Climate Change & Canadian PolicyClimate Change & Canadian PolicyAPEGGAAPEGGA

Edmonton, February 18, 2003Edmonton, February 18, 2003

Rick HyndmanRick HyndmanSenior Policy Advisor on Climate ChangeSenior Policy Advisor on Climate Change

2

Outline Outline

• Context: emissions, climate change and global Context: emissions, climate change and global energyenergy

• GHG emissions & oil sandsGHG emissions & oil sands

• Canadian policy & Canada’s contribution to Canadian policy & Canada’s contribution to international action on climate changeinternational action on climate change

• Policy uncertainty facing energy intensive Policy uncertainty facing energy intensive industryindustry

• Ratification, the Federal plan & large industrial Ratification, the Federal plan & large industrial emitter targetsemitter targets

• What remains to be addressedWhat remains to be addressed

3

Uncertainty about Economics, Technology Uncertainty about Economics, Technology & Climate Science& Climate Science

1o

2o

3o

4o

>5o

<1o

1o 2o

3o4o>5o

<1o

Alarmists would lead you to believe this

Recent critiques make it look more like this

Probability of Change in Average Global Temperature by 2100

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What is the real issue? Meeting energy What is the real issue? Meeting energy demand in the 3rd Worlddemand in the 3rd World

1990 2050 2100

Economic Model Projections of Global CO2 Emissions (No Kyoto)

China

India

USAW. Europe

Russia & EE

Mideast & OPECOther

Japan

Canada Australia, NZ

5

If GHG emissions have to be reduced If GHG emissions have to be reduced dramatically, what is required?dramatically, what is required?

• Improve energy efficiency & conservationImprove energy efficiency & conservation

• Reduce non-energy emissionsReduce non-energy emissions

• Switch fuels to low & non-GHG-emitting Switch fuels to low & non-GHG-emitting primary energy sourcesprimary energy sources

• Develop technologyDevelop technology CO2 capture & storage to allow transition to CO2 capture & storage to allow transition to

H2 & electric economy initially using H2 & electric economy initially using hydrocarbonshydrocarbons

New non-emitting primary energyNew non-emitting primary energy

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Implications for oil and gasImplications for oil and gas

• Two sources of effects on oil and gas Two sources of effects on oil and gas producers in the short- to medium-term:producers in the short- to medium-term:

Global effort to reduce GHGs: bigger effort --> Global effort to reduce GHGs: bigger effort --> greater energy efficiency & more fuel switching --> greater energy efficiency & more fuel switching --> lower demand for oil and eventually gaslower demand for oil and eventually gas

Domestic policy - potential for costs to be imposed Domestic policy - potential for costs to be imposed on industry for its own emissions --> production on industry for its own emissions --> production costs increasecosts increase

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Canadian policy appears to be the larger Canadian policy appears to be the larger riskrisk

• The global effort: The global effort: energy efficiency & renewables energy efficiency & renewables

But, rising population and living standards in 3rd But, rising population and living standards in 3rd worldworld developing countries won’t intentionally forgo developing countries won’t intentionally forgo

economic growth to avoid higher energy useeconomic growth to avoid higher energy use --> global oil and gas demand likely to continue --> global oil and gas demand likely to continue

growing for two or more decades & remain highgrowing for two or more decades & remain high

• Risk to Canadian producers mainly from Risk to Canadian producers mainly from Canadian policy being excessive & out of line Canadian policy being excessive & out of line with world effortwith world effort

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The Kyoto Protocol as a global effortThe Kyoto Protocol as a global effort

• Kyoto will not significantly affect global Kyoto will not significantly affect global emissionsemissions With the US out, the aggregate of countries’ targets is With the US out, the aggregate of countries’ targets is

only a few percentage points below business as only a few percentage points below business as ususalususal

The distribution of targets creates winners and losers: The distribution of targets creates winners and losers: Russia - large surplus, Canada, Japan - large deficitRussia - large surplus, Canada, Japan - large deficit

• A different approach will be required for A different approach will be required for significant global actionsignificant global action The form of Kyoto targets is unlikely to attract the US The form of Kyoto targets is unlikely to attract the US

and developing countries to take on targets in the and developing countries to take on targets in the futurefuture

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Canada & Kyoto: the issue is the Canada & Kyoto: the issue is the Target!Target!

