New Caps and New Concerns: Discussing the Federal Government’s Plan for Oil and Gas Emissions
This week on the podcast we discuss the Canadian Federal Government’s July 2022 discussion document “Options to Cut Oil and Gas Sector Greenhouse Gas Emissions to Achieve 2030 Goals and Net-Zero by 2050.” Joining the discussion is our guest Sander Duncanson, Partner, Regulatory, Environmental, Indigenous and Land at Osler, a Canadian business law firm.
There are two policy options being proposed. Option one is a new cap-and-trade system for the oil and gas sector in addition to the existing provincial carbon pricing systems already in place. Option two proposes to modify the existing carbon pricing systems in each province, setting more stringent rules for oil and gas.
Jackie, Peter and Sander express a number of concerns about the proposal; the inefficiency of pricing carbon higher for one sector of the economy, the potential for unintended consequences from overlapping policies, including the potential to harm smaller oil and gas producers, and the policy could potentially face legal challenges from the provinces creating uncertainty that could ultimately slow down investment and reduction in GHG emissions.
The discussion document is asking for feedback to be submitted by September 30, 2022, and sent to PlanPetrolieretGazier-OilandGasPlan@ec.gc.ca. We encourage people to participate and express their views on the proposed cap on emissions.
Content referenced in this podcast:
- “Eradicating the Smoke Nuisance” from Energyphile
- “Options to Cut Oil and Gas Sector Greenhouse Gas Emissions to Achieve 2030 Goals and Net-Zero by 2050.”
Last month (July 2022) the federal government published a discussion paper seeking to generate response new cap and trade concepts. The document is called “Options to Cap and Cut Oil and Gas Sector Greenhouse Gas Emissions to Achieve 2030 Goals and Net Zero by 2050.”
In this episode of the ARC Energy Ideas Podcast, the discussion paper generates plenty of things to talk about for Jackie, Peter, and guest Sander Duncanson, a partner at Canadian business law firm Ostler, Hoskin & Harcourt. Sander focuses on environmental, regulatory, and climate change issues and policy.
There is already a long list of policies to support reductions in greenhouse gas emissions in Canada, all affecting the oil and gas sector. Carbon pricing, carbon tax regimes, cap and trade schemes, regulations on methane emissions, The Clean Fuel Standard, and various tax credits. It’s a complicated space.
The discussion paper is a 29-page document that outlines two options to create a cap on emissions from the oil and gas sector. “Quite frankly, I think no matter which one of these options is selected, there’s probably a fairly high likelihood that it’s going to be challenged by at least one of the provinces,” says Sander. “I expect that there’s going to be more and more litigation around the constitutional jurisdiction that the federal government has to advance this agenda that they’re on, not only with oil and gas, but more broadly.”
“So legally, neither option one or two is free of any sort of legal implications?” asks Peter.
“Yeah. I think that’s fair to say,” says Sander.
“It doesn’t estimate the cost of these two policies which is a major omission,” says Jackie. “There’s also what I call ‘carbon discrimination.’ Basically, these policies are creating a higher price of carbon for a molecule CO2 that comes from the oil and gas sector than other sectors in the Canadian economy. And fundamentally that just isn’t that efficient. For example, if you have $100 to spend, and you can buy emissions reductions from some other industry that can do it at $10, so you would be able to reduce 10 units or you can do, for $100, you can only reduce one unit in your sector, Canada would meet its goals more quickly if we could actually pick the cheapest emissions reductions, and this policy is going the other way.”
Adds Peter “I would say that certainly in my wide peer group of people that I know, the policy is not favourably viewed. But we want to be fair and take a look at some of the elements of the policy proposal. It requests discussion at the very end, discussion questions that the public is invited to opine on and submit. We encourage people to do that. It’s on page 28 of the document.”
This podcast episode will be submitted to the federal government as part of that response.
Please review our disclaimer at: https://www.arcenergyinstitute.com/disclaimer/
Check us out on social media:
X (Twitter): @arcenergyinst
LinkedIn: @ARC Energy Research Institute
Subscribe to ARC Energy Ideas Podcast
Apple Podcasts
Google Podcasts
Amazon Music
Spotify
Episode 164 Transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast with Peter Tertzakian and Jackie Forrest. Exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the ARC Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian. And welcome back. Well, it’s been a hot summer.
Jackie Forrest:
Yeah, it is crazy. I know we had that heat dome last year, but other places are getting them. The UK had temperatures at almost 39 Celsius, and a lot of people don’t have air conditioning there. North America’s also having some hot temperatures, and I know Europe’s expecting another round of hot temperatures.
Peter Tertzakian:
Paris and places like that. Yeah. So definitely there’s a lot of power being used. Some systems are being pushed to the limit.
Jackie Forrest:
Yeah. I mean, I think there’s a lot of implications. One is natural gas inventories are going to be lower than people thought. I think there’s going to be a real focus on power systems after this summer. And as we think about climate policy, I’m sure this is going to factor into how people think about the next climate meeting, right?
Peter Tertzakian:
Well, we are going to talk about climate policy today. In particular, we’re going to be talking about the new federal paper discussion document issued in July 2022. Options to Cap and Cut Oil and Gas Sector Greenhouse Gas Emissions to Achieve 2030 Goals and Net Zero by 2050. So this is a discussion paper that is seeking response. So we’re going to give our response on the podcast.
Jackie Forrest:
Yeah, we are. But before we get to that, talking about carbon policy, you’ve restarted your Energyphile weekly vignette cards.
Peter Tertzakian:
I have. Yeah.
