The Case for a National Energy Strategy

1. Introduction
2. I. An Energy Wise Culture
3. II. Regulatory Reform
4. III. National Approach to Carbon Management
5. IV. Market Diversification
6. Conclusion

Introduction

Canada is in an enviable position: plentifully endowed with crude oil, natural gas, coal, uranium, and water reserves, as well as increasingly tapped wind, solar and geothermal potential. We have the world’s third largest oil supplies and the highest-grade uranium deposits. We are the world’s third leading natural gas producer and the third largest hydro electricity generator. We are the top energy exporter to the United States and could become a major supplier of oil and natural gas to rapidly developing Asian countries. For 2011, the energy sector generated 6.9% of GDP and 25.4% of export revenues, making it the strongest contributor to Canada’s net merchandise trade.¹ These gains accrue to Canadians from coast to coast, even though energy resources are not distributed evenly. Many of the machine parts of Alberta’s oil sands operations, for instance, come from the industrial shops of Ontario.

Clearly, the right to develop these resources comes with the attendant responsibility to do so conscientiously. Energy extraction, transportation, storage, and use can occasion serious environmental and social impacts, ranging from urban smog to displacement of wildlife to disruption of traditional First Nations grounds. At the global level, the threat of anthropogenic climate change continues to loom large, posing a serious hurdle to a country where per capita energy use is among the world’s highest; as of 2010, Canada is the 9th highest emitter of fossil fuel-based carbon dioxide emissions yet is only the 35th most populated country.² Meanwhile, end-use energy demand continues to climb—at home but even more significantly abroad, in the emerging economies. As an oil and gas exporter that is also a high per capita consumer, Canada has an obligation to take a lead in transitioning to a lower-carbon world.

For the foreseeable future, fossil fuels will still be the dominant energy sources, but system transformations now on the horizon genuinely hold out the promise of a reduced emissions landscape. Already a strong energy producer, Canada is poised to also become a leader in innovation, efficiency, and stewardship. Unfortunately, progress toward a new energy dynamic is floundering for want of a national vision. The energy value chain is framed by a complex, multi-jurisdictional edifice, held up by federal and provincial or territorial governments who often take related but different paths. There is a “leadership vacuum” here dating back to the negative experience with the 1980-1984 National Energy Program, which Western Canadians remember as an imposition by Ottawa. Cognizant of the lingering suspicions, several prominent voices, including Alberta Premier Alison Redford, have been calling for a multi-pronged, multi-sector strategy for achieving global excellence in energy productivity. Importantly, these energy players are not imagining a centralized, top-down scheme that displaces the constitutional division of powers. What is required instead is intergovernmental cooperation to establish the conditions for success. Here are several priority elements of the nascent consensus.

I. An Energy Wise Culture

Since the oil embargo of the 1970s, successive governments have preached the virtues of energy efficiency and conservation with limited success. Even as the energy productivity of household appliances, office equipment, and residences and buildings improves, our overall consumption continues to rise, offsetting much of the gains. Between 1990 and 2009 in the residential sector, the average occupied space grew from 116 to 129 m2, while the average number of individuals per household fell from 2.8 to 2.5.³ The average number of appliances per household climbed from 15 to 21, while the proportion of occupied residential space cooled by air conditioning nearly doubled, from 23% to 44%.

Few Canadians realize how much energy is lost during the extraction, refinement, conveyance, and consumption stages, even with today’s technology. Most of the chemical energy of natural gas or coal dissipates (as waste heat) in its conversion to steam power, transmission as electricity over grids, and final transformation into heat, light, or motion, often leaving the unaware consumer switching on an appliance with less than one-third of the original energy. By reducing consumption “at the end,” the user of an incandescent light bulb could magnify the energy saved “at the source” by as much as 50 times.

Because consumer behaviour changes slowly, though, progress in energy efficiency and conservation tends to arrive in small increments. Many provincial and municipal jurisdictions already incorporate efficiency standards in building codes and offer rebates and interest-free loans to incentivize capital investments in energy efficiency and conservation. More dramatic shifts will only come about when Canadians better appreciate the costs and benefits of various energy and technology types and base their decisions on this awareness. Fundamentally, this calls for two actions: developing energy literacy and moving to marginal cost pricing.

