Misconceptions, Fears, Myths & Realities regarding Canada’s Climate Change Policies APEGGA Conference November 13, 2007 Pierre Alvarez

Outline Misconceptions  Canada’s oil sands development is a major factor in global GHG emissions  Canada is a major player in addressing the global climate change challenge Fears:  Because of Kyoto, Canadian GHG policy will get seriously out of line with our trade competitors and undermine the competitive position of industry  The federal government will discriminate against the oil and gas sector and penalize it because of its growth Myths:  Canadian policy for industry GHG emissions is not serious because it is based on intensity targets instead of absolute caps  Canada is a laggard in addressing industry GHG emissions relative to Europe Realities  Alberta moving ahead with industry support  Federal policy is almost right, but undermined by Tech Fund limit and phase out Proposed federal air pollutant regulation:  New challenge,  Considerable time and effort required to get it right

Global Energy-Related Emissions 2005

Canada’s GHG Emissions 2005

Global Coal + Oil Sands CO 2 Emissions 2005 Total 11,387 m tonnes CO 2

CO 2 Emissions: Electricity from coal versus Wells to vehicle transport fuel from Oil Sands

What does the world have to do? Low CO 2 emission energy supply Low CO 2 hydrocarbons:  coal  natural gas  CO 2 capture & storage More renewable energy  Hydro, Wind, Solar, Geothermal, Wave, Tidal, Biomass Nuclear  Fission, Fusion Reduce process emissions Agriculture Industry

What does the world have to do? Slower growth in energy demand Efficiency & conservation Change in lifestyles Reduce population growth Biological sinks Forests Agriculture soils

Fear: Kyoto & Canadian policy Fear: Kyoto ratification  Canadian GHG policy will get seriously out of line with our trade competitors and undermine the competitive position of industry September 2002 PM Chrétien announced that Canada would ratify the Kyoto Protocol Industry & financial community feared the government would implement policies to drive a 35% reduction from trend emissions to meet the target Estimates of major costs on oil sands projects  Costs to oil sands could reach $5/bbl ($50/tonne on 100 kg/bbl)

Fear: government would not consult & would discriminate against the oil and gas sector Fear: The federal government would design policy without consulting industry The government ignored industry’s warnings that Canada’s Kyoto target was unachievable without major economic damage Fear: the federal government would discriminate against oil and gas because of its high growth rate

Realities Federal government never proposed industry GHG policy based on the Kyoto target Large industry GHG targets reflect reasonable principles:  Designed to avoid undermining of competitive position  No discrimination among industry sectors  Recognize the contribution from efficient new facilities  Focus on continuous improvement and investment in advancing technology [but limited amount and time is a serious flaw in current federal proposal discussed below]

Myth: Intensity targets aren’t serious Myth: Canadian policy for industry GHG emissions is not serious because it is based on intensity targets instead of absolute caps Canada is a laggard in addressing industry GHG emissions relative to Europe

Reality World Resources Institute (WRI.ORG) has pointed out that the correct distinction is between effective and ineffective policies, not intensity and absolute targets EU ETS allocations for required no reductions in most cases – allocations exceeded industry emissions  It appears the policy achieved few or no reductions in emissions, but did allow electricity companies to make large profits UK allocation for for trade-exposed sectors – less demanding than Canadian targets  Free allowances [equivalent to target under Canadian policy] based on 93% of projected output and business as usual intensity for each sector; 7% of allowances to be auctioned  Facility allocations in absolute terms are based on shares of projected intensity-derived sector target, with allowances for new entrants and facility expansions

Canadian policy: Alberta Alberta targets took effect July 1, 2007 Facility-specific, emission intensity improvement targets:  Existing facilities: 12% improvement relative to each facility’s average intensity  New facilities: 3 years for start up, then 2% per year improvement up to 12% over 6 years, relative to 3 rd year intensity  12% improvement rate greater than companies are generally expected to achieve at a reasonable cost for the initial stage so alternative compliance mechanism is central to design

Canadian policy: Alberta Compliance  Improvement in facility emission performance  Payment into Technology $15/tonne to cover emissions- target gap  Acquire credits for offset reductions in Alberta emissions outside target coverage 12% and $15  chosen to avoid undermining competitive position as Alberta moves in advance of US and other trade competitors

Alberta Policy & Strategy for Oil Sands and Coal- fired Power Technology Fund  At arm’s length to government  First full year contributions up to $150 million  Invest in advancing technology for larger, lower cost, future reductions Payments into Tech Fund primary compliance mechanism  First payments March 31, 2008 for 2 nd half 2007 emissions  Provide revenue to fund vanguard carbon management projects, e.g. CO 2 capture & storage  Early projects’ cost per tonne significantly greater than $15 compliance price  As in other countries, government may still need to support in addition to Tech fund

Federal industry targets: Same structure as Alberta targets, with higher % improvement rates and rising compliance price Annual cost to all industry up to $700 m with up to $500 into the Tech Fund Targets % of Base-period Intensity Tech Fund Compliance Price

Federal industry targets: fundamental flaw in current proposal Phase out of Tech Fund compliance is a fundamental flaw in the policy Maximum Tech Fund Compliance as Percentage of Targeted Reduction

Offset credit compliance Intensity improvement targets beyond what industry can do at a reasonable cost Phase-out of Tech Fund forces industry into offset credit compliance  Based on an inappropriate view of addressing the climate change challenge  Purchase of credits instead of contributing to the Technology Fund to support advancement in technology development, deployment and infrastructure

Closing: GHG emissions will be addressed by technology The effort to address this challenge must be policy driven, with a major focus on technology advancement Industry needs a framework of good, certain policies If Canada is going to move to high cost actions, industry needs to be able to recover costs in competitive markets  Canadian industry can only be an international leader if competitiveness is addressed – addressing trade issues will become the key policy question as countries move from low cost actions to higher cost actions Emission trading is a distraction  Domestic offsets are an administratively costly way to address domestic emissions  International emissions trading is a wealth transfer mechanism There are better means to help poor countries develop cleanly There is no reason for Canadian industry to pay for other developed countries’ reductions – we should devote our effort to our own emissions  Policy should focus on continuous improvement and investment in technology

Proposed federal air pollutant regulation Well intentioned goal of benchmarking Canadian regulation to best in the world, but  Proposal rushed  Numbers flawed  Policy not designed to fit with major provincial role in air pollutant regulation Need to take the time to:  gather good data  evaluate current systems, plan for complementary federal and provincial roles  design and assess options that fit with diversity across the country and are aligned with current federal & provincial approaches that are effective