Trudeau faces ‘stranded assets’ debate in climate policy

Will some oil have to ‘stay in the ground’ to meet climate targets?

PARIS, FRANCE - DECEMBER 12: Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC) Christiana Figueres (L 2), Secretary General of the United Nations Ban Ki Moon (C), Foreign Affairs Minister and President-designate of COP21 Laurent Fabius (R 2), and France's President Francois Hollande (R) raise hands together after adoption of a historic global warming pact at the COP21 Climate Conference in Le Bourget, north of Paris, on December 12, 2015. Arnaud BOUISSOU/Anadolu Agency/Getty Images

Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC) Christiana Figueres (L 2), Secretary General of the United Nations Ban Ki Moon (C), Foreign Affairs Minister and President-designate of COP21 Laurent Fabius (R 2), and France’s President Francois Hollande (R) raise hands together after adoption of a historic global warming pact at the COP21 Climate Conference in Le Bourget, north of Paris, on December 12, 2015. (Arnaud BOUISSOU/Anadolu Agency/Getty Images)

OTTAWA — When star NDP candidate Linda McQuaig mused during the opening days of the federal election campaign that some of Alberta’s oil wealth would have to “stay in the ground” in order to meet Canada’s climate change targets, the remark was treated as a scandalous revelation by her political opponents.

Yet McQuaig, known for her sometimes polarizing and provocative views, arguably was simply stating 2015’s middle-of-the-road orthodoxy.

From the governor of the Bank of England, to the U.S. president and the investment arms of the planet’s biggest banks, 2015 was the year that “stranded assets” stopped being some mythical bedtime story told by tree huggers to spook oil workers and landed in the mainstream.

Mark Carney, the Canadian head of the Bank of England, attracted international attention with a Sept. 29 speech at venerable Lloyd’s of London cautioning against the grave risks to the financial system posed by a changing climate.

Carney cited estimates by the Intergovernmental Panel on Climate Change that only between a fifth and a third of proven oil reserves can be burned if humanity is to avoid catastrophic climate impacts.

“If that estimate is even approximately correct it would render the vast majority of reserves ‘stranded’ — oil, gas and coal that will be literally unburnable without expensive carbon capture technology, which itself alters fossil fuel economics,” said the central bank governor.

President Barack Obama, making the case for his rejection of the Keystone XL pipeline barely a month later, made much the same point.

“Ultimately, if we’re going to prevent large parts of this Earth from becoming not only inhospitable but uninhabitable in our lifetimes, we’re going to have to keep some fossil fuels in the ground rather than burn them and release more dangerous pollution into the sky,” he said.

Investment houses are also issuing cautions.

Last April, HSBC Global Research reported that: “Fossil fuel companies, or some of their assets, may become non-viable or ‘unburnable,”‘ under conditions of increased climate regulation and depressed prices.

And following this month’s UN COP21 climate agreement in Paris, Citigroup Research Equities Australia was warning investors that, “whatever the fine print, high emissions industries will face substantial change in coming decades.”

It remains, however, a highly sensitive subject for Canadians who spent the past decade being told the country was on the path to becoming a global energy super power.

Prime Minister Justin Trudeau, in a year-end interview with The Canadian Press, sounded the requisite progressive notes when asked about the impact of the Paris climate agreement on Canada’s resource sector.

“We know, and with Paris it’s very clear, where the world is going,” said Trudeau, whose Liberals won power in October promising to make Canada a responsible player on the international climate front after 10 years of Conservative ambivalence.

“We’re going towards a zero carbon economy. The question is, does Canada want to drag its feet on it or do we want to be part of it?”

But Trudeau also maintains new oil pipelines to spur oil sands development are compatible with this low-carbon future. He argues the transition requires investment and innovation, which is dependent on a robust economy.

It sounds a bit like having your cake and eating it too; not so different from the Conservative government’s mantra of balancing the environment and the economy. Trudeau pushed back hard at the analogy.