Canadians need to understand that their personal choices are part of a wide, complicated system that has effects on the environment from one end of the value chain to the other. For example, how many people know that the transportation sector, which includes passenger vehicles, is a larger source of greenhouse gas (GHG) emissions than the “dirty” oil and gas industry? The Primer on Energy Systems in Canada, prepared by Pollution Probe, is an example of an initiative that gives readers a comprehensive, interlocking picture of the energy network, individualizing the understanding of its impacts. Another project, the Personal Energy Dashboard designed by Canadian Geographic in association with Shell, allows users to record their daily energy use and follow up on suggested changes. With such examples in mind, the Energy Policy Institute of Canada (EPIC) has called on the federal and provincial governments to establish a “Centre for Energy Learning” in conjunction with businesses. It would coordinate and enhance public engagement and facilitate collaboration between end-users, managers, owners, and regulators.⁴ In the long run, the goal at the community scale would be integration of electricity, indoor climate, transport, water, and waste management into a holistic framework, enabling optimization of the system by minimizing duplication of services and transforming waste heat into useful energy.

Ultimately, consumers will respond primarily to price changes. The practice in many provinces is to set electricity prices to match average costs of production (total cost divided by total output), often to ensure that the public continues to benefit from “legacy” assets built decades ago. This amounts to a hidden subsidy that keeps prices artificially low. Yet a basic economic principle is that resources are allocated effectively only when the price of commodity equals the expense of producing an additional unit—the marginal cost. Without rates that adjust to reflect daily and seasonal peaks in demand, when more costly generating units are brought online, residential and industrial users tend to consume electricity excessively. Certainly, lower income Canadians would be more disproportionately affected by a move to marginal cost pricing since they spend relatively more income on fuel and electricity. Here social policies could be re-tooled to assist the most vulnerable. Nonetheless, all users should begin the difficult but necessary transition to a genuine cost regime, becoming more “energy wise” in the process.

II. Regulatory Reform

Regulation of the resource and energy industries is a complex affair. The Constitution Act (1867) and the Natural Resources Transfer Agreements (1930) grant provincial governments authority over resource extraction, refinement, and distribution within their own boundaries.⁵ The federal government’s role is broader, covering interprovincial and international transport, exploitation of offshore resources, and protection of fish habitats and species at risk, to name but a few areas. Nonetheless, Ottawa shares jurisdiction with the provinces in several resource and environment domains, such as cross-border movement of pollutants through air and water. First Nations, Métis, and Inuit groups also have inherent rights and treaty claims over resources situated on traditional lands.

In this framework, even though an application to construct cross-border pipeline falls under the purview of the National Energy Board, it could trigger involvement of the Canadian Environmental Assessment Agency, Environment Canada, Fisheries and Oceans Canada, Transport Canada, and Aboriginal Affairs and Northern Development Canada, not to mention relevant provincial and municipal authorities. Not surprisingly, the number of ministries and agencies involved, each with their own mandates, procedures, and timelines, makes the regulatory environment ripe for overlap, uncertainty, and delay.

Consider the following example: Imperial Oil’s Kearl proposal in the oil sands was subject to an environmental assessment (EA) by the Alberta Department of the Environment but also required approval from the federal Department of Fisheries and Oceans (DFO), acting under the Fisheries Act. Following the joint provincial-federal EA, the permits issued by DFO were challenged by environmental groups in the Federal Court of Canada on the grounds that that the joint panel had failed to explain why GHGs emitted by the project would not constitute a “likely significant environmental effect” under federal law. That a Fisheries Act permit could be challenged owing to the failure of a body to consider the effects of GHG emissions is evidence of regulatory incoherence.

Lengthy reviews have also become characteristic of the regulatory framework. Famously, the approval of the Mackenzie Valley Gas Pipeline proposal took more than six years, after separate reviews by a joint provincial-federal panel and the National Energy Board (before final authorization by the federal cabinet). Shell applied to expand the Jackpine Mine in December 2007, only to wait more than three and a half years for the Alberta and federal governments to establish a joint panel in September 2011.