Kyoto Protocol TargetsKyoto Protocol Targets % of 1990 Emissions % of 1990 Emissions

• USUS 93%93% Russia Russia 100%100%

• EUEU 92%92% New Zealand New Zealand 100%100%

• JapanJapan 94%94% Norway Norway 101%101%

• CanadaCanada 94%94% AustraliaAustralia 108%108%

• Canadian economy more like Australia’s than Canadian economy more like Australia’s than EU, Japan & USEU, Japan & US

• A significant element of the difference is A significant element of the difference is Canada’s role as a growing net exporter of oil Canada’s role as a growing net exporter of oil and natural gasand natural gas

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Expanding natural gas production is Expanding natural gas production is part of the solutionpart of the solution

• Natural gas is a transitional fuel: lower carbon Natural gas is a transitional fuel: lower carbon intensity than coal and oilintensity than coal and oil

• Increased Canadian production and exports Increased Canadian production and exports allow a shift to lower carbon fuels in North allow a shift to lower carbon fuels in North AmericaAmerica

• Increased production-related emissions in Increased production-related emissions in Canada more than offset by lower end use Canada more than offset by lower end use emissions in the USemissions in the US

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Canadian oilsands -- economic Canadian oilsands -- economic development and energy security development and energy security

• 3 major global oil resources: 3 major global oil resources: Persian GulfPersian Gulf Oil sandsOil sands Venezuela heavy oilVenezuela heavy oil

• Global oil demand will grow for several Global oil demand will grow for several decades, major primary energy for most of 21st decades, major primary energy for most of 21st centurycentury

• Like Venezuela heavy oil, oil sands are energy Like Venezuela heavy oil, oil sands are energy intensive to produce, but technology has intensive to produce, but technology has reduced intensityreduced intensity

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Production related GHG emissionsProduction related GHG emissions

Oil sands production is energy intensive, but technology is Oil sands production is energy intensive, but technology is reducing intensity significantly reducing intensity significantly

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

To

nn

es C

O2e

/bb

l

Conventional Oil

Oil sands mining or SAGD+ upgrading

Bitumen

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Oil sands production is more energy Oil sands production is more energy intensive, but end use emissions dominateintensive, but end use emissions dominate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

To

nn

es

CO

2E

pe

r M

3

EndUse

Refining & Marketing

Production & Pipeline

By-product use

ConventionalOil

Oil Sands Venezuela Heavy

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Contributing to a global effort on climate Contributing to a global effort on climate change v. meeting the Kyoto target change v. meeting the Kyoto target

• Improve energy efficiency & emission intensityImprove energy efficiency & emission intensity NOT: shift energy intensive industry to countries NOT: shift energy intensive industry to countries

without targets versuswithout targets versus

• Sustained effort over decades built on Sustained effort over decades built on prosperity & investment in energy supply and prosperity & investment in energy supply and use technologyuse technology NOT: Transfer capital to other countries to cover an NOT: Transfer capital to other countries to cover an

inappropriate targetinappropriate target

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Why was there such uncertainty last Why was there such uncertainty last year ?year ?

• Focus on Kyoto target without a plan involving Focus on Kyoto target without a plan involving consumers in covering the gapconsumers in covering the gap

• Industry was left to believe that it was exposed Industry was left to believe that it was exposed to the liability for any gapto the liability for any gap

• Persistence among some stakeholders of ideas Persistence among some stakeholders of ideas about allocation that suggested growth would be about allocation that suggested growth would be penalizedpenalized

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Kyoto Ratified but Federal Plan does not Kyoto Ratified but Federal Plan does not attempt to achieve Kyoto targetattempt to achieve Kyoto target

1990 2010

M tonnesCO2e

600

2000

Current EmissionTrend?

Kyoto Target 570 Mt

810 Mt

Uncovered60 Mt

Other Policies & Programs

125 Mt

Large Emitter targets 55 Mt

Likely

Unrealistic

by >40 Mt

835-40 Mt

Gov’t projection in 2001699 (P)

726(Actual)*

?

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Federal Government assurances about Federal Government assurances about policy approach for industrypolicy approach for industry

• Targets will be intensity basedTargets will be intensity based

• Government assumes risk regarding the Government assumes risk regarding the success of everything beyond the intensity success of everything beyond the intensity targets: targets: Action Plan 2000Action Plan 2000 Forest & agriculture sinksForest & agriculture sinks New programsNew programs Projection of business as usualProjection of business as usual

• COCO22 price risk price risk

• Volume riskVolume risk

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What did the $15 price & 15% volume What did the $15 price & 15% volume risk limits do?risk limits do?