“You square that by making sure that Albertans, who have been innovative in the energy sector for decades, are part of that disruption, are part of moving beyond the fossil fuel resources we have,” he said. “Leverage the fossil fuel resources we have now — and are needed now — into solutions for tomorrow.”

For Canadian policy makers, that’s a very tricky needle to thread.

Former prime minister Stephen Harper agreed last April to a G7 goal to decarbonize the economy by the end of the century, a timeline long enough to delay hard choices in the short term.

But under the new Liberal government, Canada was among those at COP21 who helped push for a goal of limiting global warming to around 1.5 degrees Celsius above pre-industrial levels, an ambitious target that demands swift policy action.

Interim Conservative Leader Rona Ambrose says Canada needs policies to deal with the fall-out of stranded assets.

“All you have to do is talk to CEOs of major corporations and they’ll tell you, billions and billions of dollars have left Alberta and will never come back,” Ambrose said in an interview.

“So if the Liberal government is talking about going even farther than the targets that we had already proposed to go to Paris with as a Conservative government, they need to look very closely at what the implementation of that looks like.”

Dave Sawyer, an economist with EnviroEconomics, says there are two tracks for ongoing oil sands production even in a low-carbon economy.

Companies with large investments already sunk in production will continue to make money off oil, but they’ll be less profitable.

“It’s like a sunsetting sector in the economy where you just don’t invest capital in the operation,” he said.

Future increases in production, meanwhile, must be driven by technology that reduces costs and carbon emissions.

“The longer term question is: Is there room for oil in a significantly de-carbonized world? There are a bunch of end uses we’re looking at now — even with transformative technologies — that you can’t really do much with,” said Sawyer, pointing to long haul trucking and jet travel as examples.

David McLaughlin, the former head of the defunct National Round Table on the Environment and the Economy, said the concept of stranded oil resources is now an accepted part of the climate debate — a development that poses profound policy implications for an energy dependent economy like Canada’s.

McLaughlin posited that this fall’s Alberta NDP climate plan, which includes a hard cap on oilsands emissions by about 2030, serves as “validation” of the stranded asset argument and thus has significance far beyond the specific greenhouse gas levels it legislates.

“This is the new normal, we’re into it,” he said in an interview.

“So Canada’s economy, being based on an energy bet, becomes really risky. Canada’s economy, based on an environment bet tomorrow, is even riskier.”

Managing the transition will be the policy challenge of a generation, he said.

The International Energy Agency released a report on the global energy investment outlook in June 2014 that clearly laid out the looming stranded asset debate and the perilous path ahead for fossil fuel investors and public policy makers.

The report’s summary of conflicting public sentiments is cautionary reading for Canadian governments: “a demand for stronger action on climate change but a backlash against the cost of subsidies; opposition to fracking; protests against nuclear and coal-fired plants; suspicion about CCS (carbon capture and storage).

“Against this backdrop, the risk of policy incoherence and even policy reversals is high.”

— With files from Stephanie Levitz


Trudeau faces ‘stranded assets’ debate in climate policy

  1. And this question, my friends, illustrates most exemplary, why some find it hard to accept that Canada is a serious country. Imagine, if you will, a Canada where provincial governments pursued mandates to purchase no goods manufactured in a certain other province, so as to assuage the sensibilities of people who live in another country. Just try it.
    Try and imagine the government of BC making a legislative decision to only purchase vehicles for the provincial motor fleet that are manufactured in Korea, with no domestic content, as part of an agreement for Korean companies to purchase BC lumber. Or the government of Saskatchewan passing legislation that only allows French wines and beers in the liquor stores in order to secure a deal to sell potash in France.
    What if the government of Alberta passed a law that car dealers could not sell units that are built in the Ontario car plants, but would have to source toe units from US plants even if the normal course of action would be to source from Ontario plants (many models are built at multiple assembly plants)?
    How is this any different than various internal governments and political factions demanding the sequestering of one industry in particular solely at the behest of external influences? When external agents can wield such influence as to dictate domestic policy to such an extent that it creates intentional self-harm to the nation’s fiscal and social health, we cannot make any claim to being a truly sovereign nation.

