Climate Policy’s Next Industrial Targets

Robert Lyman is an Ottawa energy policy consultant, former public servant, and diplomat. His full bio is here.

Introduction

The purpose of this article is to explore the possible next steps in the efforts by governments to reduce emissions in the emissions-intensive sectors of the Canadian economy. Much of the media and public attention recently has focused on the oil and gas sector. In 2017, greenhouse gas (GHG) emissions from oil and gas production were 195 million tonnes, making this the largest single source, at 27 % of the total. Most of these occurred in Alberta and Saskatchewan. Oil and gas, however, is only one of the emissions-intensive industrial sectors, the rest of which are spread across Canada. 

Canadian Climate Policy and Targets

The present Canadian government climate policy target is to reduce emissions by 30% from 2005 levels by 2030. This would reduce them from 716 million tonnes of carbon dioxide equivalent per year in 2017 to 512 million tonnes in 2030, a reduction of 204 million tonnes. The New Democratic Party, the Green Party and many environmental groups are urging the Liberal government to adopt a more stringent emissions reduction target, such as a 45 per cent reduction (i.e. to 401 million tonnes) or even lower by 2030. So, in theory, one could completely eliminate all emissions from oil and gas production, and that alone would not attain the current 2030 target. It would go nowhere near meeting the proposed 45%-by-2030 target.

What if the government were to augment its emissions reductions effort by also addressing the other energy intensive industries in Canada? What would that mean for the other provinces and especially for the central provinces of Ontario and Quebec?

A Profile of Canada’s Energy-Intensive Industry

We can gain insights into this by using the data collected by Environment and Climate Change Canada (ECCC) in its GHG Reporting Program. Under this program, all large emitting facilities (i.e. those emitting more than 10,000 tonnes of CO2 equivalent per year) in Canada must report annually. In 2017, 1,622 facilities reported to this program; these facilities accounted for 290 million tonnes, or 41%, of Canada’s emissions. I used the ECCC data to compile lists of the largest industrial facility emitters in Ontario and Quebec, the ones that could offer the largest contribution to the attainment of the government’s climate policy goals. The lists are set out in the annexes to this paper. Table 1 (Annex 1) indicates the company, facility location, and 2017 emissions of large emitters in Ontario, and Table 2 (Annex 2) does the same for Quebec.

In 2017, mining, quarrying and oil and gas extraction accounted for 36% of the emissions reported by emissions-intensive facilities; utilities 30%; and manufacturing, 29%. 187 Mt, or 64% of these emissions, originated in Alberta and Saskatchewan. Forty-three Mt (15%) originated in Ontario and 23 Mt (8 %) originated in Quebec. 

A review of the list of facilities in Ontario indicates that, while the facilities are diverse in size and located in several different industries, there are five industries that dominate: steel making (Dofasco and Stelco in Hamilton), petroleum refining (Sarnia area and Nanticoke), petrochemicals (Sarnia area mainly), cement manufacturing (Bowmanville, Bath and Woodstock) and mines and metals processing (in many places). 

A review of the list of facilities in the province of Quebec indicates that, while the largest emitters are the oil refineries in Montreal and Levis, there are many other facilities spread across the province in the aluminum, mining, cement and other industries. It is also striking how many of these facilities are in relatively small centres in rural Quebec (e.g. Baie-Comeau, Saguenay, Jonquiere, Alma, Saint-Constant, etc.). The closing of these facilities due to loss of competitiveness would have large effects on jobs in the small communities, as often the plant is the largest employer. This, of course, is a phenomenon sadly well known in Alberta and Saskatchewan.

The ”Opportunity” and the Risks

If the federal and provincial governments are to take advantage of the “opportunity” to reduce emissions from these plants, they will face some difficult questions as to how to do so. Their most likely approach would be to continue to raise carbon dioxide taxes to and beyond the levels that are now planned (i.e. $50 per tonne in 2022). If the federal government is to reach its 2030 target, this seems inevitable. If it adopts even more demanding targets for reductions in energy use, the level of taxes must be high enough to force facilities to cut back emissions or to close. 

