Canadian Prime Minister Justin Trudeau this week unveiled a plan to tax carbon emissions beginning in 2018, offering provinces a choice between a cap-and-trade program and a carbon tax. If a province fails to implement one of those policies by 2018, a federal carbon tax would be imposed, starting at C$10 per ton, rising by C$10 each year until it reaches C$50 in 2022.
The plan was hailed by some environmental groups but slammed by a few provinces that depend on oil and gas production. “The level of disrespect shown by the Prime Minister and his government his stunning,” Saskatchewan Premier Brad Wall said in a statement. “This new tax will damage our economy.”
Given that the Canadian Prime Minister has taken a middle-of-the-road approach to energy and the environment thus far, he may be receptive to approving pipelines to help the industry.
The Premier of Alberta, where the bulk of Canada’s oil and gas production is located, was also critical, but she took a more nuanced position. Rachel Notley said that in exchange for a carbon tax, the federal government must help the oil industry build major pipelines to allow Alberta oil to reach more markets.
Given that the Canadian Prime Minister has taken a middle-of-the-road approach to energy and the environment thus far, he may be receptive to Alberta’s position.
Trudeau charts new path on climate
“There is no hiding from climate change,” PM Trudeau said at the House of Commons, arguing for both his carbon tax and for Canada to ratify the Paris climate accord. “It is real and it is everywhere. We cannot undo the last 10 years of inaction. What we can do is make a real and honest effort—today and every day—to protect the health of our environment, and with it, the health of all Canadians.”
Justin Trudeau, elected almost a year ago, has made climate change a top priority, hoping to undo the damage done to Canada’s global reputation as a climate pariah under his predecessor. He has spoken numerously about clean energy and climate action, and has strongly supported the international climate negotiations, including the Paris climate accord. The carbon tax would be his signature climate policy and will likely be a key determinant as to whether Canada hits its 2030 target of reducing greenhouse gas emissions by 30 percent below 2005 levels.
Trudeau has put off making several tough choices that will force him to choose between his climate goals and trying to kick-start a moribund Canadian economy that is still reeling from the crash in commodity prices.
At the same time, however, Trudeau has put off making several tough choices that will force him to choose between his eagerness to be a climate champion and being a leader trying to kick-start a moribund Canadian economy that is still reeling from the crash in commodity prices. His dilemma has been encapsulated in the stack of pipeline proposals sitting on his desk. The Prime Minister has tried to reinvigorate regulatory oversight for major energy projects, stiffening standards and environmental scrutiny in an effort to restore faith in the process. Still, Trudeau has been loath to approve or reject several large projects for fear of disappointing voters, but the situation is coming to a head.
Alberta oil needs pipelines
Oil companies want the approval of major pipelines to increase takeaway capacity, allowing oil from Alberta to reach international markets.
Canada’s oil industry has been ravaged by the crash in prices, but the global slump is largely out of its control. But there is one area where companies are eager to spur changes in the domestic market: They want the approval of major pipelines to increase takeaway capacity to allow oil from Alberta to reach international markets.
TransCanada long dismissed opponents of the Keystone XL Pipeline, arguing that if the U.S. did not approve the project, another pipeline would be constructed to take Canadian oil elsewhere. But moving Canadian oil to the water has been exceedingly difficult, with opponents rebuffing industry efforts in every direction. The dearth of pipeline capacity forces Canadian oil to sell at a discount to international prices, raising transit costs and making producers less competitive. The Canadian Association of Petroleum Producers (CAPP) expects investment in Canada’s oil industry to fall by $50 billion between 2014 and 2016, or about 62 percent. CAPP says building more pipelines is a “national priority.”
With the southern route to the U.S. blocked by the rejection of the Keystone XL Pipeline last year, Alberta’s oil industry has fallen back on a handful of other paths to get oil to market, all of which have faced formidable resistance.
