’s low-oil-price scenario in which growth in oil sands production largely stalls at about three million barrels a day in 2020, up from 2.5-million b/d last year.

Given that lower-growth scenario, the cap on oil sands emissions won’t affect companies before 2030, Prof. Leach said. But it will have an impact if markets rebound more sharply than anticipated and investment picks up, unless companies can deploy new technology to drive down per-barrel emissions.

With the carbon tax, large industries will receive a subsidy to offset much of the tax costs, with the amount of that payment determined by their environmental performance. That’s meant to keep those industries competitive with those in other jurisdictions. “The idea is to effect the emissions decision, not the location decision,” Prof. Leach said, referring to the potential for Alberta to lose investment in emissions-intensive production to jurisdictions that don’t have carbon pricing.

Meanwhile, the Alberta government is entering into negotiations with the province’s utilities to determine how they will be compensated for the planned phase-out of coal-fired power by 2030.

TransAlta Corp. announced recently that it is slashing its dividend and refinancing its debt to prepare for a transition from coal to natural-gas-fired electricity and renewable power.

Ontario

Emissions in 2013: 171 MT, down 6 per cent since 1990.

Emissions by leading sectors: transport, 43 per cent; industry, 30 per cent; buildings, 17 per cent; electricity, 9 per cent.

Targets: 15 per cent below 1990 levels by 2020, 37 per cent below 1990 by 2030.

Ontario saw its emissions flat-line between 2011 and 2013 after a steep drop due to the impact of the recession and its decision to phase out coal-fired power. In its report last summer, the province’s Commissioner for the Environment warned that the province would not meet its 2020 target if it did not embrace “a more ambitious suite of action.”

Since then, the province has unveiled its plan to link with Quebec and California in a cap-and-trade market, with the first auction for tradable permits due early next year. It is also pursuing a broader array of policies – investment in public transit, in charging stations to encourage adoption of electric vehicles and is expected to announce new plans, in conjunction with Ottawa, to provide energy retrofits for buildings.

As in Quebec’s system, the government will provide free allowances for some large industries that are energy intensive and exposed to competition. But the protection will be based on a ranking system and it is not clear yet who will win and who will lose.

But there are relatively few industries that are overexposed, said economist Christopher Ragan, chair of the Ecofiscal Commission, a group of academics and former political leaders who have endorsed explicit carbon pricing. In a study released last fall, the commission concluded that Ontario’s manufacturing sector is “mostly unexposed” to competitiveness pressures from carbon pricing.

The exceptions: petrochemicals, cement manufacturers, refining and, to a lesser extent, steel. Mr. Ragan endorses the provision of free allowances to EITE companies, so long as it is done on a temporary basis, and is targeted and transparent.

“Businesses will always stand up and say they have competitiveness challenges and they need help,” he said in an interview. “You don’t just want to give them based on a handshake in a dark room. You want to give them away based on some sort of objective use of data and in a transitional way.”

The Ontario chemical industry based in Sarnia and Toronto is making efforts to position itself as part of the solution on climate change. But the industry, which is dominated by large multinationals, still worries that high carbon costs in Ontario will erode competitiveness, not only in its production process but in its supply chain and transportation network.

“It is the provinces that will feel the impacts if the manufacturing they have disappears because they make the wrong choices,” said Bob Masterson, president of the Chemistry Industry Association of Canada.

Quebec

Emissions in 2012: 78 MT, down 8 per cent since 1990.

Emissions by leading sectors: transport, 45 per cent, of which road transport is 78 per cent; industry, 32 per cent; buildings, 10 per cent.

Targets: 20 per cent below 1990 levels by 2020, 37.5 per cent below 1990 levels by 2030.

Quebec touts itself as Canada’s leader on climate change, certainly in terms of emission reductions. Between 1990 and 2012, the province led the country in emission reductions and Premier Philippe Couillard’s government expresses confidence it will reach its 2020 goal as a result of its cap-and-trade system that now covers 85 per cent of all emissions in the province.

Quebec has also provided emissions free of charge to energy-intensive industries but – as planned in Ontario – will reduce that free allocation by 1 to 2 per cent a year. Those companies not provided free allowance must purchase emissions units in annual auctions that are held in conjunction with California.

