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Mining trucks carry loads of oil-laden sand at the Albian Sands oils sands project in Fort McMurray, Alta.JEFF McINTOSH/The Associated Press

The Alberta government has quietly presented a proposal to sharply increase levies on carbon production and force large oil-industry producers to slash greenhouse gas emissions by as much as 40 per cent on each barrel of production, a long-term plan that has surprised Ottawa and industry executives with its ambition.

Alberta Environment Minister Diana McQueen stunned a recent meeting in Calgary attended by senior oil executives and her federal counterpart, Peter Kent, with the proposal, which goes well beyond anything Ottawa or the companies contemplated, industry and government sources said Wednesday. The three sides are engaged in intense negotiations, with the industry warning that regulations that are too onerous could undermine the competitiveness of the oil sands sector as it seeks international investment to drive production growth.

Alberta Premier Alison Redford will return to Washington next week as part of a federal-provincial-industry effort to lobby the Obama administration to approve TransCanada Corp.'s controversial Keystone XL pipeline proposal.

She and Prime Minister Stephen Harper are under considerable pressure to introduce regulations for the oil industry to limit greenhouse gas emissions.

Opponents of Keystone XL in the United States point to the oil sands sector as one of the most carbon-intensive sources of crude.

"One of the really important things right now is that both the province and the federal government recognize that there's got to be some signals to Washington that environmental change is taking place in Canada," said Bob Page, director of the Enbridge Centre for Corporate Sustainability at the University of Calgary.

"A larger part of the discussion around Keystone has been about greenhouse gas emissions" from the oil sands, said Clare Demerse, director of federal policy with the Pembina Institute. "This is clearly a sector that is under scrutiny right now, and the right answer to that scrutiny is to come out with credible regulations."

Mr. Kent has promised draft regulations soon, but the federal Conservatives are reluctant to introduce anything that could be construed as a carbon tax. Ottawa is likely to agree to an "equivalency" approach with Alberta and perhaps other provinces, in which the federal government would pass regulations that set levels of emission reductions while provinces are free to impose their own systems, so long as they match Ottawa's ambition.

An Alberta regulation that took effect in 2007 required oil sands producers and other larger emitters in Alberta to reduce their per-barrel emissions by 12 per cent from a base year, and pay $15 into a provincially run technology fund for every tonne of emissions above their limit.

Ms. McQueen's proposal would, over a period of time, require a 40-per-cent reduction in per-barrel emissions and a $40-per-tonne payment when the limit is exceeded. At that rate, the regulations would boost the cost per barrel by less than $2 for oil sands producers.

Sources stressed that the provincial cabinet has not yet approved Ms. McQueen's proposals.

The Redford government has conceded it won't meet its 2020 emission targets under current policies. Environmental groups warn that even if Ottawa agreed to Alberta's 40/40 proposal, Canada would be on track to miss its commitment to reduce emissions 17 per cent from 2005 levels by 2020.

In a report this week, the Pembina Institute urged governments to impose a levy of at least $100 per tonne for emissions above the targeted level.

"Getting these regulations right is critical for Canada's climate credibility, and oil and gas is the litmus test for that," Ms. Demerse said on Wednesday.

Mr. Kent's spokesman, Rob Taylor, declined to comment, while Wayne Wood, a spokesman for Alberta's Ministry of Environment and Sustainable Resource Development, said it was "premature to speculate" on the targets the province is proposing.

Officials at the Canadian Association of Petroleum Producers also declined to comment, but industry sources called Ms. McQueen's proposal a negotiating position rather than a hard demand. The industry is divided over the looming regulations, with some more willing to accept tougher rules than others. And many oil sands companies have already accounted for much higher carbon prices. Royal Dutch Shell PLC, for example, assumes a long-term carbon price of $40 per tonne.

But like many companies in Alberta, Shell has warned about the potential implications of raising the provincial levy. Asked in a recent interview whether the Anglo-Dutch giant would support a higher carbon price, its Canadian president, Lorraine Mitchelmore, said: "Alberta needs to be sure that it keeps the industry competitive."

Ms. Mitchelmore praised the province's existing greenhouse gas policy, which can feed a technology fund, as "a very, very nice package." She said any discussion of changes needs to "look more holistically about the long-term development [of the oil sands]. We need to think about our cost structure, our competitiveness, but we also need to think about the environmental opportunity."

Other senior energy figures have also warned about raising the carbon tax. "It's a bad idea to make companies uncompetitive," Rick George, who last year stepped down as chief executive of Suncor Energy Inc., said in a recent interview.

But oil sands firms are not the only ones that have raised competitiveness issues.

More strident opposition has come from oil refineries, including those in eastern Canada, which are a large source of emissions and have historically suffered from narrow margins. The natural gas industry, struggling against low prices, has also fought a big new carbon price, warning that it could put some businesses under.

The Alberta government has heard those complaints, the sources said, and is open to creating a regime that imposes different burdens on different industries, under the principle of "use the right tool in the right sector."

Editor's Note: In a report this week, the Pembina Institute urged governments to impose a levy of at least $100 per tonne for emissions above the targeted level. An earlier version of this article incorrectly said the levy was at least $100 per barrel.

Follow Shawn McCarthy on Twitter: @smccarthy55Opens in a new window
Follow Nathan VanderKlippe on Twitter: @nvanderklippeOpens in a new window

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