Jackie Forrest:
So maybe explain what they are and how people can get them.
Peter Tertzakian:
Yeah. Well, first of all, you can go to the website energyphile.org, and see the full collection. We’re continuing to add to the collection. This particular card is called Eradicating the Smoke Nuisance. And so it’s based on a page taken out of an 1850s log book from the city of York in England. And in 1850, they had a smoke nuisance problem. The emissions from coal fired mills was really quite toxic and overwhelming in terms of the basically soot that was in the atmosphere. So the page out of the log book basically shows a measurement system for measuring emissions. And the little book talks about basically penalizing factories that emitted too much and offered financial rewards for mill operators that cut back on their emissions.
Jackie Forrest:
All right. Early day cap and trade. And we’ll talk about that. Yeah.
Peter Tertzakian:
Yeah. Cap and trade is in this document, and we want to talk about it.
Jackie Forrest:
Well, hey, before we get to our topic, we do want to introduce our guest who’s going to join us in this discussion today. So we want to welcome Sander Duncanson, who is a partner at Osler that focuses on environmental regulatory and climate change issues and policy for the firm. Welcome.
Sander Duncanson:
Yeah. Well, thanks Jackie, thanks Peter, for inviting me to talk with you guys today.
Jackie Forrest:
Well, maybe you could provide just a little bit of background about yourself for the listeners to get to know you.
Sander Duncanson:
Sure. Yeah. So like Jackie said, I’m a partner at the law firm Osler in Calgary, and my practice focuses on regulatory, indigenous, and environmental issues for pretty much any company looking to develop infrastructure or resources of any kind. So for oil and gas clients in particular, one of the things that I help them do is understand the various types of regulations that apply to their business and how to come up with strategies to comply with those regulations while still achieving their various business goals.
Sander Duncanson:
I should say as part of my kind intro, personally, I’m a big supporter of Canadian resource development, and I’ll have some concerns about the discussion document that we’ll talk about today. But those views, of course, are my personal views. They don’t reflect the views of the firm that I work at. And nothing that I say today should be construed as legal advice. So with those two caveats out of the way, I’m happy to get into the discussion.
Peter Tertzakian:
Okay. Well this will be both a personal and professional discussion, and what we want to be is fair and objective.
Jackie Forrest:
Well, let’s start with the main ideas. I do want to give some context for the listeners. I think many of them are aware, but there’s already a long list of policy to support reductions in greenhouse gas emissions in Canada, all affecting the oil and gas sector. Carbon pricing since 2019. And each province has the choice to either take the federal policy or put in their own. And Alberta and Quebec, for example, have put in their own. Alberta has a carbon tax regime, and Quebec, a cap and trade. Obviously the price is escalating on that to $170 by 2030, which is expected to drive a lot of-
Peter Tertzakian:
It escalates every year, doesn’t it? By $15 a ton?
Jackie Forrest:
Yes. Yeah. So that’s expected to drive a lot of emissions changes and reductions in the future. We’ve got a lot of methane regulations on the oil and gas industry. Growing to 75% reduction by 2030. The clean fuel standard, which we just talked about on our last podcast is a final rule that’s going to affect refineries and has some motivation for oil and gas producers as well to reduce our emissions. We have the CCUS tax credit. And we’re expecting to have tax credits on other clean energy policies coming. And as a side, the US just put in, we don’t know for sure that the bill will get passed, but Biden has put forward a bill that could also do a lot of tax credits in the US. So I think that will be important to keep Canada competitive with the US.
Jackie Forrest:
Okay. So there’s a long list of stuff we thought that was enough. But now we find out that there’s this plan to put another additional policy on top of the oil and gas sector. And so let’s talk about the reaction so far. There’s a predictable, I think, reaction from the provinces. There’s a lot of concerns that this will be a requirement to drop the production of oil and gas from these provinces because many people think that the goal, and the only goal we have right now is in that emissions reduction plan, which we talked about quite a while ago, maybe a few months ago, on the podcast. Which talked about potentially a 42% reduction from the oil and gas sector in terms of the emissions by 2030. And many people don’t think that is possible. And they think, okay, well, if you’re going to put in a policy that mandates that, it may mean you need to actually reduce your production. That’s the easiest way to reduce your emissions is don’t produce as much.
Jackie Forrest:
And so there’s a lot of concern from, for example, Sonya Savage, who is the energy minister in Alberta. She put out a joint statement that said, “Alberta will not accept any plan from the federal government that seeks to interfere in our constitutionally protected ability to develop our resources.” Premier Moe has concerns along the same lines as well.
Peter Tertzakian:
From Saskatchewan.
Jackie Forrest:
Yeah. From Saskatchewan. And then as you know there’s a leadership race going on right now within Alberta for the UCP party. And a few of the people running for that have said some things. Well, let’s talk about Danielle Smith, because she’s got a lot of opinions. And she says, “Justin Trudeau wants to decimate Alberta’s economy with nearly 50% cut to oil production. This is another unprovoked assault on Alberta.” So some pretty strong opinions there.
Peter Tertzakian:
Yeah. So that’s the politics of it. I mean, I would say that certainly in my wide peer group of people that I know, the policy is not favourably viewed. But we want to be fair and take a look at some of the elements of the policy proposal. It requests discussion at the very end, discussion questions that the public is invited to opine on and submit. We encourage people to do that. It’s on page 28 of the document. So we’ll post that.
