Canada has legitimate aspirations to be a global energy superpower, based on our rich resource endowment. But at the same time, governments in Canada and around the world are grappling with the right policy responses to climate change in general and greenhouse gas (GHG) emissions specifically. Can these apparently competing interests be reconciled?
In the Conference Board of Canada's view, the first step toward reconciliation is to establish a common understanding of the underlying reality – the facts – to help define what is possible today and in the future. We have developed a list of 10 "basic truths" on Canada's energy and environmental realities, creating a framework for debate, policy design and implementation.
1. Global demand for oil and gas is still rising
Hydrocarbons will be in demand for decades to come. While energy demand in industrial countries is now in decline, emerging markets have added a new structural element to global hydrocarbon demand that is far from peaking. If Canada does not meet this demand, someone else will – possibly someone with less developed environmental, democratic and other societal standards.
2. The physical evidence of climate change is overwhelming
As a result, pressure is building to find ways to reduce greenhouse gas emissions. In addition to the scientific evidence, business evidence – like rising damage claims for the property insurance industry due to more frequent extreme weather events – confirms the growing negative economic impacts of climate change. However, adaptation policies to manage the impact of climate change are currently not well developed or understood.
3. The commodity supercycle appears to have come to an end
Lower commodity prices than during the past decade are projected. Nevertheless, we expect commodity prices to remain higher than long-term historic trends, driven by the added demand for resources from emerging markets.
4. American reliance on energy imports is falling
U.S. demand for oil is now in decline, even as U.S. oil and gas supply capacity is growing thanks to more effective extractive techniques. Concurrently, the Obama administration is committed to addressing climate change, largely through regulatory measures so far.
5. Canada is heavily dependent on one buyer for our energy exports.
More than 97 per cent of our energy exports flow to the U.S. market. Consequently, Canadian energy exporters receive lower prices and revenues than they would if they had better access to global energy markets.
6. There is a critical need for energy transportation infrastructure that provides access to global (non-U.S.) markets
The need for pipelines to blue water is particularly acute. However, it is increasingly difficult to obtain the social consensus needed for pipeline development.
7. Canadian energy suppliers are increasingly shipping by rail
Rail shipments have grown from near zero in 2011 to about 7 per cent of oil exports today. Rail is flexible and adaptable to energy customer needs, but it is more costly for shippers and increases the risk of accidents. Rail access for other bulk products like agricultural goods has also been squeezed.
8. Pricing carbon is a more efficient way to reduce GHG emissions than applying regulations
Pricing carbon will mitigate energy demand and improve financial incentives to innovate, ideally leading to lower GHG emissions while creating commercially attractive business opportunities.
9. There are public policy advantages to a carbon tax
Both a carbon tax and a cap-and-trade system can be used to put a price on carbon and thereby reduce hydrocarbon demand and resulting GHG emissions. In our view, a carbon tax is simpler, more transparent and easier to administer.
10. Reconciling these competing interests is key
Finding a reasonable path forward will be the central purpose of Canadian energy and environmental policy.
Based on these "basic truths," Canadian governments and the voters that elect them will need to engage, actively and deliberately, in a balancing act between our economic and environmental interests, with the aim of creating sustainable wealth. In specific terms, the overall goal of that policy should be to capture our fair share of the evolving global energy market, while fostering the steady and inevitable transformation toward a lower-carbon future to limit the negative impacts of climate change. Let the discussions begin.
Glen Hodgson is senior vice-president and chief economist of the Conference Board of Canada.