    • You said a mouthful. The Balkanization and parochialism of economic policy in Canada is an issue that weakens us all. It will be difficult to meet or even propose national commitments based on such disorganized and fractious arrangements. Given the distribution of powers between provinces and the fed, a good deal of consultation and cooperation is needed; during the Harper regime this was virtually non-existent, so much so, that recent events show that the nation has ‘forgotten’ how to even have group meetings due to lack of practice; and then we have the example of Brad Wall who seems to think that communication consists of shouting from the top of a soap box (as Brad’s kindergarten teacher admonished ‘time to put on your listening ears’).

      The simple fact is that Canada has no effective national energy policy: what masquerades as agency is the NEB which according to it’s composition is more accurately the National Fossil Fuel Industry Association – it is unrepresentative of population distribution, scope of energy production, energy users or even relevant provincial agencies; this is an agency whose outlook papers see putting an end of clean electricity exports to New England states (Quebec is a fine place to build pipelines but not to produce renewable energy); the drastic imbalance in NEB composition is divisive to the extent that many provinces have espoused energy policies that are contrary to NEB direction and energy outlooks that have little in common with the NEB outlook, with the possible exception of Alberta and Saskatchewan.

  2. Fossil fuel in the ground might be a ‘stranded’ resource but can’t compare to vast hydro-electric capacity and future potential or skilled labor forces in the most populous provinces, etc, etc. Even large fossil fuel reserves are large not infinite as oil and gas producers in the Atlantic provinces are beginning to discover. For Nova Scotia, the end to producible natural gas is forseeable yet there is no national plan to supply Canadian NG to Nova Scotia – even in the carbon economy there is no concerted national plan. The most direct solution to reduced carbon footprint is to burn less. Even band-aid solutions like CCS can only realistically be applied to one sector of consumption (a CO2 tank in every home and every vehicle seems unlikely).
    Energy is a cost in every part of the productive economy so improved energy efficiency is not just a good idea but a direct economic benefit; this is the tradeoff between energy industry profit and profitability of the great majority of the economy. One problem is that there is little ownership of energy efficiency as it doesn’t conform to the simplistic notion of energy as a commodity market. Yet, energy efficiency is the simplest method of decarbonization and studies show that it is the lowest cost approach with a negative cost i.e. most amply repays the investment. Canada as a whole is very poor at this as shown by our high energy intensity in every sector as compared to other comparable jurisdictions; even Canadian EnergyStar listings tend to the bottom end of US listings which isn’t saying much as compared to EU standards, for example.
    Reduced fossil fuel development comes with a bonus: capital is a limited commodity where the fossil fuel industry has lately absorbed ~25% of all capital investment to drive ~11% of GDP (possibly not the best investment for the national economy); also, employment versus unit of GDP is also lower than most other sectors of the Canadian economy while concentration of temporary foreign workers and imports of materials and heavy equipment are relatively high – redistribution of economic activity could be good for the Canadian workforce and balance of trade.
    The most important question here is why is it Trudeau alone that ‘faces this debate’? Should not Canadians as a whole take responsibility?

    • Canadians as a whole would have to look at what their own province is doing for the world and their own country in terms of lowering emissions. Climate change does not distinguish Canada from other places. Buying oil from south America, Nigeria or Saudi Arabia does not make the emissions disappear. Shipping the oil by tanker instead of through a pipeline does not make the environmental risk disappear. Selling coal to China does not make the emissions disappear. Giving money to prop up Bombardier so they can build big jets which burn a lot jet fuel is hardly in step with plans to lower emissions. In short, Canadians are finger pointing hypocrites. As is Barrack Obama. He is fracking, he is selling record amounts of coal to China and he is planning to drill for oil in the Arctic. Canada can certainly develop far less fossil fuels but if no one else does, what is the big gain because the oil sands account for only 8 percent of all of Canada’s emissions and whether or our emissions are high per capita or not, they are still a drop in the bucket on the world stage.

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