Jackie Forrest:
Yes, we’ll post the document. We do suggest that you do get involved. We are planning to use this podcast as our submission, and the transcript from it. But we really think it’s important that you get your voice heard. The deadline is the end of September. So you got some time to do that. But we encourage you to do that, and we’ll put a link to the questions. Now in terms of what it is, it’s 29 pages that outlines two options to create this cap on emissions from the oil and gas sector. I think it’s very high level, and there’s really not a lot of data to support the costs of the various options. But let’s start with the two options very briefly, Peter. Could you just outline them, option one and option two?
Peter Tertzakian:
Yeah. Option one is basically into the introduction of another cap and trade system on the oil and gas industry. Now the idea behind this is not new. Not new at all. It’s been proposed probably several years ago. It’s just that now it’s another layer of policy on top of all the other ones that you mentioned.
Peter Tertzakian:
So cap and trade works basically very much like the eradicating smoke nuisance card that I talked about earlier. A level of emissions is set. If you produce emissions above that level, you either have to buy carbon credits to offset it, or reduce physically your emissions. If you go underneath that level, you basically generate credits that you can sell to others.
Peter Tertzakian:
And so the cap and trade system that’s being proposed has one, I wouldn’t call it a unique feature, but an important feature. And that is that the trading has to occur exclusively within the oil and gas industry. In other words, a cement emitter cannot sell to an oil producer. And vice versa, a credit produced from an oil producer can’t be used. So it’s sort of like foreign currency that is not exchangeable in other markets within the economy.
Jackie Forrest:
Right. Well, and I think the other issue is there’d be allocations provided, and who gets them? We’ll get to that. But certain companies would get allocations to allow them to emit. And how would those be handled? Now I would say this would be a double tax in the situation. Because in Alberta, for example, you’d already be paying a carbon tax under the TIER system, and now you’d have to, again, acquire or pay for other right to emit under this other system. This would be regulated under the Canadian Environmental Protection Act. So this maybe is a little more difficult to implement because it would require totally new legislation. And we’ll get to maybe the chance of legal challenges. But let’s talk about option two first.
Peter Tertzakian:
Okay. Go for it.
Jackie Forrest:
So option two is basically you have an existing carbon tax program in each of the provinces, but you make some specific new rules for oil and gas. So for example, in Alberta, there is a carbon tax. We talked about the fact that it only applies to a certain percentage of all of your emissions. You may make that carbon tax higher for the oil and gas industry than other sectors because you want to drive more emissions down in that sector. And you may increase the stringency, the fraction of all the emissions that are being taxed to be larger than other industries.
Jackie Forrest:
So this would actually create a unique, small carbon market that only oil and gas producers can participate in because they have a higher tax and different rules. And we talked about the fact that one of the issues is that we find that there’s a small market in Alberta, and only so many buyers and sellers. Well, that would make the market even smaller. Now this would use the existing system so it wouldn’t require a bunch of new legislation. It would just require changes to the existing one.
Peter Tertzakian:
So basically, it’s a harmonization.
Jackie Forrest:
So, this one would be adjusting the existing provincial, not having two systems. So, it makes sense that way. It would use the existing-
Peter Tertzakian:
Framework.
Jackie Forrest:
… mechanisms and framework. So probably a little bit easier to implement. However, it has the problem of creating a small market just for oil and gas. So, Sander, maybe we can hear from you on your comments on the legal challenges that could occur. Do you think option one or two have any differences in terms of the amount of legal challenges they could face? It’s obvious that some of the people in the provinces aren’t supportive of the policy.
Sander Duncanson:
Yeah. Quite frankly, I think no matter which one of these options is selected, there’s probably a fairly high likelihood that it’s going to be challenged by at least one of the provinces. And this is of course something that, as a lawyer, I’m personally very interested in. I expect that there’s going to be more and more litigation around the constitutional jurisdiction that the federal government has to advance this agenda that they’re on, not only with oil and gas, but more broadly.
Sander Duncanson:
And as I’m sure Jackie and Peter, you’re aware of the Supreme Court decision from a couple years ago in the greenhouse gas reference case where the Supreme Court of Canada said that the federal government’s legislation for emissions reductions was constitutional. And the federal government has kind of interpreted that to say, well, we have the constitutional authority to really do whatever we want if it relates to climate change and emissions reductions. And so not only this particular policy, but the clean fuel standard, which you mentioned, and there’s the clean electricity standard that’s coming in as well.
Sander Duncanson:
There’s a number of examples where the federal government is now becoming more, I would say, aggressive and specific in how the provinces are to manage their own provincial economies. And I do see some key differences between what the federal government is doing now relative to that previous act that was upheld by the Supreme Court. And so, I do think that there’s going to be more and more litigation around this. And I do think that there is increasing risk that one or more of these is going to be found unconstitutional ultimately.
Peter Tertzakian:
So legally, neither option one nor option two is free of any sort of legal implications.
Sander Duncanson:
Yeah. I think that’s fair to say. The only other thing I’ll add on just how to sort of conceptualize these two different options, a cap-and-trade model is one that’s designed to sort of, as the name applies, cap emissions at a certain level and manage under that. And as you mentioned, that’s a different model than what’s being used across Canada right now, with the exception of Quebec and Nova Scotia. And so, it would be an entirely different type of regime to layer on top of what’s there already.
Sander Duncanson:
The idea of harmonizing, the option two, coming up with a new special rule for oil and gas that would get layered on top of the existing regime, but that are conceptually similar to the existing regime, that’s administratively simpler, I think. But conceptually, you’re not capping emissions in the same way. And so, one of the issues there is this whole policy seems to be designed to reduce oil and gas emissions to a specific level. The number seems to be 42% emission reduction. But the model in option two isn’t directly achieving that. You’re trying to basically price carbon to incent certain behaviors that will ultimately lead to emission reductions. But it’s kind of a trial and error. And even the document sort of suggests that they may have to modify the price over time if they’re not getting the results that they’re looking for.
