The oil sands fundamentals are dire and stark – and Canada shouldn’t spend to revive a dying dream

​​​​​​​In her first press conference as Canada’s Finance Minister, Chrystia Freeland told Canadians she wants us to “build back better.” Albertans are all in on that idea; we want a better Alberta. This week’s announcement that the province is enduring the largest deficit in its history “by a country mile” shows we have our work cut out for us.

Given her former unofficial role as the federal minister in charge of defusing Western alienation, many expect Ms. Freeland to make moves to build a greener industry with a major public investment in decarbonizing oil production. There is widespread support for this approach. After all, many of Alberta’s oil producers are in the high-cost, high-carbon quadrant, and for them to follow the world in moving to low-carbon energy, the public needs to help with the Herculean adjustment effort. Many see this as critical to the economic future of Alberta.

But this would be a case of building backward, not back better. Peak oil is near – not because of oil scarcity, but because demand is slowing. Electric cars are getting cheaper and better, climate polices are getting stronger, and now COVID-19 has accelerated workplace changes that have and will continue to reduce commuting and business travel.

On the supply side, technological change is also making oil extraction cheaper and more competitive. Fracking of tight oil is a relatively inexpensive option that can be ramped up quickly and inexpensively compared with projects in the oil sands, which require significant capital and time investment.

One need not be an economic Einstein to see that the combination of flattening demand and increased supply means downward pressure on prices. While geopolitical shocks and business cycles will occasionally spike prices, the oil-patch fantasy of a return to long-run triple-digit prices has melted away faster than our glaciers, a fact increasingly acknowledged by the oil majors themselves; even they have begun to muse whether it’s time to stop looking for new oil. This is also why some leaders in Alberta’s oil patch no longer project a hockey stick-like production growth curve, as they did just a few years ago.

But it gets worse. While the growth of global climate policy is unsteady, humanity can’t dodge climate reality, and policies will have to grow stronger. Youth will win the Greta vs. Trump battle. Perhaps quickly. And while our oil is more ethical than Saudi Arabia’s or Russia’s, global markets have not figured out how to price human rights into the cost of a barrel, and it is hard to imagine they ever will.

All of this adds up to a not-too-distant future when Alberta producers will chase a diminishing market with declining prices, using a product that will likely face carbon penalties. We run the real risk of getting priced out of the market for new production in spite of our best efforts. In a carbon-constrained world trending toward cheap oil, the future for Alberta’s industry is bleak, as evidenced by the huge challenge companies now face to secure capital.

Not even the most heroic engineering achievements can change oil-market fundamentals. It’s clear that emissions-reduction moonshots won’t save the industry. Continuing to invest significant funds into maintaining sales in a shrinking market is a bad business proposition and a bad use of public funds. We should let carbon pricing and regulation drive the cost-competitive emission reductions that should be pursued by the companies themselves.

So what’s a new Finance Minister to do?

Building Alberta back better means using public money to develop and deploy new technologies and industries, and to enhance the province’s other industries. It means focusing on how Alberta can win by leveraging the skills and resources we have within our oil industry to develop new energy pathways, such as low-carbon hydrogen for transportation. It means capturing as much wealth as possible from the parts of the oil sector that remain competitive and putting it toward the profit drivers of the future.

It also means applying key guiding questions to any consideration of public investment. Does the investment support a technology or market that can grow and generate economic value to power the Alberta economy? Can the technology demonstrate a credible path to driving the economy in a world beyond oil? Does the investment help to build a bridge to the future or result in a dead end?

We won’t know the exact path up front – whether it will be toward metals, chemicals, manufacturing, transport futures or the new and emerging sectors referenced in Alberta’s recovery plan – but we can build it on what Alberta has in abundance: a high-skilled young workforce and great education.

There is another role for government in managing the dislocation that workers that will face. Transition is a scary word for many working in the oil industry, because it can come across as “transitioning me into not having a job.” But it is less scary than facing market forces with no plan. Instead, we need a transition plan for workers that draws on policy tools such as income replacement, retraining and early retirement. Public money, which is increasingly scarce in these post-COVID-19 days, should be focused in those areas; governments must not succumb to the pressure to fund corporate welfare for investors.

This is what building back better means for Albertans, and for the many fellow citizens we talk to on a daily basis. We hope Ms. Freeland agrees.

Original post on The Globe and Mail

Cop22 After Trump: The Good and Bad News for Climate Change

On the Monday before the U.S. presidential election, climate negotiators gathered in Marrakesh, Morocco, to begin the long, hard process of implementing the Paris Climate Agreement. But all eyes were on the United States, and when the news that Donald Trump had won the election hit Marrakesh early Wednesday morning, it was not well received.