For example, the Northern Gateway Pipeline is a $6.5 billion proposal to take oil from Alberta to British Columbia’s Pacific Coast. Earlier this year, a Canadian court rescinded the project’s permit because Enbridge, its sponsor, did not adequately consult with First Nations. The decision leaves the project’s fate in the hands of the new Liberal government of Trudeau, who ran against the project last year. Trudeau has already dimmed Northern Gateway’s prospects when his government issued a moratorium on oil tanker traffic on British Columbia’s North Coast. That would effectively kill off the project. The PM set a November 25 deadline on a decision for the pipeline, but its chances are not strong.
A second major project on the table is the Energy East, another long-distance pipeline pushed by TransCanada. The 4,600-kilometer pipeline would carry 1.1 million barrels per day of Alberta crude to refineries in Eastern Canada, and would ultimately connect more landlocked Alberta oil to the global market. The C$15.7 billion project faces stiff opposition, particularly in Quebec, which could prevent TransCanada from breaking ground. “We believe the opposition to the project is too much for the project to overcome,” Robert Hope, an energy-infrastructure analyst at Bank of Nova Scotia, wrote in a note to clients a few weeks ago. The bank only gives Energy East a probability of approval at 25 percent.
A third pipeline, backed by Kinder Morgan, has much better odds. The Trans Mountain pipeline is rumored to be slated for approval by the PM. The advantage with Trans Mountain is that it is simply an expansion of an existing line that runs from Alberta to the coast of British Columbia. That makes it significantly less controversial. Moreover, Trudeau is under pressure to approve any project in order to appease Canada’s oil industry. Kinder Morgan’s project, he seems to believe, is the least offensive option. If approved, the twin line would triple the pipeline’s current capacity from 300,000 b/d to 890,000 b/d.
Environmentalists feel betrayed
Canadian pipeline companies have not had an easy time, with a handful of high-profile projects having suffered delays, while the Keystone XL project was ultimately nixed by the U.S. The new carbon tax announcement seemed to add insult to injury.
But Trudeau is attempting to straddle the political center, and doing so will mean trying to placate the concerns of oil and gas producers. At the end of September, he approved a massive LNG export project to be constructed in British Columbia. The $36 billion project is not yet a foregone conclusion—its backer, Malaysia’s Petronas, has deferred a final investment decision because global LNG markets are expected to be oversupplied for the next several years. Nevertheless, the approval from Trudeau’s government was applauded by Canada’s oil and gas industry.
Trudeau is attempting to straddle the political center, and doing so will mean trying to placate the concerns of oil and gas producers.
However, environmentalists felt burned by the approval of Petronas’ colossal gas export project, and the carbon tax may not be enough to mollify them. “The Trudeau government’s lofty rhetoric on climate has been proven nothing more than sunny ways talking points,” Caitlyn Vernon of the Sierra Club of British Columbia said in response to the Pacific NorthWest LNG approval.
Moreover, Trudeau’s carbon tax is not all that aggressive, green groups say. British Columbia already has a C$30/ton carbon tax in place and wouldn’t need to increase it under the federal plan until 2021. At the same time, Ontario and Quebec already have a cap-and-trade program. The federal carbon tax would be an incremental move and would not be enough to achieve Canada’s stated climate goals by 2030. In order to achieve a 30 percent reduction in greenhouse gases by 2030, the tax would need to be C$200/ton, according to a recent study.
Alberta to get a pipeline?
Trudeau eagerness to see his carbon tax enacted increases the odds that he also approves the pipeline in order to blunt the political blowback from Alberta.
The Prime Minister was never going to be loved by both the oil industry and environmentalists, and he seems to have angered both with his recent actions. Nevertheless, he is adamant about sticking to the center. With a flurry of decisions to be made in the last few months of 2016, he will likely reject several pipelines (Northern Gateway and Energy East) while approving the Trans Mountain expansion. His eagerness to see his carbon tax enacted increases the odds that he also approves the pipeline in order to blunt the political blowback from Alberta. The oil and gas industry in the province may finally get its wish.