Peter Tertzakian:
Right. So, what you’re saying is just that a carbon tax of even $170 a ton, or whatever the number is required, is no guarantee that you’re going to hit your emissions target.
Sander Duncanson:
Yeah, exactly.
Jackie Forrest:
Right. Where allowances, you know people only be able to emit what they’re allowed to emit, depending, I guess, on the penalties. That’s another issue. I want to quickly go through just factually a few more things that the document has in it before we get to some of our analysis. The document does provide some logic to why we need this. Why does the oil and gas sector need this? One of the arguments is the oil and gas sector has been increasing in its emissions. Grew by 5% from 2005 to 2020. Where they highlight the electricity sector or heavy industry that have declined over that time.
Jackie Forrest:
They also talk about the fact the scope is uncertain. They ask in the discussion questions should this apply only to the oil and gas, or also include refineries and pipelines. What it doesn’t say is also important. It doesn’t actually give a specific reduction goal in the document. However, it says it should account for what’s expected in the emissions reduction plan. And if you look at the emissions reduction plan, it suggests a 42% reduction. So yeah, it is a little uncertain what the number is. And I’m sure you saw recently Minister Guilbeault, head of environment and climate change, who’s putting out this policy, talked about the fact that maybe there’d be some flexibility on that number. So, we were a little uncertain about the number.
Jackie Forrest:
It also doesn’t estimate the cost of these two policies, which I think is a major omission. And we don’t even know, for the case of option two, how high the carbon price is that they think that they need to achieve their goals. So not knowing the cost, I think is a bit of uncertainty in terms of understanding which one’s better or worse, right? Of course, we have the questions that we talked about that people are expected to answer.
Jackie Forrest:
Okay. So, let’s get onto the analysis. And in this section, we’ll talk about what we like about the policy and what we do not like about the policy. And I will start just to say, I really had a hard time, and I tried, to find something positive to say here in what I like about it. But I think having overlapping policies try to do the same thing just generally doesn’t seem that efficient. So, I don’t know, Peter, if you have something you can.
Peter Tertzakian:
Well, let’s just sort of stick to the positives here. So having read through this a few times, I like the introduction. I mean, I think the introduction acknowledges directly “dual challenge of maintaining energy security and fighting climate change.” So, there is an acknowledgement of the difficulty of the situation. There’s an acknowledgement of the role of oil and gas. There’s a lot of statements here that I’ve never seen really in policies, proposals, or actual policies before relating to the oil and gas industry. So that’s the good news.
Peter Tertzakian:
I think another positive is that cap and trade systems, especially under option one, are probably the way to go. But as I said, there’s a big caveat to that. If it’s a single policy that is not complicated by others. And I want to come to that when we talk about the detractions of this policy. But on balance as a standalone document, if you’re looking for the positives, as I said, there’s sort of a good summary and acknowledgement of the situation, and that cap and trade makes sense.
Jackie Forrest:
All right. Sander, any things you like about it?
Sander Duncanson:
Well, I’m by nature an optimist. I try to find silver linings. I kind of lean with Jackie on this. It’s hard to find much in here to be excited about. The positives that I see are the document does acknowledge not only energy security, which Peter mentioned, but also the concept of carbon leakage. That it’s not good policy for us to make investing in Canadian oil and gas so uncompetitive that you’re just driving investment to oil and gas in other jurisdictions where the same emissions are going to be generated, if not more, but we don’t get any of the investment benefits. So that concept shows up a few places in the document, as well as the concept of energy affordability. Now I think one of the challenges is there’s not a lot in the document about how either of these options is going to avoid those types of impacts. But at least acknowledging that those are things that we need to be mindful of, I think, is a positive.
Jackie Forrest:
Okay, well, let’s get onto what we don’t like. And we’ve outlined a number of topics here. Let’s start with, I’m calling it, carbon discrimination. And basically, these policies are creating a higher price of carbon for a molecule CO2 that comes from the oil and gas sector than other sectors in the Canadian economy. And fundamentally that just isn’t that efficient. For example, if you have $100 to spend, and you can buy emissions reductions from some other industry that can do it at $10, so you would be able to reduce 10 units or you can do, for $100, you can only reduce one unit in your sector, Canada would meet its goals more quickly if we could actually pick the cheapest emissions reductions, and this policy is going the other way.
Peter Tertzakian:
Well, yeah. I mean, as I said earlier, if you take the caveat that this policy is applied to only one sector of the economy, in this case oil and gas, then it makes sense. But that assumes that there’s no co-dependencies in generating emissions between all the different sectors of the economy. Every other sector of the economy pretty much uses oil and gas, which means they combust and generate emissions. And what you’re saying is, as the emissions say generated by the steel industry, fertilizers, aviation, whatever, are of lesser value than the emissions generated by oil and gas. And that doesn’t make any sense. You should have fungibility. In other words, the ability to trade across the economy, given the co-dependencies. Otherwise, you’re going to create major problems, in my opinion, in terms of supply and demand of credits, and actually achieving the goal of reducing the emissions.
