Gattinger: Federal Energy And Climate Policy, Part 1 — Can Government Wrap Its Arms Around So Many Things?


In this four part series on federal energy and climate policy, DOB analyst Monica Gattinger begins in Part 1 by analyzing key pieces of Ottawa's energy and climate agenda, questioning whether the federal government can wrap its arms successfully around so many different initiatives. Parts 2, 3 and 4 dive into key challenges: whether regulatory frameworks for federal decision-making on major projects are up to the task, how Ottawa’s plans to finance emissions reductions are shaping up (including an analysis of Budget 2023), and how well Ottawa is doing collaborating with the provinces. Articles will be released on a monthly basis.

‘Never before in human history have we tried by means of deliberate political decisions and by means of economic planning to choose the method by which the industrial system will operate and [how] we will live our lives.’

So said Canada's ambassador to the UN Bob Rae of climate change policy in a speech in Ottawa last fall.

Insightful words.

When it comes to the interface of energy and climate policy, they couldn't be more true.

After decades of governments walking out of the energy space through the doors of deregulation, trade liberalization, privatization and electricity sector restructuring, governments the world over are fast rushing back into energy, this time through the door of climate.

Canada’s federal government is no exception. Its energy and climate agenda is breathtaking in reach. With initiatives touching just about every corner of the energy system, one wonders whether Ottawa can wrap its arms successfully around it all — and whether those affected by the feds’ plans can possibly keep on top of everything, much less help inform Ottawa’s decisions.

A single article can't cover the breadth of things underway, but listing some highlights demonstrates the scale and scope of what's envisaged — and some of the key questions it raises.

First, a reminder. In fall 2020, Ottawa released its climate plan, A Healthy Environment and a Healthy Economy, which it projected would enable Canada to exceed its Paris target of reducing emissions by 30 per cent from 2005 levels by 2030. A key plank of the plan was the commitment to increase the carbon tax over time to $170 per tonne by 2030. In spring 2021, the federal government upped its emissions reduction target from 30 per cent to a 40 to 45 per cent decrease by 2030. This was followed by passage into law of the net zero accountability act, which committed the government to reducing emissions in line with net zero by 2050. And in March 2022 the government released the new Emissions Reductions Plan to pursue its higher target.

This was just the beginning. Ottawa has announced a flurry of new policies, legislation, strategies, regulations, programs and consultations to reduce emissions. Each of them is broad in its reach. Collectively, their scope is enormous.

The pace of announcements is lightning fast. Over the last three years alone, they include the CCUS investment tax credit; enhanced methane and clean fuel regulations; an oil and gas emissions cap and Clean Electricity Regulations; strategies for hydrogen (2020), small modular nuclear reactors (2020), critical minerals (2022) and CCUS (forthcoming); Regional Energy and Resource Tables; the Pan-Canadian Grid Council; just transition legislation; the Canada Growth Fund and the Net Zero Accelerator Fund. Many more things could be added to this list.

The pace and scale of this agenda is unprecedented. How will it all fit together? Can Ottawa manage to wrap its arms around so many things?

To date, there are more questions than answers.

Looking across all of these measures, are they coherent? Are they clear? Is there enough certainty for energy sector players to make crucial decisions about investments, operations and strategies? Does the timing align across activities?

Many in industry — the main target of Ottawa’s plans — are concerned.

Take the nexus of emissions reductions targets for oil and gas, the oil and gas emissions cap, the CCUS investment tax credit and the CCUS strategy (now referred to as the carbon management strategy).

Ottawa’s strengthened climate plan committed to reducing emissions from oil and gas by 42 per cent from 2019 levels by 2030 — a massive reduction in a few short years. It’s tough to imagine how this can be accomplished without production cuts, something the government has repeatedly stated it will not impose.

Against this backdrop, Ottawa has identified CCUS as a crucial technology. To help support industry, the government created the CCUS investment tax credit, a credit worth between 37.5 per cent and 60 per cent between now and 2030, depending on the type of project.

But excluded from eligibility is CCS with enhanced oil recovery. While the government likely viewed this as a necessary political concession to those who oppose continued oil and gas production, unfortunately it means the credit won’t help some producers. 

Is this coherent?

Excluding CCUS-EOR doesn’t align with approaches being taken in the U.S. — our largest customer and competitor for oil and gas. Nor does it align with International Energy Agency definitions of CCUS for emissions reductions.

Given this, it’s not lost on some that the first net zero oil in the world will be produced in none other than Texas through a carbon capture and EOR partnership between Occidental Petroleum and Carbon Engineering. That Carbon Engineering is a Canadian firm is bitter icing on the cake.

Add to this that the government has yet to decide how it will cap and reduce oil and gas emissions. How can producers plan for the future and make the multibillion-dollar investments in CCUS that Ottawa desires amidst this uncertainty?

And for those that do plan to go ahead, what about timelines to plan, permit, finance and construct CCUS facilities?

Things will likely extend beyond 2030, putting Ottawa’s target well out of reach.

Questions surrounding timeliness, clarity and predictability of energy project decision-making processes loom large. While they aren’t exclusively a federal challenge, they are especially vexing when it comes to Ottawa’s new impact assessment process.

This isn’t just a challenge for the oil and gas sector. McKinsey estimates capital expenditures of $1.6 trillion will be required to transform Canada’s energy system and broader economy to net zero by 2050. And this might be on the conservative side. A recent report by Ontario’s Independent Electricity System Operator pegs the price of decarbonizing the province’s bulk power system alone at $400B or more.

Whatever the final number to achieve net zero, it’s going to be huge.

Attracting and mobilizing this much capital will require a clear, predictable and timely investment environment for major projects.

Many would say we don’t have that in Canada. There is growing recognition — including among federal ministers — of the challenge of permitting infrastructure and the need to streamline regulatory project decision-making. This is a crucial challenge — and the subject of next month’s analysis.

Another set of questions relates to money. Announcing new measures is one thing, financing and implementing them successfully is quite another. Ottawa’s announced many new initiatives — the CCUS Investment Tax Credit, the $8B Net Zero Accelerator Fund and the $15B Canada Growth Fund are but three examples.

Many of the new programs involve multiple government departments — Natural Resources Canada, Environment and Climate Change Canada, Industry Science and Economic Development, and Finance Canada. Are departments talking enough to each other? Will their programs — notably financial measures — align with one another? Will Ottawa be able to administer all of its new funding commitments? Ottawa’s struggled in the past to get money out the door.

The third part of the series will dive into this.

A final set of questions concerns federal-provincial relations. How well is Ottawa consulting and collaborating with the provinces on its agenda? The growing friction between Ottawa and Alberta over the just transition legislation suggests there are flies in the ointment. Again, this isn’t just an issue for oil and gas. Ottawa’s Clean Electricity Regulations aim to transform the grid to net zero by 2035 and it’s got a growing number of programs in the electricity space. Will this stoke conflict with provinces, who have jurisdictional authority over electricity within their borders?

The federal government created the Regional Energy and Resource Tables to foster collaboration between Ottawa and the provinces. This may help to blunt the sharp edges of potential conflict, but not all provinces are at the table (notably Alberta) and there is only so much that the tables can take on. 

The final part of the series will dig into federal-provincial relations.

The jury is out on whether the federal government can manage to wrap its arms successfully around all these initiatives. Progress on both energy and climate goals will require considered reflection and informed action on energy project decision-making, government spending to support emissions reductions and federal-provincial relations. The next three parts of this series drill down into each of these areas and will suggest ways to address the multiple questions and issues they raise.

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