Five years ago, the federal government took the important step of establishing the Major Projects Management Office to consolidate the work of federal departments and monitor the progress of project reviews through the federal system. Reform must go beyond current talk of streamlining procedures to attainment of a “one proposal, one body, one assessment” ideal. Regulatory coordination within and between all jurisdictions is needed if Canada is to maintain competiveness, attracting the needed capital that could otherwise be invested elsewhere in the world. This can be accomplished without weakening environmental and social standards.

Each provincial and federal government should create or designate one agency or department to be the “lead” in environmental assessments. The mandate of this agency or department should be broad enough to reflect that government’s energy and environment outlook. Similarly, the provinces and their federal counterparts ought to establish a method for determining which government should have the lead authority, without ceding ultimate jurisdiction (this can be accomplished by substituting, say, equivalent provincial processes for a routine federal one). The lead body must lay out clear and consistent timelines, provide a single window to deposit requested data, and apply a common risk methodology that is commensurate with the activity type assessed. It should also specify clearly which issues are for assessment and which others fall within the purview of the democratically elected government as a whole.

Regulatory reform must also involve a closer alignment of policies across ministries and agencies to minimize tensions between objectives and identify priority areas for action. For instance, electricity savings in coal-burning provinces such as Alberta and Nova Scotia would translate into greater emission reductions than the same effort in British Columbia and Quebec, where hydropower is the norm. By examining their regulations and programs from an “energy system” point of view, major government departments will see the combined impact of separate measures and, if needed, make adjustments to maximize policy effectiveness.

Finally, regulatory reform is also an opportunity to enhance the participation of First Nations, Métis, and Inuit communities in resource development while protecting their air, water, and land. In recent years, some Aboriginal groups have entered into Impact and Benefit Agreements with companies, using revenue sharing, minority equity stakes, and even full partnerships to secure tangible benefits for their communities. For their parts, because the duty to consult Aboriginal groups is owed by the Crown, the federal and provincial governments need to better define the process parameters, which have not clearly laid out each party’s responsibilities. The First Nations and Métis Consultation Policy Framework established by the Saskatchewan government in 2010 is one such example.⁶

III. National Approach to Carbon Management

It is by now apparent that the current patchwork of federal, provincial, and municipal climate change programs will not enable the country to meet its target of reducing GHG emissions by 17% from 2005 levels by 2020. Without national consistency, consumers and firms will continue to face conflicting obligations from the myriad of action plans, regulations, standards, taxes, and incentive offerings. The central part of any broad-based approach would be a carbon pricing scheme, endorsed by environmental groups, many businesses, and several governments alike.⁷

The basic argument for a common carbon price is that emitters will take the least marginal cost measures to reduce emissions up to a threshold level, beyond which they face a tax or offset credit that costs less than further abatement. This is not simply a “right to pollute,” as it is often disparaged. As long as emissions are capped across a sector or region, efficiency will be maximized when emitters are allowed to determine between themselves the lowest cost methods of reaching the target. A few provinces have established pricing of some form—in British Columbia, there is a fuel tax on manufacturers, combined with small-business tax credits to provide revenue neutrality; in Alberta, there is an option for large final emitters that exceed allowed emission intensities to buy offset credits or pay into a clean technology research and development fund. Also, Quebec will soon have an emissions trading system, to take effect next year.

Unless we act together, however, then one or another group will be disadvantaged with respect to others in the continued zero-sum game. This does not mean that a carbon price scheme will not be effective unless it is imposed “from above” by the federal government. Now that all provinces and two territories have emission-reduction targets in place, equivalency agreements between jurisdictions can be fashioned to rationalize revenue distribution and avoid unduly burdening any sector or region. Thus, a carbon price approach should be introduced broadly across the economy, including the consumer side. It would have to include allowances to assist exporting industries (who nonetheless recognize that competing firms in other countries are beginning to face their own reduction requirements). In the long run, the price should also be aligned with carbon management frameworks in the United States and then with that in other countries. In all of this, the federal government would play a pan-Canadian, coordinating role.

Many consumers worry about the corresponding rise in gasoline costs and electricity bills that carbon pricing could lead to. Yet they also want progress in this area and should be prepared to do their share. As in British Columbia and Alberta, governments can help households and businesses adapt by committing to revenue neutrality or investing collected funds into retrofits of building, equipment and machinery, or research and development and commercialization of promising technologies. In this way, a carbon price would be viewed not so much as a penalty but as an incentive that catalyzes energy savings.