Quebec set a floor price of $10.75 per tonne in 2013, and increases it annually at a rate of 5 per cent plus inflation. At a 2 per cent inflation rate, the floor price would be roughly $17.30 a tonne in 2020.

The Quebec system is connected to California through a carbon market, which facilitates the buying and selling

But achieving its 2030 target will be more challenging because most of the relatively inexpensive reductions have been made, said Steven Guilbeault, senior director of Montreal-based environmental group Équiterre. “We’re pushing the government to complement cap and trade with measures that would accelerate and maximize reductions here,” Mr. Guilbeault said.

Mr. Couillard caused a stir in Paris when he opposed oil and gas drilling on Anticosti Island in the Gulf of St. Lawrence and suggested the days of using natural gas as a transition fuel are limited. He envisages his province being free of fossil fuel use by 2050 – that’s an easier reach for Quebec than other provinces given its vast hydroelectric resources.

To get there, the government has invested heavily in charging stations for electric vehicles and provides incentives for consumers to purchase them. The plan is to have 100,000 EVs on the road by 2020, still a relative drop in the bucket given the four million cars and trucks in Quebec.

Gaz Métro’s Ms. Brochu was unperturbed by Mr. Couillard’s Paris positioning. Her company is promoting the use of natural gas instead of diesel for heavy trucks and ships, and liquefied natural gas instead of oil for remote industrial facilities such as mines.

She noted that the Quebec government recently kicked in $50-million for a $120-million expansion of the company’s liquefaction plant in Montreal.

Saskatchewan

Emissions in 2012: 75 MT, up 72 per cent since 1990.

Emissions by leading sectors: oil and gas/mining, 34 per cent; electricity, 21 per cent; agriculture, 16 per cent; transportation, 21 per cent.

Target: Twenty per cent below 2006 levels by 2020 with a promise to revise that as part of a national strategy.

Saskatchewan Premier Brad Wall is something of an outlier among his provincial colleagues. He has resisted the trend for a provincial carbon levy and warned of the dangers to resource industry jobs if Ottawa imposes too onerous a carbon price.

His government has supported the construction of one of the world’s first carbon-capture-and-storage facilities at its Boundary Dam coal-fired power plant.

The plant, which started up last year, is not performing as well as SaskPower had predicted but both the government and the utility say it is early days and have not ruled out CCS projects at other generating stations.

Saskatchewan faces tough challenges in its power sector, which relies on coal for roughly 45 per cent of its electricity output. Under federal regulations adopted by the previous Conservative government, it must phase out its reliance on coal-fired power, unless it is equipped with CCS.

Mr. Wall recently announced a commitment to increase the use of renewable energy, pledging that the province would get 50 per cent of its power from renewable sources by 2030. The Canadian Wind Energy Association applauded that announcement, saying wind generation capacity could grow from current 200 megawatts to 2,000 MW by 2030.

In a statement, the Saskatchewan Environment Department said the province is ready to impose a broad climate policy but is waiting for more clarity from Ottawa on the province’s roles and responsibilities under a proposed national strategy. An agreed national price on carbon would allow the province to impose its own levy and direct revenues to a provincial fund to underwrite green technology, the department said.

The Saskatchewan Environmental Society has urged the government to catch up with its neighbouring provinces, and recommended the adoption of a revenue-neutral carbon tax that would increase the cost of fossil-fuel consumption but cut taxes elsewhere. It also called for incentives for consumers to purchase fuel-efficient vehicles and to install solar panels on roofs, farms and commercial buildings, though the commodity price slump has left provincial coffers somewhat strained.

Mr. Wall faces a election on April 4, and will be approaching the federal-provincial climate debate with a clear eye on voters at home.

British Columbia:

Emissions in 2012: 60 MT, 21 per cent higher than in 1990.

Emissions by leading sectors: industry, (not including oil and gas), 26.6 per cent; oil and gas, 13.4 per cent; transport, 37.3 per cent; buildings, 11 per cent; deforestation, 5 per cent.

