Paying the price of a carbon-based economy

Ottawa’s latest effort to confront industrial GHG emissions builds upon the federal government’s April 2007 Regulatory Framework for Air Emissions, which established the overall target of reducing Canada’s total GHG emissions by 20 per cent below 2006 levels by 2020.

By Alan Young

“Canadians can therefore expect to bear costs under the regulatory framework that are not trivial.” This understated five-alarm fire bell is buried deep in the Government of Canada’s Regulatory Framework for Industrial Greenhouse Gas Emissions released on March 10, 2008 (GHG framework). It may become the perfect tag line for Canada’s fight against climate change. All Canadians have a vested interest. Nothing less than the future of Canada’s economy is at stake, given the strong link between fossil fuel production and use and economic growth, as well as the clear link between energy use and GHG emissions. Perhaps all Canadians should start to pay closer attention.

Ottawa’s latest effort to confront industrial GHG emissions builds upon the federal government’s April 2007 Regulatory Framework for Air Emissions, which established the overall target of reducing Canada’s total GHG emissions by 20 per cent below 2006 levels by 2020. Following one year of further consultation and analysis, industrial emitters and interested stakeholders now have a clearer picture of the direction federal government regulation will be taking. Compliance will be neither easy nor cheap. 

Major players

The GHG regulatory framework affects large emitters in most of Canada’s major industrial sectors, including pulp and paper, iron and steel, smelting and refining, chemicals and fertilizer, and oil and gas. Two of the sectors that are critically important to Canada’s future economic growth and that will be affected considerably by the new regime are electricity generation and oil sands production. Furthermore, these two industry sectors are essential to Canada’s ability to meet GHG emission reduction targets.

The GHG framework provides greater clarity around two issues of particular importance to electricity generation and oil sands production, namely what constitutes a “new facility” and defining a clean-fuel standard. These are important because new facilities are granted a three-year commissioning period under the framework before facing an emission-intensity reduction target. Once the three-year period expires, a cleaner fuel standard will be applied, with a reduction target set as if the new facility were using the designated fuel. It is essential that owners of electricity generation and oil sands facilities know these details so that they can engage in medium and longer-term planning.

New facilities are defined as those coming into operation in 2004 or later, and include greenfield facilities (i.e., new build where no facility existed previously), major expansions, and major transformations. Major expansions will be defined as a 25 per cent increase in the physical capacity of an existing facility and major transformations will be considered to have occurred where “significant changes” have been made to process (this will require further clarification).

With regard to a clean fuel standard, the electricity sector will have a fuel-specific cleaner fuel standard set, namely “supercritical” technology for coal-fired generation, natural gas combined cycle technology for gas-fired generation, and oil-fired gas turbine technology for oil-fired generation.  In other sectors, including oil sands production, the cleaner fuel standard will be based on natural gas.

Carbon capture and storage (CCS) technology plays a significant role in the government’s approach to climate change, as evidenced by the GHG framework. In fact, all coal-fired electricity plants and all oil sands upgraders and in-situ plants coming into operation in 2012 or later will be required to meet a target based on the use of CCS by 2018. There is some risk in relying on CCS technology to meet targets, given the nascent state of the technology. Furthermore, some criticize investment in and reliance on CCS because it involves fossil fuel use rather than focusing on new, renewable energy technologies.

CCS technology would separate GHG emissions from the process or exhaust stream of large industrial facilities, compress the CO2 and inject it underground into secure geological formations. Today, CCS is more theoretical than operational. According to a recent report by the ecoEnergy Carbon Capture and Storage Task Force appointed by the federal and Alberta governments, two billion dollars in new public funding should be invested soon by the federal and provincial governments to lever industrial investment and lead to phase-one CCS projects by 2015.¹ This lengthy time frame is indicative of the fragile nature of reliance on CCS technology working as planned and as a cost-effective solution to meet GHG emissions targets.

Draft regulations capturing the essence of the GHG framework are expected to be published for comments some time in the fall 2008. By fall 2009, the federal government expects final regulations to be approved with Jan. 1, 2010, as the planned date for the regulations to come into force.

What impact will the GHG framework have on Canadian citizens and businesses? The Government of Canada’s economic modeling indicates that Canadians “can expect to bear real costs” as we move to lowering GHG emissions, primarily in the way of higher energy prices that will be felt throughout the economy. On average, national residential electricity prices are projected to be approximately four per cent higher than they would otherwise by 2020.² It is expected that higher energy prices will lead to energy efficiencies and changes in production processes and consumer habits. The federal government’s view is that moderation and improved efficiency in GHG-emitting energy consumption will serve as the principal driver of emissions reductions.

From the perspective of the business community, higher energy costs will be a critically important factor in all future planning. Nowhere will pressure be more keenly felt than in the electricity generation business. Senior business decision makers in this industry must build their business cases today to meet the demands of the future. The difficulty of doing so should not be underestimated.  Should they build new natural gas plants or should they plan to construct new nuclear facilities? At what point, if ever, does CCS technology become available and make coal an economical way to generate electricity? What happens if CCS technology is too expensive or does not come on stream in time to meet the industry’s reduction targets? These questions, and more, will challenge the best CMAs that Canada has to offer.

Alan Young (young@tactix.ca) is co-president of Tactix Government Consulting Inc.

¹   Canada’s Fossil Energy Future - The Way Forward on Carbon Capture and Storage; The ecoEnergy Carbon Capture and Storage Task Force Report to the Minister of Alberta Energy and the Minister of Natural Resources Canada, January 9, 2008.

²   Detailed Emissions and Economic Modelling, Government of Canada, March 10, 2008.

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