Sander Duncanson:
Yeah. I think that’s a really good point, Peter. I mean, one of the big issues that I see in my practice around sort of carbon credit trading is we’ve got all of these really distinct, fragmented carbon markets already across Canada. Every province has their own distinct regime, and it doesn’t really allow for trading across provincial borders. You’ve got the federal government’s own regime that layers on top of that. The clean fuel standard, it’s yet another carbon credit market. And then this would be another one on top of that as well. And the challenge is within each of these regimes, you’ve got a relatively limited pool of buyers and sellers of credits. And by creating yet another distinct market, you’re further limiting the ability to increase the size of that pool.
Jackie Forrest:
Well, one molecule of CO2 could participate in three different carbon trading policy mechanisms here if this goes forward. Well, let’s go to the next one. Another question I have is why is a unique policy needed for one sector in Canada? And as I said, the document argues that oil and gas emissions have increased, and therefore it requires this policy.
Jackie Forrest:
However, if you go look into some of the other sectors that aren’t in the document, there’s been increases in other sectors as well. For example, buildings emissions are up around the same percentage over the same time period as oil and gas. Transportation has been flat, but 2020, which is the baseline year they’re using, was a bit of a low year. I expect transportation’s going to be up quite a bit this year.
Jackie Forrest:
And so why aren’t we putting unique policies for buildings and transportation. For example, we already pay a price at the pump when we fill gasoline or diesel into our cars, but that may not be enough here. Maybe we should put a limit on how many kilometers each family is allowed to drive in Canada. And once they’re done their allocation for the year, they can’t drive anymore. Or they need to buy it from somebody else. That would be the exact same thing that’s being proposed here.
Peter Tertzakian:
Yeah. I think that this is another major issue, and you’ve opened up basically a can of proverbial worms. If I can just sort of respond to some of the… I wanted to actually start it with the data. Okay? The 5% increase, and the table that’s included on page 10, which gives emission numbers for all the various subsectors.
Peter Tertzakian:
First of all, as a data scientist, and so why are we using 2020? This is one of the most anomalous years in the entire century with the pandemic, probably the most anomalous year, certainly, since the financial crisis. And so, to basically take simplistic measurements and comparisons of 2020, I think is completely unfair for any part of this analysis. And then a lot of the analysis within the text goes from 2005 to 2020. Sort of basically drawing a two-point straight line and saying, okay, you’ve increased by 5%. Well, it’s not a straight line. Okay. None of these are straight lines.
Peter Tertzakian:
Anyone who’s a data scientist looks at trends and tries to understand whether they are decelerating, accelerating. What’s going on. I mean, if you actually look between 2000, say even, ’17 to 2019, I mean, it’s basically fairly flat in the oil and gas business. So, my objection here is just sort of even the way the analysis is done, the implication that it’s a straight line 5% increase. And therefore, the unwritten implication that it’s continuing to increase by 5%, I think is really misleading. And so that’s point number one. And then point number two is, yeah, well, why in this long list of other subsectors of the economy is one sector, which all the other ones are codependent on, singled out as being the one. You can’t convince me, for example, that housing, which I presume may be a subset of building-
Jackie Forrest:
Right. It’s not in the document, but you can go look at it-
Peter Tertzakian:
It’s not in the document. Is not increasing in its emissions because we have not imposed any sort of cap-and-trade system on the building of houses, so they become net zero faster. And so-
Jackie Forrest:
And buildings is up 5% over that same period.
Peter Tertzakian:
Okay, buildings is up 5%. So, to me, I think fair, and politically fair. And I’m going to come to that a little bit later here, to be politically fair within the Canadian economy, because different provinces have different strengths in different subsectors of the economy, you have to apply this sort of cap-and-trade system to each and every one.
Jackie Forrest:
Yeah. For example, for buildings, you could say, you’re only allowed to burn a certain amount of natural gas this year. And after that, you just have to be cold.
Peter Tertzakian:
Sure, sure. Well, and some people might say, yeah, that’s what we need to do. Okay, fine. At least let’s get some uniformity in the way these things are applied. And let’s get, as I said, the transferability of credits, call every credit and equal credit, so that the overall task of reducing emissions economy-wide is accomplished.
Jackie Forrest:
Yeah. So, you’re arguing for what we have today, which is broader systems. In fact, honestly, today, we have these provincial systems, which we talked about are getting too small. We need a national system so that we can be more efficient, and this is kind of going the other way.
Jackie Forrest:
Okay. Let’s talk about the next one, which is layering policies that have the same end goal can create unintended consequences. When we say unintended consequences, its sometimes once these policies are in place, they have incentives that were hard to foresee when you started. So, it’s just not efficient to have two carbon pricing policies. Everyone else in the world is still working on getting one, and we think we need two. But when you have two things that could incent different behaviors that ultimately don’t result in emission reductions to the same extent as one policy would’ve.
Peter Tertzakian:
Yeah, this is called pancaking of policies. And I became very familiar with pancaking of policies, when I helped conduct the Royalty Review back in 2015, ’16. And so when you have a base policy or a base goal, and then you start pancaking policies on top of each other to achieve the goal, all of a sudden you get unwanted distortions in the economy as a consequence of the interactions. And what happens is that you can’t necessarily predict the unintended consequences of this. But clever people start looking at this thing and start figuring out the distortions, and start actually making a lot of money by figuring out effectively what others may call the loopholes, or the cross interactions between the different policies. So for example, with two different cap and trade systems, you can generate two credits off of one unit of carbon, right? And some clever person, probably a trader, is going to figure out how to take advantage of that.
Jackie Forrest:
Well, and option two is a great example, is that maybe an oil and gas producer would’ve went and invested in a solar farm or a renewable natural gas project, but now they’re in this tiny little carbon market and they can’t participate like they could before. So an intended consequence may be less investment in some clean energy. Which isn’t good for Canada, or for reducing our emissions goals.