• CO2 price risk guarantee:CO2 price risk guarantee: In complying with large emitter targets, companies’ In complying with large emitter targets, companies’

cost will be no more than C$15/tonne CO2cost will be no more than C$15/tonne CO2 Companies face the lower of the international market Companies face the lower of the international market

price or C$15/tonneprice or C$15/tonne

• Volume risk guarantee:Volume risk guarantee: Under the target system, large emitters reductions Under the target system, large emitters reductions

will be no more than 55 Mt (15% of business as usual)will be no more than 55 Mt (15% of business as usual)

Oil and gas sector will not be hit disproportionately:Oil and gas sector will not be hit disproportionately:• Oil & gas intensity targets will be no more than 15% below Oil & gas intensity targets will be no more than 15% below

projected business as usual (BAU) for 2010projected business as usual (BAU) for 2010

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15% Below Business as Usual requires 15% Below Business as Usual requires purchase of credits to meet targetspurchase of credits to meet targets

200220240260280300320340360380400

Mt

CO

2e

No Intensity improvement2005-10

Intensity Change2005-10

0%/yr -1%/yr Businessas Usual

-3.7%/yr Large IndustrialEmitter Target System

55 Mt reduction or 15% below BAU would require 3.7% per year

improvement in intensity 2005-2010

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Downside impact of Large Industrial Downside impact of Large Industrial Emitter Target SystemEmitter Target System

• Maximum cost impact per barrel at the price and Maximum cost impact per barrel at the price and volume risk limit can be approximated as:volume risk limit can be approximated as:

projected emissions in tonnes COprojected emissions in tonnes CO22e per bbl for 2010 under e per bbl for 2010 under

business as usual improvements in intensitybusiness as usual improvements in intensity multiplied by 15% and $15/tonnemultiplied by 15% and $15/tonne

• Publicly stated estimates:Publicly stated estimates: Suncor: Suncor: C$.20 - .27/bblC$.20 - .27/bbl CNRL: CNRL: C$.17/bblC$.17/bbl Western Oil Sands Trust: Western Oil Sands Trust: C$.21/bblC$.21/bbl

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Key elements of Intensity Target System Key elements of Intensity Target System still need to be addressedstill need to be addressed

• Longer-term policy certaintyLonger-term policy certainty Early assurance by governments that policy beyond 2012 Early assurance by governments that policy beyond 2012

will not undermine competitiveness of Canadian industrywill not undermine competitiveness of Canadian industry

• Details of intensity targetsDetails of intensity targets

• Compliance options:Compliance options: How facilities can meet targetsHow facilities can meet targets

• National system - joint federal-provincialNational system - joint federal-provincial Reliance on existing regulatory structuresReliance on existing regulatory structures

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Other aspects of policyOther aspects of policy

• Complementary measures outside target systemComplementary measures outside target system

• Innovation, research & technology should be a Innovation, research & technology should be a key focuskey focus

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What next?What next?

Optimistic (given Canadian ratification):Optimistic (given Canadian ratification): Kyoto seen as an initial international step that has to Kyoto seen as an initial international step that has to

change to fit the US and developing countries.change to fit the US and developing countries. Federal-provincial coordination on policy that Federal-provincial coordination on policy that

addresses competitiveness but doesn’t meet the addresses competitiveness but doesn’t meet the Kyoto target -- neither industry nor taxpayers face a Kyoto target -- neither industry nor taxpayers face a liability for the Kyoto gapliability for the Kyoto gap

PessimisticPessimistic Federal government focuses on Kyoto target -- Federal government focuses on Kyoto target --

looking for someone to pay the bill for the gaplooking for someone to pay the bill for the gap Federal-provincial conflict, continuing threat of Federal-provincial conflict, continuing threat of

costly future policiescostly future policies

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What is required for a best case outcome?What is required for a best case outcome?

• Plan to address the long-term risk of climate changePlan to address the long-term risk of climate change

• Shift focus:Shift focus:

FromFrom Primary concern with the short-term numbers, 570 Mt, 55 Primary concern with the short-term numbers, 570 Mt, 55

Mt, etcMt, etc

ToTo Emission reduction policies that will move Canada ahead Emission reduction policies that will move Canada ahead

in the short term, be effective in the long-term and allow in the short term, be effective in the long-term and allow Canada to contribute to the international effort in a way Canada to contribute to the international effort in a way that is in its interestthat is in its interest

Adaptation strategyAdaptation strategy Contribution to research on climate science Contribution to research on climate science

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What is required for a best case outcome?What is required for a best case outcome?

• Ensure efficient, harmonized federal-provincial Ensure efficient, harmonized federal-provincial policies, programs and regulatory frameworkspolicies, programs and regulatory frameworks

• Design policies for industry that will make Canada a Design policies for industry that will make Canada a moremore attractive place to invest and to develop, apply attractive place to invest and to develop, apply & export world class technology& export world class technology

• Be proactive in international negotiations in pushing Be proactive in international negotiations in pushing an approach that fits Canada & developing countries, an approach that fits Canada & developing countries, and will attract the USand will attract the US