IV. Market Diversification

Canada has long relied on the United States to be its major energy buyer. Over 99% of our crude oil exports and all of our electricity and natural gas exports head to our largest trading partner. However, this near-total dependence on a single customer will not last indefinitely. American consumption of liquid fuels and natural gas is not expected to grow substantially in the next two decades and, thanks to the shale gas revolution and new oil drilling, our neighbour could achieve more energy independence and even become our competitor in natural gas exporting. While America will always figure importantly in Canadian energy commodity destinations, stronger prospects now lie east.

China, of course, is the priority emerging market for Canada’s energy commodities. As its economic success propels more citizens into the middle class, the desire for modern consumer services of all types is spreading rapidly. Japan will become further reliant on natural gas imports as it scales back nuclear power. The Koreans are already major importers of gas and, unlike the Japanese, are comfortable with nuclear generation, for which uranium is the fuel source. India is a more distant market that has nonetheless shown interest in applying Canadian nuclear technology.

The market potential of Canada’s renewable energy technologies must not be neglected, either. This scene is increasingly global and competitive. According to the Pew Environment Group (PEG), global public and private investment in clean energy stood at some US $263 billion in 2011, up 6.5% from the year before. Even as they strive to lift their large populations out of energy poverty, many Asian states are looking to options beyond fossil fuels to bolster their energy security. There are opportunities for, say, Canadian wind turbine firms, who have energized impressive growth in installed generating capacity at home in recent years, acquiring commercialization and operations experience along the way.

Is Canada well-positioned to take advantage of the tilt towards Asia? The need for additional oil and gas pipeline capacity affording access to these newer markets is well known. To build this appropriately, the oil and gas industry, having taken a black eye with mishaps like Enbridge’s oil spills in Wisconsin and Michigan, must go beyond mere assurances of public safety and commit unhesitatingly to potential mitigation efforts and underwriting of losses of livelihood. As suggested, though, we should also be considering the establishment of multiple energy trade and investment paths, encompassing the full array of conventional and alternative energy services. The Asia Pacific Gateway and Corridor Initiative is one example of such smart public investment, a federal enhancement of transport infrastructure in British Columbia to facilitate Canadian merchandise trade with Asia. Another critical government task will be active involvement in trade missions and early demonstration or adoption of made-in-Canada innovations, facilitating the branding of our products and expertise (understandably, foreign buyers are reluctant to purchase goods and services that do not have domestic validation).

On the research side, attracting Asian investment through partnerships can lead to the sharing of technology and expertise, such as that which is hoped for in Hitachi’s $60 million partnership with SaskPower to build a carbon capture and storage facility in the south of Saskatchewan. The Canada-Asia Energy Futures Task Force recommends that universities, governments, and industries establish a network of energy innovation institutes as the ideal forum for expanding the range and quality of Canadian energy know how. It could build on the federally funded Networks of Centres of Excellence Program, which leverage industry support towards tripartite (public, private, non-profit) research and development collaboration in numerous fields.⁸ Such innovation clusters, notes EPIC, tend to evolve organically, attracting players across the spectrum focused on enabling technological breakthroughs that lead to new ideas in different but related areas. Discoveries in one field can be adapted to and applied in others.⁹

Conclusion

Prime Minister Stephen Harper has said that Canada must become a “clean energy superpower.” Already, our electricity comes primarily (over 75%) from emissions-free hydro and nuclear power and our energy use per GDP fell by 21% over 1990 to 2009.¹⁰ Our natural gas, which is a lower GHG-emitting source (per unit of energy) than diesel, could fuel a switchover revolution in the heavy-duty trucking and rail industries. Our oil helps prevent non-democratic, Middle Eastern states from further dominating the market.¹¹ Yet our enviable status is also at risk. Canada faces competition with the Middle East, Russia, Australia, and the United States in selling to growing Asian markets. Unless developed with lower-emissions intensity, the oil sands and the products derived from them could be discriminated against by countries and regions quietly “green protecting” their own firms. In many parts of the country, electricity transmission infrastructure is aging, impeding our ability to become more efficient.

