Misconceptions, Fears, Myths & Realities regarding Canada’s Climate Change Policies

1. Misconceptions, Fears, Myths & RealitiesregardingCanada’s Climate Change Policies APEGGA Conference November 13, 2007 Pierre Alvarez

2. 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

3. Global Energy-Related Emissions 2005

4. Canada’s GHG Emissions 2005

5. Global Coal + Oil Sands CO2 Emissions 2005Total 11,387 m tonnes CO2

6. CO2 Emissions: Electricity from coal versusWells to vehicle transport fuel from Oil Sands

7. What does the world have to do? • Low CO2 emission energy supply • Low CO2 hydrocarbons: • coal  natural gas • CO2 capture & storage • More renewable energy • Hydro, Wind, Solar, Geothermal, Wave, Tidal, Biomass • Nuclear • Fission, Fusion • Reduce process emissions • Agriculture • Industry

8. 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

9. 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)

10. 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

11. 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]

12. 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

13. 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 2005-07 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 2008-12 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

14. 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 2003-05 average intensity • New facilities: 3 years for start up, then 2% per year improvement up to 12% over 6 years, relative to 3rd 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

15. Canadian policy: Alberta • Compliance • Improvement in facility emission performance • Payment into Technology Fund @ $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

16. 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 2nd half 2007 emissions • Provide revenue to fund vanguard carbon management projects, e.g. CO2 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

17. Federal industry targets:2010 - 2020 • Same structure as Alberta targets, with higher % improvement rates and rising compliance price • Annual cost to all industry sectors @$15/tonne up to $700 m with up to $500 into the Tech Fund Targets % of Base-period Intensity Tech Fund Compliance Price

18. 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

19. 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

20. 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

21. 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