Targets: 33 per cent below 2007 levels by 2020, 80 per cent below 2007 levels by 2050.

Quebec has competition in its claim for climate leadership: British Columbia was the first jurisdiction in North America to introduce an economy-wide carbon tax, which now sits at $30 a tonne of carbon-dioxide equivalent. B.C.’s emissions rose by 22 per cent between 1990 and 2012, compared with Quebec’s 8-per-cent drop, although the western province also boasts stronger economic and population growth.

Environmentalists have been disappointed that Premier Christy Clark froze the carbon tax at $30, rather than allowing the scheduled increases. Ms. Clark says her government wants to see other jurisdictions catch up before B.C. goes further, although she is considering a proposal to increase it beginning in 2018.

A provincially appointed climate panel recommended last fall that B.C. should raise its carbon tax by $10 increments to $150 a tonne by 2030, while dropping the provincial sales tax and providing some “competitiveness adjustments” for the trade-exposed industrial sector. It also urged complementary regulations that would cut emissions in transportation and buildings.

“B.C. has an aggressive target and our modelling shows we need the entire package to be able to meet or even come close to our target,” said Nancy Olewiler, a panel member and economist from Simon Fraser University. She said the overall impact on the B.C. economy would be fairly modest, especially compared with the recent volatility in commodity markets.

Prof. Olewiler said B.C. faces a particular challenge as it is presented with several plans to build liquefied-natural-gas plants to export gas to Asia. The panel urged the government to support industry proposals to use electricity to liquefy the gas, which would shield it from increasing carbon costs.

But the LNG industry’s representative on the panel said he does not support a higher price on carbon at this time, given pressure from competitors around the world. “We’re not opposed to a potential increase in the price of carbon, as long as we’re certain that other jurisdictions are catching up to where British Columbia already is,” said David Keane, president of the BC LNG Alliance.

Indeed, that industrial challenge is a key concern for all provinces as well as the federal government – as the Prime Minister and premiers look to hammer out a national climate strategy that reflects the commitments made in Paris.

The transition to a low-carbon economy holds the promise of enormous economic benefits from the burgeoning clean-tech and renewable energy industries. But it also threatens massive disruption to sectors that have been the bedrock of the Canadian economy.

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Glossary

Carbon price: Any measure that imposes a cost on greenhouse-gas (GHG) emissions, whether a tax, an emissions cap or regulatory burden. An explicit carbon price is generated through a tax or a cap-and-trade system.

Emission cap: A government-imposed limit on emissions, typically placed on large stationary sources such as power plants and industrial facilities, but also at the wholesale level for gasoline, diesel and natural gas. Caps are lowered over time to reduce GHG emissions.

Emissions trading: A system in which companies can sell and buy the right to emit specified tonnes of greenhouse gases, creating a market that encourages the most efficient emissions reductions in an economy.

Energy-intensive, trade-exposed industry: Industries for which energy is a major component of production costs and that face considerable competition either as exporters or in their home markets. In pursuing climate policies, governments often seek to protect the competitiveness of such EITE companies.

Carbon leakage: An effect of GHG policy in which industrial activity moves to another jurisdiction due to higher regulatory costs or taxes usually on EITE companies, resulting in a loss of economic activity in the home jurisdiction with little or no impact on global GHG emissions.

Allowances: Under a cap-and-trade system, governments allocate “allowances” or “permits” to companies to emit up to their cap. Those allowances can either be sold or provided free of charge to the companies. A regulated company that can reduce emissions to a level below their cap can then bank the surplus permits for future use or sell them to other firms that then use the credits to comply with their own regulated emissions limit.

Offsets: Companies outside the system – non-covered entities – can generate “offset credits” by cutting emissions and having the reductions certified by a government body. The credits can be sold to a regulated firm to comply with its emissions cap. The seller must demonstrate that the revenue generated by the sale is needed to justify the investment in the emissions reduction.

Deep decarbonization: The aim of dramatically reducing – or even eliminating – fossil fuel use in the economy over the long term. Countries at the Paris climate summit last month agreed to essentially eliminate GHG emissions that result from the consumption coal, oil and natural gas by the second half of the century – 35 years from now.

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