Stranding Canada's oil is no way to reduce carbon emissions

  • National Newswatch

Liberal plan to mandate NEB to review upstream carbon emissions risks Canada's oil exports.The Liberal government's platform pledged to revise the federal National Energy Board (NEB) process for approving pipelines. There may be desirable improvements to the process – particularly deepening consultation with Aboriginal peoples. However, the government also wants the NEB to weigh upstream carbon emissions (i.e. the emissions from the extraction of the oil that a pipeline will transport) against approving a pipeline. The NEB currently views upstream emissions as outside the scope of its reviews. Changing that approach would be a mistake.Nixing any pipeline on the basis of upstream emissions would be wrong for two reasons. First, stranding Canadian oil is damaging economically and not the best way to reduce Canada's overall emissions. Second, mandating the federal NEB to scrutinize upstream emissions risks intruding into provincial jurisdiction for industrial regulation – and also contradicting the Liberals' pledge to defer to provincial efforts to curb emissions.Canada's petroleum production currently lacks pipeline capacity to reach international markets where it can fetch the world price. As a result, Canadian oil gets a lower price than it could. Stranding our oil deprives Canada's economy of its full value on world markets. Building pipelines to link demand with supply maximizes the price Canadians receive for any oil that is profitable to produce.Distorting prices by keeping oil from getting to world markets is not the efficient way to reduce Canada's overall emissions. A gram of carbon dioxide has the same effect in the atmosphere whether it's emitted from oil extraction or other activities. Canada's goal must be to achieve our target emissions while minimizing the economic costs. This means reducing emissions most efficiently across all activities, not just particular industries or regions. There's no reason to presuppose that each ton of carbon emissions generated by oil production in the Athabasca will yield less value for Canada's economy than cement production in Quebec, steel manufacture in Hamilton or coal mining in Cape Breton.Better than stranding oil is internalizing the cost of emissions through carbon pricing. Carbon pricing induces the most economically efficient reductions. Firms and households will cut back on any activity for which the carbon cost is greater than the value of the activity. Carbon pricing also avoids picking who can emit by regulatory fiat. That dodges the significant risk that a government gets it wrong – or favours certain industries and regions over others. If an oil producer remains profitable while paying the going carbon price, that oil should be produced, while other carbon emitters cut back. The converse is also true: facing a carbon price, certain oil producers will no longer be profitable.Pipelines are for getting the oil that is profitably produced to market. Notably, the NEB's review process considers the availability of supply in its assessment of whether a pipeline is necessary. Various factors determine whether economic sources of supply are available for a given pipeline – including carbon prices for upstream emissions and petroleum prices. Global policies to reduce petroleum reliance may also decrease demand for oil and lessen petroleum prices. If carbon pricing means that high-cost petroleum resources cannot be economically extracted, the NEB might find that a proposed pipeline is unnecessary.But blocking a pipeline because of the upstream emissions from economic petroleum reserves is backwards reasoning. If a petroleum producer is profitable while paying the carbon price, that production will occur and Canadians should get the highest price for those resources. If there is ample supply for a pipeline at the upstream carbon price, the pipeline will still be necessary.Apart from the economic argument, there's a legal concern: mandating the NEB to weigh upstream emissions against approving a pipeline may stretch the federal government's constitutional authority.The NEB has jurisdiction to approve pipelines because of the federal power for “interprovincial works and undertakings,” and the Supreme Court has limited the scope of the NEB's review to matters of federal concern. Canada's constitution does not assign jurisdiction for the “environment” to either the federal or provincial government, and federal environmental assessments require environmental effects on an area of federal responsibility. A proposed pipeline's direct environmental effects therefore fall within the NEB's purview, as do environmental effects that are sufficiently connected to a particular approval: for example, additional generation capacity required to serve an electricity export contract.Nonetheless, the NEB cannot inject itself into general industrial regulation, which is a provincial responsibility. As the NEB has reiterated, Alberta's oilsands are already regulated provincially and subject to project-specific environmental assessment processes. Alberta will also soon have a new carbon-pricing regime. Particularly with existing provincial regulation, requiring the NEB to scrutinize emissions from upstream industrial activities looks suspiciously like an intrusion into provincial jurisdiction for industrial regulation and control over natural resources.Prime Minister Trudeau supported Keystone XL and was rightly disappointed when President Obama rejected that pipeline, citing its effect on upstream emissions. Canada's Liberal government should not make this same mistake at home.This item originally appeared in the Financial Post on December 18, 2015.Grant Bishop is a Fellow-in-Residence and Benjamin Dachis is a Senior Policy Analyst at the C.D. Howe Institute.