Under U.S. President Barack Obama, the United States had forged an important alliance with China to put forth more ambitious climate policies and to move the world toward signing the momentous Paris Agreement last year. That comity was still on display in Marrakesh, but little else of consequence has happened so far, other than strategizing about how to respond to the U.S. election results.

The political uncertainty surrounding a Trump administration added confusion to a task that was already extraordinarily difficult. Global warming is a near-perfect example of the tragedy of the commons, as it is a problem that no individual action, no single country can resolve on its own. On the one hand, this suggests a great danger to a Trump presidency: his reversal of climate change policies could bring about a global knock-on effect, pushing the world toward harsh nationalism and reduced international cooperation. On the other hand, there is a veiled hope that the negative impacts of U.S. climate policy—or lack thereof—under Trump will be limited by the current momentum in technological advancement and other factors.

Original post on Foreign Affairs

A win-win-win solution

What should we do with the carbon we produce when we burn fossil fuels? Some experts say we should fight climate change by putting the carbon back underground, whence it came.

In late January, a blue-ribbon panel recommended that Canadian governments spend $2-billion to begin deploying carbon capture and storage technology (CCS). This technology injects the carbon dioxide produced by burning fossil fuels into exhausted oil and gas fields or salty aquifers deep underground.

As is true of any large-scale energy technology, CCS carries costs and risks. The Intergovernmental Panel on Climate Change, the world’s leading expert body on these topics, has estimated that CCS’s costs are competitive with other leading ways to cut emissions and that its risks are small compared to those of related industries, such as underground storage of natural gas. CCS is not a magic bullet. But many climate and energy experts think that it’s among humanity’s best tools to control carbon emissions.

Yet almost all Canada’s environmental groups panned the panel’s recommendation. And these groups’ opposition is clearly slowing CCS’s development. Governments spend money to win the support of various interest groups, so they’re reluctant to commit major funding to CCS – an environmental initiative – as long as environmental groups don’t like it. In last week’s budget, the federal government announced just $240-million in CCS funding, far less than previous support for biofuels and wind power.

By opposing CCS, environmental groups are gambling that we can make the huge cuts in CO2 emissions we need simply by improving our energy efficiency and using renewables like solar and wind power. They may be right. But if they’re wrong, they could cripple action against climate change – the greatest environmental threat of our age. It’s a dangerous, and seriously imprudent, gamble.

In criticizing the panel’s proposal, environmental groups focused their ire on the use of government money to jump-start CCS technology. As John Bennett, of ClimateforChange.ca, put it, “The cost of cleaning up an industry should come out of the profits of the industry, not the taxpayers’ pockets.”

In many respects, these criticisms are fair. Ideally, polluters should pay to clean up their pollution. Governments should use taxes and technology-neutral regulations to put a price on carbon emissions, which would push industries to make deep reductions. Solutions would then come from the bottom up, and government would stay out of the business of choosing the best ways to cut emissions. Industries such as coal-fired electrical utilities and Alberta tar-sands processors that can generate relatively pure streams of CO2 might decide to go the CCS route and pay the cost of putting their emissions underground.

Yet the sad reality is that it will take years and maybe decades to untangle Canada’s baroque energy and climate policies and to replace them with transparent and simple regulations based on the “polluter pays” principle. Environmental groups are wrong to argue that we shouldn’t use government funds to support promising technologies before the mess is straightened out. We don’t have the time to wait, because Earth’s climate is changing fast, now.

Without carbon prices or regulation, public funding is the only way to ensure that CCS technology gets going quickly. Such an investment today would bring a double return: near-term emissions reductions and, more important, the option to use CCS at a much larger scale later. By 2015, we would have “kicked the tires,” by trying out CCS at full industrial scale. Then we would be able to count on the technology if we need it on a vastly larger, economy-wide scale in the following decades.

If the real root of the opposition to CCS were the belief that the polluter should pay, environmental groups would also be attacking subsidies for wind power, biofuels and solar panels.

Direct federal subsidies for renewable electricity already amount to $1.7-billion, along with $2-billion for biofuels and $1.5-billion for Sustainable Technologies Development Canada. Also, the federal government offers an across-the-board tax break for renewable energy. For electricity alone, provincial incentives include Quebec’s purchase requirement for 4,000 megawatts of wind power (worth more than $8-billion) and renewable energy targets or requirements in B.C., Saskatchewan, Manitoba, Ontario, New Brunswick and Nova Scotia.

