Friday, September 24

Philip Cross: Ottawa can’t cap oilsands output so Trudeau should stop saying he can


The Liberals ceded direct control over oilsands emissions when it implemented a carbon tax instead of a’cap-and-trade’ system

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During a weekend campaign stop at Granby, Que., Justin Trudeau defended his government’s purchase of the Trans Mountain pipeline by saying “The biggest concern that people have around the pipeline is,’Oh, we’re going to see oilsands expansion.’ No , we’re not.” The promise to curtail the oilsands echoes his famous 2017 remark to a gathering in Peterborough, Ontario, that “We can’t shut down the oilsands tomorrow. We need to phase them out.” This is just the latest example of Trudeau’s penchant during election campaigns to promise whatever the audience wants to hear without considering whether he can conceivably deliver it.

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In a recent paper for the Macdonald-Laurier Institute, I outlined how oilsands production has powered ahead even after the swan dive of oil prices in 2014. The oilsands have expanded rapidly to account for 70 per cent of all oil produced in Canada, with one -third of their growth occurring since 2015 when Trudeau took office. Capital spending of $8.3 billion a year in the oilsands is four times that of auto manufacturers, whom the prime minister has no trouble subsidizing even as he disparages the fuel that powers almost all of their vehicles.

The oilsands’ steady growth almost certainly will continue no matter what Trudeau says

Oilsands production has followed a remarkably stable growth path since 1991. This reflects how its huge capital outlays require a long-term planning horizon that ignores both cyclical downturns in oil prices and electoral cycles in politics. This steady growth almost certainly will continue no matter what Trudeau says. IHS Markit projects that even after the drop in oil prices in 2020, oilsands output will rise from 2.7 million barrels a day to 3.8 million barrels by 2030. Half of the forecast increase comes from existing operations, which suggests the ruling party in Ottawa has no mechanism to prevent more oilsands production no matter who is its leader. The National Energy Board does control the issuance of permits for oil exports, but it is independent of the Prime Minister’s Office.

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One of the many problems surrounding public discussion of the “oilsands” is the portrayal of all operations as the same. Though every oilsands plant is unique in terms of both emissions and technology there are only two main types of operation. One is the open- pit mining technique that the media loves to picture next to all references to the oilsands, while the other is underground (“in situ”) melting of the bitumen. In situ has become the dominant form of oilsands production despite less than two decades of this innovative Canadian technology being deployed. Most importantly, in situ operations only require provincial permits, making it even harder to see how the federal government could contain their expansion even if it wanted to.

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The prime minister went on to say of the oilsands that “We’re not going to see an increase in those emissions.” But oilsands production could expand without necessarily raising emissions if technology continues to improve. Already, oilsands emissions have declined to about the average for oil produced in the US, although they vary greatly from project to project even when the same technology is used. Despite these advances, environmentalists continue to demonize the oilsands as if nothing has changed since the 1990s.

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The future course of oilsands emissions is not directly controlled by the federal government, so it is misleading for Trudeau to pretend he can dictate their course. His government ceded direct control over emissions when it implemented a carbon tax instead of a “cap-and- trade” system. One of the problems with using a carbon tax to help control emissions is that it targets the price but not the quantity of emissions. The government sets the carbon tax at a level that it expects will reduce emissions by a certain amount, based on the estimated responsiveness of oil demand to price hikes. This is an inherently imprecise exercise in forecasting. If, for example, the price of oil shoots up by enough, firms could decide it is profitable to produce more and let emissions rise while paying the carbon tax.

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The alternative is the so-called “cap-and-trade” scheme, in which the level of emissions is capped and their price is set in markets in which people trade emissions permits. Cap-and-trade allows the government to directly control the quantity of emissions by foregoing control over the price the permit market places on emissions. The point is not that a carbon tax is superior to cap-and-trade — economists debate the merits of the two systems — but that, after choosing a carbon tax as its tool for lowering emissions, Ottawa is not in a position to directly control industry output.

Posturing about containing oilsands production and emissions panders to environmentalists outraged by Trudeau’s pipeline purchase but makes little difference to global emissions and climate change. As the International Energy Agency’s chief economist put it, the impact of the oilsands on global emissions “is not peanuts, it is a small fraction of peanuts.” The prime minister would serve Canadians better if he used his pulpit to inform the public about the misinformation surrounding the oilsands and explained how their continued development was consistent with both economic growth and an improving environment.

Philip Cross is a senior fellow at the Macdonald-Laurier Institute.

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In-depth reporting on the innovation economy from The Logic, brought to you in partnership with the Financial Post.

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