Tony Keller is editorial page editor
On Wednesday, the Trudeau government announced new rules for reviewing pipeline projects. Among them is that a pipeline's climate-change impact – will it increase production of greenhouse gases? – must be assessed when considering whether to give it the green light. At almost the same time as the government was making its announcement, the National Energy Board, which among other things is the body that reviews new pipelines, released a major report on the future of Canada's energy industry. You don't have to read far into that NEB report to find it implicitly endorsing the idea that pipelines indirectly increase greenhouse-gas emissions.
According to the NEB, Canadian oil production in 2040 will be 56 per cent higher than it is now, at 6.1 million barrels a day. However, that prediction rests on the assumption that sufficient pipeline capacity will be built to move all of that oil to market. In an alternate scenario – what the NEB calls its "Constrained Oil Pipeline Capacity Case," where none of the major pipelines now on the table are approved – Canadian oil production in 2040 will be markedly lower, at only 5.6-million barrels. And without new pipelines, capital expenditures in the oil patch will be "reduced by 15 per cent in the conventional oil sector, and by nine per cent in the oil sands."
It all comes down to Economics 101. If you want to encourage consumption of something, make it cheaper. If you want to discourage it, make it more expensive. That's why economists who want to reduce greenhouse-gas emissions believe in putting a price on carbon with carbon taxes.
Pipelines are generally the cheapest and most efficient way to move oil to market. Pipelines lower the price the producers must pay to move their oil, which means that the profit Western Canadian producers earn is higher – encouraging more oil production. And because pipelines can transport oil at lower cost than the alternatives, they make some of Western Canada's more costly and otherwise marginal oil operations economically viable.
If the three major pipelines under consideration – Enbridge's Northern Gateway, Kinder Morgan's Trans Mountain expansion and TransCanada's Energy East – are never built, then the NEB's best guess is that will result in an extra half-million barrels of Canadian oil a day being priced out of the market. That oil will simply remain in the ground. If the pipelines are built, then that oil will be taken out the ground, refined and burned, with significant greenhouse-gas emissions.
The NEB looked at what would happen to prices for Canada's two main Western oil benchmarks – heavy grade Western Canada Select (WCS), and the light grade known as Mixed Sweet Blend (MSW) – without new pipeline construction. The difference between the MSW price and the North American benchmark of West Texas Intermediate would widen, says the NEB, by about $5 (U.S.) per barrel. That's how much less producers would get paid for their oil. And the spread between WCS and West Texas would grow to "about $10 (U.S.) per barrel. This is the approximate extra cost that would be incurred to transport Canadian heavy crude to the U.S. Gulf Coast by rail instead of by pipeline." At those lower prices, a lot of Canadian oil production becomes uneconomic.
The bottom line? "The assumptions of the Constrained Case have implications for Canada's energy system," says the NEB. "Reliance on a more costly form of transportation such as rail, as well as increased competition for market share and pipeline capacity, leads to lower prices received by Canadian producers, net of transportation costs. This leads investment, crude-oil production, economic growth, energy use and GHG emissions to grow more slowly."
Now flip the previous sentences around: Reliance on a less costly form of transportation such as pipelines leads to higher prices received for Canadian producers. This leads investment, crude-oil production, economic growth, energy use and GHG emissions to grow more quickly.
How will the new, greenhouse gas-conscious, pipeline-review process deal with that fact?
The logical way to lower Canada's greenhouse-gas emissions is to reduce demand for oil and other carbon-based fuels by putting a tax on them. A carbon tax would give governments a big new revenue source, which could be used to boost spending or lower other taxes. Forcing one part of the economy to be less efficient (by preventing new pipelines from being built and having oil move by more costly rail) might also raise oil prices and lower consumption. Then again, it might just shut down some Canadian production, with no effect on output in the rest of the world or consumption in Canada. (Isn't that what's happening already?)
Whatever the carbon-emissions outcome, it would result in no new revenue for government or economic benefits for Canadians. That's why reducing Canadian oil production by kneecapping pipelines as a punishment for their efficiency, rather than reducing emissions economy-wide through a tax-based carbon price, is a half-baked idea.
But many environmental groups have long wanted pipeline reviews to more fully consider their greenhouse gas consequences, and given the NEB's own conclusions, it's not hard to see why. "We applaud the Trudeau government's decision to add a 'climate test' to the assessment process," said Steven Guilbeault, senior director at Équiterre in a press release. "We believe that this climate test will enable the government to ensure that no project gets approval if it does not meet the Paris Agreement to limit temperature rise to 1.5 degrees Celsius."
Over the coming months, as several pipeline reviews move toward the finish line, Canadians will find out exactly what this new test means, and how it's going to work.