Environmental groups have lobbied long and hard for such subsidies. But if they simply wanted the polluter to pay, they’d surely argue we should cut subsidies and wait for carbon prices. Although it’s true, for instance, that wind power doesn’t release much carbon pollution, it’s certainly part of the electricity industry. And applying the polluter-pays principle to electricity would mean, once again, pricing or regulating carbon and letting the industry find the cheapest ways to cut its carbon output – with wind power a leading competitor.

Environmental groups might say that coal, oil and tar-sands companies are rich, so they don’t need more government money. But the distinction doesn’t make sense: Most of the profit from government incentives for wind power ends up with the big technology providers such as General Electric’s wind turbine division. Why is it fine to subsidize wind power when the money goes to multinationals like GE, yet it isn’t acceptable to subsidize Canadian companies to build made-in-Canada CCS technology?

There are likely two deeper reasons why environmental groups dislike CCS. First, most of these groups want to believe that we can make deep cuts in carbon emissions using renewables and improvements in efficiency alone. Few advocate CCS, and almost none support nuclear power.

This position reflects a profound failure to grasp the scale of humankind’s carbon-energy crisis. To limit dangerous climate change, we need to cut emissions sharply very soon, so we must use technologies close at hand. Even holding greenhouse gases in the atmosphere to double their pre-industrial level – a limit that still risks severe climate disruption – will require reducing worldwide emissions about 80 per cent below their business-as-usual level by 2050. Such a huge cut, even over 40 years, will require a staggering transformation of the global energy system.

Yet for the foreseeable future, modern societies and their industries will depend on centralized sources of high-reliability power to supply a large fraction of their energy. Nuclear reactors and coal-fired plants with CCS are arguably the only two methods of generating massive quantities of reliable low-carbon power using today’s technologies. We can probably afford to reject one of these two options and still cut emissions quickly. But if we reject both, the problem gets vastly tougher and perhaps impossible. Why fight with one hand tied behind our back?

The second reason environmental groups don’t like CCS is in some ways more pernicious: a deep suspicion of big business and big industry that’s a residue of the leftism of the original environmental movement. In recent years, most such groups have accepted that markets must play a central role in any response to climate change, and some work effectively with business, but many still harbour an almost reflexive distrust of capitalists and capitalism.

CCS will be a big-industry technology: major implementation will require huge outlays of capital and armies of scientists, engineers and construction workers. It will also generate huge profits. So when environmental groups saw that industry representatives dominated the blue-ribbon panel, they assumed that the energy industry was once again positioning itself to line its pockets, and attacked its recommendations. As Dave Martin of Greenpeace Canada put it, “Carbon capture is a public relations smokescreen for the tar sands and coal-fired electricity generation.”

It’s time that Canada’s environmental groups freed themselves of this ideological straitjacket. They need to acknowledge that modern capitalism is the most dynamic, innovative and adaptive economic system human beings have ever invented. It’s true that capitalism has fuelled our climate problem, and that many big businesses have lobbied hard to block serious action, but we’re not going to solve the problem without capitalism’s help – albeit capitalism that’s ultimately guided by strong government-imposed constraints.

In this respect, Canada’s environmental groups are out of step with others around the world, such as Environmental Defense and the Natural Resources Defense Council in the United States and several groups in Europe. These groups have come to understand that they must work constructively with big business to get capitalism’s extraordinary energy focused in the right direction, using technologies that include CCS.

In Canada, supporting this technology would also be politically astute. Without CCS, fossil-fuel industries would only lose under any tough climate policy, but with CCS some industries will win and some will lose, which will help split apart the coalitions that oppose real action and making it easier to craft the grand bargain among interest groups that truly commits Canada to deep cuts in carbon emissions.

Many business leaders – even those in energy industries – realize the urgency of the problem. They care about their children’s future like anyone else. And they’re tired of constantly being tarred as the bad guys. The environmental community should give these leaders a way to tackle climate change while preserving part of their industry.

Canada’s environmental groups can identify the industry leaders who support aggressive action on carbon and then work with them to find win-win-win solutions that benefit the environment, Canadian society and industry, too. CCS is just such a solution.