In July, the Standing Senate Committee on Energy, Environment, and Natural Resources observed, “Energy issues can be a powerful force of national unity or they can be divisive and lead to unrest.”¹² Absent a national energy strategy, the differences between communities, regions, sectors, and governments will be even further sharpened, as evidenced by the Eastern Canadian charges of “Dutch Disease” or disputes between Aboriginal communities and oil and gas project proponents in British Columbia. Everyone must be on hand in charting a path forward, ready to offer their unique strengths in the knowledge that the entire union will benefit from a new energy dynamic. At different times in our nation’s history, the transcontinental railway lines, the Canada Health Act, and the Free Trade agreement with the United States were all achieved through creative and bold collaboration. Why not with energy, the lifeblood of our economy?

Notes

1 National Energy Board, Canadian Energy Overview, 2011 http://www.neb-one.gc.ca/clf-nsi/rnrgynfmtn/nrgyrprt/nrgyvrvw/cndnnrgyvrvw2011/cndnnrgyvrvw2011-eng.pdf (Calgary: Her Majesty the Queen in Right of Canada as represented by the National Energy Board, 2011), pg. 2 and Statistics Canada, International Merchandise Trade, Annual Review, 2011, 65-208-X http://www.statcan.gc.ca/pub/65-208-x/65-208-x2011000-eng.pdf (Ottawa: Minister of Industry of Canada, 2012), pg. 8,9

2 United Nations, Department of Economic and Social Affairs, Population Division, World Population Prospects, 2010 Revision http://esa.un.org/wpp (New York: United Nations, 2012), (Accessed on August 27, 2012) and United States Carbon Dioxide Information Analysis Center, “Record High 2010 Global Carbon Dioxide Emissions from Fossil-Fuel Combustion and Cement Manufacture Posted” http://cdiac.ornl.gov/trends/emis/prelim_2009_2010_estimates.html (Oak Ridge, Tennessee: Oak Ridge National Laboratory, 2012), (Accessed on August 27, 2012)

3 Natural Resources Canada, Energy Efficiency Trends in Canada, 1990 to 2009 http://oee.nrcan.gc.ca/publications/statistics/trends11/pdf/trends.pdf, (Ottawa: Her Majesty the Queen in Right of Canada, 2012), pg. 13

4 Energy Policy Institute of Canada, A Canadian Energy Strategy Framework http://www.canadasenergy.ca/wp-content/uploads/2012/08/Final-Document-Aug-1.pdf (Calgary: Energy Policy Institute of Canada, 2011), pg. 83

5 A special case is that of uranium extraction, refinement, exchange, and consumption, which are regulated in all provinces by the Canadian Nuclear Safety Commission.

6 It should be noted that these new guidelines have not been endorsed by the Federation of Saskatchewan Indian Nations, whose Assembly passed a resolution rejecting the foundation of the framework in October 2010.

7 Among the industry associations endorsing a carbon pricing scheme in broad strokes are the Canadian Council of Chief Executives, the Canadian Chamber of Commerce, the Canadian Association of Petroleum Producers, and the Canadian Gas Association

8 Asia Pacific Foundation of Canada and The Canada West Foundation, Securing Canada’s Energy Future— Report of the Canada- Asia Energy Futures Task Force http://cwf.ca/pdf-docs/publications/Energy%20Futures%20Task%20Force_June%202012.pdf (Vancouver: Asia Pacific Foundation of Canada, 2012), pg. 24

9 A Canadian Energy Strategy Framework, pg. 103,104

10 Statistics Canada, CANSIM Table 127-002 (Ottawa: Minister of Industry of Canada, 2012) and Energy Efficiency Trends in Canada, 1990 to 2009, pg. 8.

11 Len Coad and Vijay Gill, Cheap Enough? Making the Switch From Diesel Fuel to Natural Gas—Executive Summary http://www.conferenceboard.ca/temp/14febe15-e161-45b8-bb16-d847b6242136/12-290_CheapEnough_NaturalGas_ES.pdf (Ottawa: The Conference Board of Canada, 2012)

12 Senate Committee on Energy, the Environment, and Natural Resources, Now or Never: Canada Must Act Urgently to Seize its Place in the New Energy World Order http://www.parl.gc.ca/Content/SEN/Committee/411/enev/rep/rep04jul12-e.pdf (Ottawa: Senate of Canada, 2012), pg. 24