As rumor became reality on August 15th, Canadians began girding their loins for an election campaign. It is still a bit hard to believe that we have added a Federal election to the political and economic challenges facing Canadian business in 2021.
As if the impact of COVID-19, global protectionism, U.S. isolationism, social polarization, and climate challenges were not enough.
When examining the political positions emerging from the campaign that affect the Canadian Energy industry, I turned to a veteran sage of the Canadian oil and gas industry- Dennis McConaghy, former executive with TransCanada Pipelines and author of two books on the Canadian energy industry.
I sought out Dennis McConaghy because, as he states in this book, “Breakdown: The Pipeline Debate and the Threat to Canada’s Future”, he spent roughly forty years professionally engaged in the development of hydrocarbon infrastructure and upgrading in Alberta, achieving considerable professional recognition. He states that in his professional experience, prior to 2008 there was no substantive public policy debate that questioned hydrocarbon infrastructure and upgrading as inconsistent with the national interest or as representing a moral quandary.
However, he recognizes that we are faced with the question of whether the world can continue to burn hydrocarbons such as oil and gas as fuel and must have some recognition of the risk of global climate change. He further states that catastrophic impacts are possible without appropriate mitigation and adaptative policy response to climate change, but he also points out the specific action required to deal with the risk is problematic. Our discussion centered on a comparison of what the two major Canadian political parties are proposing.
As the Liberal policies get described as “vague” by media outlets, with some even asking “Why haven’t the Liberals released their election platform” until they were 2 1/2 weeks into the campaign, Dennis McConaghy addressed the Liberal policies that he sees as relevant to energy and infrastructure development.
He noted that the current federal government espouses aspirations to Net-Zero by 2050 which is intended as a path to contain temperature increase to 1.5 degrees. The claim is that policies to achieve Net-Zero will work and allow us to meet or exceed our Paris commitments. The general Liberal consensus is that the $170/tonne Carbon tax could bring about fundamental change. But Canada he notes, already has a low carbon electrical economy (for the most part, other than the province of Alberta). So it would be difficult for Canada to achieve incremental emissions reductions because we don’t really have that much coal generation to displace. However, the Liberals are committed to meeting the Paris targets regardless of how much it may cost us to meet those targets and specify that $170/tonne Carbon tax is a viable method to achieve this. They also specify rebates for some households, some exports, and certain industries. They have pledged 17 billion in retrofits and green initiatives to accelerate green fuels, electric vehicles, and green tech.
“One of the major achievements of the Conservative’s Erin O’Toole is that he has come out with a position that is at least, more defensible than the position Andrew Scheer tried to run on.” according to McConaghy. He says it is materially different from the Liberal’s position in that there is a commitment to achieving Paris emission reduction targets, however non-industrial emitters in Canada- the average Canadian driving their cars, heating their homes, etc,- would only face a Carbon tax of up to $50/tonne. In addition, the Conservatives have introduced a conditionality for the industrial sector. They propose the industrial sector would only see carbon taxes ramp up to $170 if our major trading partners were also ramping up to $170/tonne. It’s not clear how much would be spent on green energy initiatives, but not as much as $17B. The wrinkle is that with a lower carbon tax, it becomes more doubtful that the Paris targets will be met. McConaghy says you can argue that the Conservative position is perhaps more economically realistic and certainly less aggressive than the Liberals.
To date, Trudeau has never really responded to the question “What does Canada do if the United States doesn’t come anywhere close to $170/tonne Carbon tax?”. McConaghy says what will unfold in the U.S. is very significant to Canadian policy. The Biden administration can be viewed as acting perversely contrary to Canadian interests in 2021. The termination of KXL and equivocations about Line 5 have pandered to U.S. politics and been punitive and unfair. The Liberal government has never really chastised them for their actions and Line 3 is not yet clear of hurdles. The Biden administration is indifferent to Canada’s aspirations to expand our oil sector into the U.S. and looked ridiculous asking OPEC to increase production in the short run so U.S. gasoline prices would not increase.
The U.S. via the Biden administration is clearly not pursuing carbon policy via carbon pricing according to McConaghy. He thinks this is a major distinction between the U.S. and the Trudeau government that would have to be resolved in 2022. But this negotiation would depend on the outcome of two pieces of legislation, the first being the U.S. Infrastructure bill and the second being the U.S. Reconciliation bill that together amount to a $5T spend. Somewhere in excess of $2T would be related to climate according to McConaghy. Much of the spend will be attempting to aggressively remove fossil fuels from the electricity generation sector via investments in wind, solar and battery technology, adjustments to their grid, green and electric vehicle incentives, and more. So the U.S. will be trying to reduce emissions by effecting a fundamental energy transition rather than by carbon pricing which both Republicans and Democrats perceive to be unacceptable to U.S. voters. Since the U.S. is Canada’s largest trading partner, this would create an imbalance that would have to be addressed. McConaghy points out that the key distinction between Canada and the U.S. is that Canada’s electric generation sector is already substantially de-carbonized, which is not the case in the U.S. Whether the U.S. can de-carbonize on wind, solar and batteries at any reasonable cost is a very open question.
In addition, the next meeting of the Intergovernmental Panel on Climate Change conference is coming up in Glasgow this November. It is the latest, long-awaited UN Summit on Climate and McConaghy points out it is unclear exactly which leaders will be at the conference due to elections like our own. He left us to contemplate interesting questions….” Will World leaders impose even more radical measures?” and “Will Canada be expected to adopt them?”
Only time and election results hold the answers. In the meantime, Dennis McConaghy continues to analyze and comment on energy policy in his podcasts on www.doce.ca or in speaking engagements.
Maureen McCall is an energy professional who writes on issues affecting the energy industry