Peter Tertzakian:
Sure. Well, whenever you create economic distortions, you create aberrant behaviors which make it less efficient in achieving the end goal, which is to reduce emissions.
Sander Duncanson:
I agree with everything that, Peter, you were just saying. I mean, I think the administrative burden for the entire sector will go up significantly, and that will likely disproportionately impact certain parties within that industry that are less well equipped to manage that additional burden.
Peter Tertzakian:
Yeah. Actually, I mean the paper actually acknowledges that burden a couple of times. It’s not really pronounced in the document, but it’s a huge issue. The regulatory burden already is huge on many industries, including oil and gas. And to layer on even more reporting, measuring, trading, the introduction of basically another currency into the system just creates a management nightmare of the whole program, which leads into inevitable inefficiencies that detract from the end goal.
Peter Tertzakian:
Ideally, this cap and trade system would be a simple, unique policy for the industry and all other industries that could then basically trade back and forth. But we don’t have that kind of harmonization in this country. Every province has its own idea of what kind of system they’re going to use. And then on top of it, it’s the pancake of the federal government. And this is what happens.
Jackie Forrest:
Yeah. Well, let’s get into the next one, which is what you’re getting to, is this could actually ultimately hurt smaller companies. For example, the costs and the administrative burden may be too high for some small companies. It could also create new barriers to entry into the oil and gas sector. For example, if we went with option one and they had to allocate emissions, are they going to do it on historical emissions? Or how are they going to do it? Could a brand new entrant maybe not have the ability to emit emissions or have to go buy them from someone at a very high price. So you could actually see small companies really suffer here. And that’s really important. Small companies are a very important part of the oil and gas industry’s ecosystem. They’ve created a lot of innovation and developed new plays, and they give jobs in small communities. So that would be a really bad unintended consequence of a policy like this.
Peter Tertzakian:
Right. And what I said earlier on in terms of the positives about the background information is being pretty good. In section three, called oil and gas sector background, there is no mention of the diversity of the type of companies that are involved from small to large in the business. This is a huge industry acknowledged by the number of people that work in it, which I can’t remember. I have 415,000 indirect workers.
Peter Tertzakian:
What’s not fully appreciated is that that diversity of small and large companies extends geographically into rural areas of certainly Alberta and Saskatchewan. And so when you alter the dynamics of the corporate landscape, the fabric of an industry that is spread out geographically across small towns and communities, there are, again, unintended consequences of what this means. And I think that small companies are not going to be able to survive the regulatory burden. They are not going to be able to participate in some of this cap and trade stuff because when you’re starting out, you have nothing, no credit to sell.
Jackie Forrest:
Yeah. And it’ll add to your costs of developing if you have to go buy right credits from large companies who need them as well. So Sander.
Sander Duncanson:
Yeah, well, so I fully agree. I mean, I think that this is a key issue. And Jackie, I know you were involved in the Enbridge Mainline hearing last year. And there was a lot of talk in that hearing about how you can’t look at the oil and gas industry as a single homogenous thing. There are really important differences between different types of companies, different geographies. And the benefits that the industry creates across Western Canada differ significantly based on the types of companies that are operating in each area.
Sander Duncanson:
And I do think that increasing regulatory burden will disproportionately impact the smaller players. What these types of policies that the federal government is talking about will do is they will give a competitive advantage to the larger more diversified, integrated companies that already have or are developing sophisticated strategies for sourcing various different types of credits, securing credits on a long term basis at a certain price, creating relatively sophisticated buying strategies for things like emission allocations. The smaller, junior players just don’t have those same resources. And so they will likely lose out on some of those opportunities.
Sander Duncanson:
And I also think one of the key issues is whatever model the government ends up going with, the federal government, or provincial governments, depending on how this is implemented, there’s going to be a lot of new government revenue that’s generated through this type of a program. And the concept in the document is that revenue is going to be reinvested back into emissions reductions in the industry. But I can guarantee the way that that is reinvested is going to be influenced by the government relations strategies that certain larger companies will be employing that will indirectly benefit their overall business at the expense of the smaller players who, again, just don’t have that.
Jackie Forrest:
Okay, well, let’s go to the next one, which in some ways the history of this idea of putting a cap on emissions came from the 2021 election campaign of the Liberals last summer, when they promised they were going to put this policy on. It seems a little out of touch with the world today, which has changed quite a bit since last year, right? We have a real focus on Western energy security. Obviously Europe has this energy shock. And we have politicians from Canada promising things like increasing the amount of oil that would come from Canada, talking about East Coast LNG, growing the oil and gas sector. So it just seems a little out of touch with the situation. And I think it could hurt Western Canadian security because if you think it ultimately will end in reductions in production, because these emissions goals are not possible in the timeframes given, then that’s really counter to what the world needs right now.
Peter Tertzakian:
Yeah. Well, there’s this inner conflict in the document. Again, at the outset, I said, one of the positives is that there’s an acknowledgement of the current situation. However, the conflict is that there’s no resolution to it. They’re just sort of pointing out, yeah, we’ve got a challenge here. And I think it would be better to try and think about how to modify the policy. Thinking all the policies to be able to answer that question that is actually posed here. How do we balance achieving climate goals while at the same time providing secure and affordable energy.
Jackie Forrest:
Right. Yeah. And this doesn’t seem like it can achieve all of those goals at the same time, right? It could create more in insecurity in what the future production may be.
Peter Tertzakian:
Yeah. Again, unintended consequences are very difficult to predict. All I can say is that the question is not answered. The question is only answered in the dimension of how do we reduce emissions.