The Conference Board of Canada recently published a report entitled Tipping the Scales. The report examined the likely effects of Canada’s current carbon dioxide pricing system on emissions-intensive and trade-exposed industries (EITEIs). In other words, EITEIs are a subset of the emissions-intensive facilities on which ECCC collects emissions data, but with a special focus on the trade effects from two perspectives: first, whether the added taxes would increase costs so as to disadvantage Canadian firms in domestic and export markets; and second, whether the results of firms’ moving their operations outside of Canada in response to these pressures would to increase emissions more than would have occurred had the firms continued their operations in Canada. The Conference Board report can be found here:

https://www.conferenceboard.ca/e-library/abstract.aspx?did=10485

In the terminology of climate policy, the Conference Board report raised the question of “carbon leakage”. As defined by the report, 

“Carbon leakage is what happens when an economy-wide pricing policy meets on-the-ground business competition. It occurs when firms faced with incremental compliance costs transfer some of their activities to jurisdictions with less stringent policies. And they take the associated GHG emissions with them.

Emissions-intensive and trade-exposed industries are the most exposed to carbon leakage risks. They rely on fossil fuels as production inputs and have limited room to pass on incremental costs to their end users.”

Compliance costs vary considerably across Canada because of the balkanized nature of the Canadian carbon dioxide pricing regime. For a detailed description of the regime, see my report published by the Global Warming Policy Foundation.

https://www.thegwpf.org/content/uploads/2019/06/Lyman-carbontax.pdf

However, the difference in compliance costs across Canada pale in comparison with the differences between compliance costs in Canada and in our principal trading partners. Of our three most important trading partners, accounting for 56 % of Canadian trade, the United States has no federal carbon dioxide pricing regime, Mexico’s carbon dioxide tax is about $3.00 per tonne and China’s regional government carbon dioxide taxes are about $2.00 per tonne. That compares to the current carbon dioxide charge under the Canadian federal government “backstop” regime of $20 per tonne in 2019, which will rise to $50 per tonne in 2022. In addition, the Canadian regime covers about 80% of our total emissions and 86% of the emissions of the EITEI firms, while the carbon dioxide pricing regimes among Canada’s 18 largest trading partners cover only 16% of the peer companies’ emissions. 

The Conference Board concluded that:

• “The competitive pressures from carbon pricing are significant for the majority of Canada’s EITEIs;
• The magnitude of potential leakages is large; the risks of leakage are high;
• The potential magnitude of carbon leakage from non-energy EITEs is greatest for non-ferrous metals manufacturing and chemicals; it is lower for non-energy mining, wood products manufacturing, and iron and steel manufacturing;
• Across Canada’s oil and gas industry, the emissions intensity of producing different outputs – natural gas, conventional crude oil, or oil sands crudes, varies significantly; therefore, the potential magnitude of carbon leakage for Canada’s oil and gas industry varies considerably by product.”

The Conference Board study did not attempt to analyze the effect on Canadian firms of the over 600 regulations, programs, special measures and taxes not related to the carbon dioxide pricing regime. It also did not assess the negative effects of government policies actively to discourage investment in the Canadian hydrocarbons industry. The review of the carbon dioxide pricing regime alone was sufficient for the Conference Board to conclude that Canadian emissions-intensive firms are at serious competitive risk. It left largely unanswered the more difficult question of how much that is likely to shift emissions outside of Canada rather than reducing them. 

Conclusion

If federal and provincial governments implement more stringent and intrusive measures to reduce emissions from the industrial sector, it is unlikely that any emissions-intensive industry or region will be exempt or will be able to escape the adverse effects on their profitability and competitiveness, and ultimately their viability. 

Those in Ontario and Quebec who observe dispassionately the economic stresses climate policies now impose on western Canada should take note. Your turn is coming.

Annex 1 – TABLE 1 – Ontario’s Largest Industrial Emitters

Annex 2 – TABLE 2 – Quebec’s Largest Industrial Emitters