Original Post on The Globe and Mail

Carbon taxes, the economy and the poor

In a recent article, Aldyen Donnelly argued that evidence from the UK and Norway show that greenhouse gas taxes (a.k.a. carbon taxes) fail to reduce emissions, hurt the poor and cost manufacturing jobs. Throughout the article, she blames academics (“Mark Jaccard, among others”) for promoting carbon taxes when we should instead be explaining the advantages of regulations “like fuel efficiency standards for auto makers and mandates that require electric utilities to buy a certain portion of their total sales from zerogeneration sources.”

Donnelly might wish it were only us academics suggesting that pricing is an effective way to reduce emissions. But the CEOs of Canada’s 25 largest corporations and the chief economist of Toronto Dominion Bank, who have recently come out in favour of pricing emissions, are not academics. In fact, a recent poll by BBC World Service showed that 57 percent of Canadians support a carbon tax, rising to 81 percent if the tax is “offset by other tax breaks so that total taxes remain the same.”

Donnelly suggests that carbon taxes and other regulatory policies cannot co-exist. But even we ivory tower academics know the world is not so simple, indeed we have frequently emphasized the potential effectiveness of the very regulatory policies Donnelly is describing. But the norm among countries who are serious about the climate change risk is to apply a combination of policies to ensure we can no longer freely emit greenhouse gases.

So, yes, we agree that greenhouse gas emissions can be reduced by regulations, but we find scant evidence for Donnelly’s claim that greenhouse gas taxes are ineffective, have hurt the poor or have cost manufacturing jobs.

Donnelly claims that Norway’s carbon tax has had a perverse effect in leading to rising emissions relative to Canada and poor economic performance. She invites the reader to look at official national statistics. So we did. According to the national statistics offices of Norway and Canada, during the period 1990-2005, per capita greenhouse gas emissions increased 7.5 percent in Canada but fell 0.4 percent in Norway. At the same time, the Norwegian per capita economic output grew 47 percent compared to Canada’s 30 percent while Norway’s oil and gas production per capita grew at much faster rates than Canada’s.

Norway’s economy has performed wonderfully while its carbon taxes have helped propel it into global leadership in emission reduction technologies. After the imposition of the carbon tax in 1991, the Norwegian company Statoil took the decision to implement the 2 Sleipner project, in which carbon dioxide is injected into a deep saline aquifer 1,000 metres under the North Sea floor. According to Statoil’s website, the “Decision to inject was taken in 1991 following the introduction of a CO2-tax.” … “The Sleipner West licensees would have had to pay [about $70 million Canadian per year] in Norwegian carbon dioxide tax had they released the greenhouse gas to the air.”

In the same vein, Norway may soon be the first country to generate near-zero-emission electricity from fossil fuels with its coastal project to generate electricity in concert with carbon capture and storage. The pressures of the carbon tax, alongside other policies, are helping Norwegian businesses to become world leaders in the emerging field of clean energy.

Donnelly also claims that carbon taxes hurt the poor, obliging government to provide compensation, as in the UK. But one of the strengths of the carbon tax approach is precisely that, unlike regulations, it provides revenue for ensuring low income groups are not worse off. Technology regulations, on the other hand, force people – rich and poor – to acquire low-emission technologies that are more expensive. They do not compensate the poor or anyone else for this extra cost.

Both taxes and regulations can work well, and both can be misused. The virtue of prices is their transparency and simplicity, and in the resulting gains in economic efficiency. Regulation breeds complexity, as the regulated work their way around the rules. Many regulatory systems must, for example, define a “Best Available Technology” a complex process that opens the door to legal wrangling and back room deals. Such decisions are better made by engineers and accountants responding to a carbon price than by lawyers.

If we Canadians don’t care that much about economic performance, we can avoid carbon taxes and regulate our way to greenhouse gas reduction. And, as applied academics, we are willing to help design those regulations in ways that minimize (but cannot eliminate) their negative effect on economic output and on low income groups. But can Canadians really afford to be so cavalier about economic growth?

Finally, Donnelly argues that where they have been applied, particularly in the UK, carbon taxes are now profoundly unpopular. But the same recent BBC poll that showed Canadian support for carbon taxes also showed support in the UK at 54 percent, for an increase in carbon taxes from current levels – support which rises to 77 percent if the extra tax is offset by equivalent tax reductions. After years of this policy, support is very strong, which is surprising when one considers that this is public support for being taxed! Indeed, the opposition Conservative Party in the UK promises to increase the carbon tax if elected. When was the last time an opposition party anywhere was confident enough about public opinion to claim that if elected it would raise a tax?

We agree with Donnelly that carbon taxes are not the be-all and end-all of climate policy. We just wish she would take a more even-handed, “academic” approach to the evidence.

Original post on The Financial Post