Jackie Forrest:
Yeah. All right. Let’s go to another question in the document, which is should the policy extend to the refining or pipeline companies? So just for context, the document talks about the fact that if you put all together, upstream oil and gas, refining, and pipelines, that oil and gas would be 85% of the emissions and the other two are 15. So they ask should this policy extend to those other sectors, or just be for upstream oil and gas? And remembering that those other groups are fairly small, only making up 15% of the group’s emissions.
Jackie Forrest:
My view is that just doesn’t seem like a good idea to add all that complexity to those other sectors when it’s a fairly small amount of emissions. And you look at refining, for example. They’ve got the clean fuel standard and the carbon tax. I think they’re very motivated to make emissions reductions. So I’m not sure it would result in any additional reductions.
Peter Tertzakian:
Yeah, well, I think that this is also would be an example of differential pancaking. It’s just like there’s different layers of policy within different subsectors of the oil and gas industry. If you just made it economy-wide and let the companies with their innovation and entrepreneurship do their work, we would probably get to the end goal a lot faster then pancaking and trying to figure out all these different carrot and stick, largely stick, type of approaches to getting this job done.
Sander Duncanson:
Yeah. Well, I mean, I fully agree. I mean, a lot of my practice historically has been in the pipeline sector. And I was imagining a scenario in a cap and trade regime if you’re requiring pipelines to bid for emission allocations, and if they’re unsuccessful in getting all the allocations that they need, you could be in a situation where they can’t actually provide all of the capacity that’s been contracted for. And if the upstream producers have been successful at acquiring all the emission allocations that they need, but they can’t actually use those emission allocations because there’s no pipeline capacity, you’re just unnecessarily disrupting the market even more than it is already going to be disrupted through this type of a policy. So I totally agree. I think adding pipelines unnecessarily complicates all of this. And pipelines are a unique industry, and it’s going to be a bit of a mess quite frankly to deal with these types of issues in that context.
Jackie Forrest:
Right. And then they cover every province. So now you’re going to have to adjust the policy in every province. And the refineries, again, I think they’re highly motivated. I really don’t think that this additional policy is going to result in more reductions. Let’s talk about the uncertainty. We talked about this creating more friction with the provinces and the potential for legal challenges. Doesn’t that uncertainty just stop all spending? Sure, we know about the provincial policies and the 170 and the tax credit for carbon capture. But hey, if I’m going to spend a billion dollars on a project, and there’s this lawsuit about this other policy that could affect the other ones, doesn’t it just stop people from spending, and ultimately hurt our chances of making the 2030 goal?
Peter Tertzakian:
Yeah. It definitely does not instill a lot of confidence in outside investors if there’s lawsuits flying around. I mean, Sander, you probably see this sort of thing.
Sander Duncanson:
Yeah, well certainly. And I mean, as you both know, I mean, of course the context for all of this is regulatory cost and risk in Canada is a key barrier to investment already. And going back to what I was saying, one of the positives of the document is that they at least acknowledge that we should try to avoid carbon leakage through any type of new policy. But imposing either option one or option two directionally will just exacerbate some of the things that have already been driving investment away.
Sander Duncanson:
And I think Jackie, to your point about uncertainty, I mean that, from my perspective, in working with various companies, uncertainty is the key. I mean, they need to know if they’re investing money over a certain timeframe, what the rules of the game are going to be. And in a cap and trade regime, you won’t know whether you’re actually going to be allowed to emit in the future to the extent that you need to. And in option two, the way it’s designed, again, is there’s uncertainty baked into what the price is. So at some point, if they go with option two, they’ll say what the initial price is going to be for the oil and gas sector, but inherently that price may need to change if they’re not seeing the right outcomes. And it’s very difficult, I think, for some companies to make long term investments without having any real certainty around what that price to emit will be.
Peter Tertzakian:
Yeah. The complexity of the pancaking and the reporting and everything alone will definitely give outside investors pause to put money in here. Because they’ll just say, “Well, how do I construct a spreadsheet out of this? I have no idea. How do I quantify risk for cell D27 in my spreadsheet? I have no idea.” And so-
Jackie Forrest:
And what is ultimately the carbon price? Not sure.
Peter Tertzakian:
What is ultimately the carbon price. I’m not sure. And so, okay, I’ll just move to other jurisdictions where it’s just easier to analyze.
Jackie Forrest:
Well, Peter, we talked about it at the beginning all the backlash from the politicians. Is that another thing that could ultimately create more road bumps here in reducing emissions?
Peter Tertzakian:
Yeah. Well, I talked about politicians, and we talked about provinces. But at the end of the day, this is about people. People live in provinces. And they make decisions about what groceries they buy. Make decisions, ultimately, we hope about reducing carbon emissions and so on. So it’s a very personal thing and it’s a psychological thing.
Peter Tertzakian:
And I want to get to what I think is a really important point about this whole document and sort of the conflicts that are in it. The subtle conflicts though that have a psychological bearing on people, particularly people in Alberta and Saskatchewan. And so if you go to page 13, and I know you’re all looking at this document on your exercise bikes as you listen to this podcast, so please turn to page 13. We see several positive things, as I said, at the outset of the podcast.
Peter Tertzakian:
The oil and gas sector is one of the leading investors in clean technology. Yep. Many Canadian oil and gas companies have already set net zero emission targets and have developed decarbonization. Yep. A central role of hydrogen, and basically saying that the oil and gas industry can play a major part in developing a hydrogen economy. And yeah, that’s true. So there’s a lot of very positive things being set up. It’s almost like a father talking to his son saying, “Son, I like what you’re saying, but,” now we go to page 16, “we need to impose more house rules to ensure that you achieve what it is that you’re saying you’re going to do.”
