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Inside the Process Loop: Policy can foster sustainable oil, gas sector


July 25, 2016  


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Recently, C.D. Howe Institute associate director of research Benjamin Dachis provided testimony to the House of Commons Standing Committee on Natural Resources.

Below is part of that transcript: If I knew better than anyone else what the future of the oil gas sector looked like, I’d currently be scuba diving off my own private yacht somewhere in the Caribbean.

But here I am.

What I can point to is what the policy priorities for governments should be to help foster an innovative and sustainable oil and gas sector in the future. There are four main themes that policymakers should have in mind.

First, governments should do more to improve the global competitiveness of Canada’s energy sector. Second, governments need to earn social acceptance for Canadian energy to world markets. Third, Canadian governments need to create collaborative governance institutions, both at home and globally. Fourth, governments need to foster the innovation Canada needs to realize the energy system of the future.

With the recent and sustained drop in oil and natural gas prices, energy producers are looking at how to reduce costs. Taxes are high at the list of costs we need to think about. In particular, municipal property taxes are becoming increasingly important costs for business. The emerging federal competitiveness issue for the energy sector in 2016 is the potential fallout from the new government’s campaign commitment to phase out what they term as “subsidies for the fossil fuel industry.”

Its specific commitment was limited to making Canadian Exploration Expenses deductible only in the case of unsuccessful exploration. This proposal has major implications for the competitiveness of the Canadian energy sector. Before making any changes, the federal government should take stock of the much bigger picture of what a good tax system should like. I’d be happy to discuss this further during the question and answer period.

On the second theme, getting Canadian energy to world markets will remain a key priority in 2016 and beyond. Having a robust regulatory approval system is critical for governments — and the energy sector — to ensure that Canada’s energy products get to world markets safely and in environmentally friendly, socially accepted ways.

But social acceptance entails more than the regulatory process; it requires governments to take the lead in areas outside the remit of regulators. It is important that regulatory bodies are asked to adjudicate only on issues that they have the power to address. In the case of pipelines, matters such as greenhouse gas emissions should not be part of the regulatory approval process.

A greenhouse gas policy led by governments would mean that a regulatory decision on building a pipeline would have no net effect on Canadian emissions. But that’s not what the federal government is doing. Instead, Canada’s new federal government has pledged to revise the process the National Energy Board uses to approve pipelines to include upstream greenhouse gas emissions from energy production facilities that might serve a pipeline.

However, the new federal policy is a mistake for two reasons.

First, requiring the National Energy Board to consider upstream emissions of greenhouse gases in its pipeline approval process could exceed the constitutional grounds for federal environmental reviews and intrude into provincial jurisdiction.

And second, counting upstream greenhouse gases against an inter-provincial pipeline would be economically costly without actually resulting in a reduction of emissions. The federal government should put all means of getting oil to market on a level playing field. That means it should not rule against a pipeline because of its potential effects on upstream emissions.

We can’t forget the importance of rail, too. Rail has become especially important for crude oil exports because of recent delays to pipeline approvals. Although the drop in oil prices has meant a recent drop in crude-by-rail shipment, shipping oil by rail has inherent benefits of flexibility and setup cost beyond reducing reliance on pipelines.

So how can Canada earn the social acceptance for energy infrastructure to get built in this country?

Governments themselves should demonstrate to the public that they will not interfere in regulatory decisions, and should allow sound, but timely, regulatory reviews of projects without directives to decide one way or the other. Industry bodies and companies themselves should make better use of international benchmarks, certifications and reporting requirements to demonstrate best-in-class regulatory adherence.

The key element isn’t just that Canada have a best-in-class and independent regulatory system. We likely already have that. We must be seen to have a best-in-class and independent regulatory system. So what should governments do outside of the regulatory process? Some form of carbon pricing — either by the federal or provincial government — would be a more effective means of reducing emissions than blocking pipelines.

This brings me to my third point about collaborative governance. Carbon pricing likely will be the key collaborative governance issue in 2016 and beyond, and the new federal government will need to tackle a provincial policy patchwork on greenhouse gas policy. The four largest provinces already have carbon prices in place or are planning to introduce them.

This decentralized approach has many merits. The best kind of carbon pricing policy in Alberta is likely very different from that in Ontario, or B.C. or Quebec. With the provinces clearly demonstrating leadership in this area, the federal government should play a role limited to facilitating interprovincial linkages between carbon pricing regimes.

This brings me to my last point, that Canada is going to need new technologies in order for us to reach our emissions reductions targets. So, how are we going to foster the innovation that creates this new technology? We cannot just throw money at research and development subsidies in hope that people will start using the technology. The research from around the world shows that a price on carbon alone without any research subsidies is about 95 percent as effective as a combined policy of carbon prices and research subsidies.

Carbon pricing creates real demand for clean technologies in the broader economy, and doesn’t just push the supply of new technologies with subsidies. Rather than focus innovation and diversification policies on what is physically produced in Canada, governments should also focus on how to enable Canadian companies to become global leaders in the specific technologies they are best at applying.

So, in sum, Canadian governments need to be thinking about how to improve their policies in four key areas: First, improve the global competitiveness of our energy sector; Second, earn the social acceptance for access to markets; Third, create collaborative governance institutions. Fourth, foster energy innovation.

About the author: Benjamin Dachis is associate director of research at the C.D. Howe Institute. He has an Honours Bachelor of Arts and a Master of Arts in Economics from the University of Toronto, and a Master of Science in Regional Science from the London School of Economics (LSE). He worked at the Centre for Economic Performance, an interdisciplinary research centre at the LSE. He has written on municipal finance, infrastructure, tax, energy, environmental and labour policy.