Peter Tertzakian:
And this is this word ensure shows up under section six. “Although it is likely that the suite of existing measures were reduce the oil and gas sector’s GHG emissions, a regulatory tool designed to cap oil and gas sector emissions will ensure the sector lowers absolute emissions.” Okay. We’ve already talked about how other sectors of the economy don’t need this tool to ensure, right? But here. And the conflict and the psychological nuance between page 16 and page 13 is so important to understand if you want to understand the public sentiment here in Alberta and Saskatchewan. Because we’re basically saying, “Son, you’re doing all the right things, but sorry, we need to impose more rules on you to ensure.”
Peter Tertzakian:
And I counted it. I mean, this word ensure is used 17 times in this document. Yeah, okay, with some subtle differences in context. But ensure, ensure, ensure. It’s sort of like, okay, we need this stick to ensure that you do this because we don’t trust what you’re saying you’re going to do. Okay. Now, so I like to be fair, and I like to be objective. And that’s not necessarily how I feel. But for the audience out there, anybody else who cares to listen to this podcast, I can tell you that a lot of people feed into this subtlety and nuance of distrust and lack of appreciation for what the industry is doing, which is outlined on page 13 of this policy document.
Peter Tertzakian:
So as I said, it’s really a case study in behavioral science and subtleties. And how, if you write a report in such a way with inner conflicts, it in itself, the way it’s delivered, is a hindrance to achieving the goal that we all want for the future of the country and the planet. And that is a reduction of emissions.
Jackie Forrest:
Yeah. It’s really just putting fuel on the fire, isn’t it? In terms of there’s already a lot of anger about the reductions. But people have really turned the corner. And you’ve got the Pathways Group saying, “They’re going to do this. They’re going to reduce their emissions.” But yet, then you get a document like this, that shows there isn’t a lot of trust.
Peter Tertzakian:
Yeah. I’m just sort of flipping through my pages here, actually, I think. “There’s no single or simple solution for transitioning Canada’s oil and gas sector.” Agreed. Then there’s another statement in here about how difficult it is to get permitting and regulatory approvals and so on. Agreed. And so it’s not going to happen overnight, right? And this is why you get leaders of the company saying, “Well, I can’t even get projects permitted by 2030, let alone build them and reduce my emissions by 42%. And then on top of that, you’re putting in policies to ensure I can do that. Well, how can I do that if I kind of even get the thing permitted?”
Jackie Forrest:
Yeah. Well, and one more thing is that we haven’t reduced absolute emissions from the oil and gas sector. That’s one of the points made in the document. But all these new policies, like clean field standard and the higher carbon tax, they haven’t even been in place yet. And so you haven’t seen investment around them yet. So it’s the fact that they haven’t reduced emissions doesn’t mean that they won’t.
Peter Tertzakian:
Right. Okay. You’re probably saying, “Well, Peter, okay, that’s fine. You went on a rant. What’s your solution to all this?” Well, look, we’ve got a whole suite of policies that I think are pretty good. The investment tax credit is very generous. Wait for it to work. And if you see that it’s not working, and that there’s no movement in terms of capital spending, even by the next couple of years, then fine. Let’s talk about policies that will help to encourage and ultimately ensure that we achieve the goals by 2050, right? And you’ll probably see the spending today is probably really going to take root, probably not until 2035 or 40, right?
Jackie Forrest:
In terms of seeing results.
Peter Tertzakian:
In terms of seeing really, really significant results. So I think that do we need another policy layered on top of all the other ones right now, given all the positive statements and goodwill that has been built as a consequence of these other policies over the last several years between the industry and the federal government? I would say, no. We don’t need this right now. Can we bring it out again or try and adjust the other policies or harmonize and do all this stuff if we see it’s all not working. Yes, of course. But right now, wrong policy. Too narrow in its scope at the wrong time. And as a corollary, you can see why there’s alienation that happens in the Western producing provinces.
Jackie Forrest:
All right. Well, this podcast has gone a little longer than normal. We really appreciate everyone listening in, but we think it’s important to go over these topics. I think we’re going to wrap this up with some conclusions. So I would encourage people to participate and let your voice be heard. We know that the Liberals made this as an election promise, and they put this discussion document out. But it doesn’t mean that this policy needs to go forward. If we really want to reduce our emissions, and this policy is not going to help doing that, then I think that is a good reason not to move forward with it and we should express our views.
Sander Duncanson:
Yeah. I mean, so the only other thing I would say, I mean, I agree, Jackie, I think the oil and gas industry is really good at finding solutions to problems and just going and working out those solutions. But generally reluctant to participate in processes like this, to stick their neck out and make their voices heard on the political level. But this is really, really important. So I really encourage everybody listening to take these issues seriously, and to try to convince whatever organization you’re involved with to speak up and be heard.
Peter Tertzakian:
Yeah. I agree. I think it’s time for people to get involved. I mean, this is a democracy. It’s a privilege. And I said, a positive of the policy is they’re asking for feedback. So give your feedback.
Jackie Forrest:
All right, September 30th, we hope you participate. Feel free to use any of the content of this podcast. There will be a transcript on our website if you’d like to use part of that as well. Thanks Sander for joining the podcast.
Sander Duncanson:
Yeah, my pleasure. Thanks for inviting me.
Jackie Forrest:
And thank you to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
For more ideas and insights, visit arcenergyinstitute.com.