The Pivotal Partnership:  Opportunities & Challenges in Energy Policies &
The Environment

Energy and environmental policy decisions in either the US or Canada have immediate impacts on both nations. The discussion of new energy sources and the impacts and challenges of changing energy sources were presented by Stephen R. Kelly of Duke University. Jean-Yves Benoit from the Quebec Ministry of Sustainable Development described the opportunities arising from Quebec’s cap-and-trade program and Green Energy Fund.

Energy Policies & The Environment

Stephen Kelly introduced his presentation by acknowledging that Canada is a vital and largely unknown energy partner of the US; that our energy security is vastly improved by having a reliable, well-endowed, and friendly supplier right next door; and that we shouldn’t take this for granted.

Total world petroleum consumption is 95 mbpd (million barrels per day), Mr. Kelly noted, and the US is the world’s foremost consumer at 19.4 mbpd (20%), while China consumes 12.4%. The US is also the world’s largest producer of petroleum and natural gas, having surpassed production by Russia in 2011.

 US remains largest producer of petroleum and natural gas hydrocarbons

The increase in America’s oil production has enabled it to reduce oil imports. In 2005, the US imported 60% of its oil. Consumers faced oil shocks, long lines at gas stations, and lived with the fear that oil producing nations that could disrupt the US economy by withholding oil.

By 2014, the US was enjoying greater energy independence and was importing only approximately 9 million barrels per day (Mb/d) of petroleum and exporting about 4 Mb/d. Thus, net imports fell to about 5 Mb/d, accounting for 27% of the petroleum consumed in the US, the lowest annual average since 1985. In 2015, only 24% of oil was imported.

What contributed to this change? More domestic production and less use. Half of US oil production in 2015 was from hydraulically fractured wells, as improved extractive capability enabled shale gas extraction through fracking. About 60% of oil consumed in the US is used in cars, trucks, and planes. And greater efficiency in these engines reduced the consumption of oil.

Today, the largest oil reserves recoverable with today’s technology and current price per barrel are in Venezuela, Saudi Arabia, and Canada. Canada is producing more oil and using less, At the same time, the US is importing more Canadian oil. US imports of oil from Canada increased 180% from 1995 to 2015. Canada is now the major supplier of oil and electricity for the US, and fully 97% of Canadian oil exports are destined for the US. Today, half of the oil imported into the US comes from Canada. In February 2016, the US imported 4 times more oil from Canada than from all the OPEC countries combined. “We are fortunate that Canada, our major oil and electricity supplier, is both geographically close and politically friendly,” Mr. Kelly observed.

There are obstacles to exploiting the oil reserves of Canada, Mr. Kelly noted. The Alberta oil sands reserve is about the size of Florida and represents the source of the majority of Canadian oil. Alberta is sparsely settled, with a population just under 35 million. However, this area is an arboreal forest, so extracting the oil means stripping the forest. The tar sands are mined in open-pit mines, and oil is extracted using steam that is heated by natural gas.

Environmental Risks

Burning natural gas releases 14%-20% more greenhouse gases (GHG) than other oil production, and Canadian GHG emissions are rising. Currently, GHG emissions are at 750 megatonnes of CO2-equivalent and they are rising, with little likelihood that Canada will be able to achieve its 2020 target of 622 megatonnes of CO2-equivalent. Exploiting the oil sands raises additional concerns about tailing ponds and toxic water quality downstream from these ponds, as well as a heightened risk of cancer.

Routes for Oil Transport

A second challenge is distribution to markets. Landlocked Alberta faces the Rocky Mountains to the west, which block access to west coast ports. Pipelines could carry oil to eastern ports; however, US opposition to pipelines blocks this route.

Leaks in a pipeline will cause damage, Mr. Kelly conceded, as occurred in The Kalamazoo River oil spill, when a pipeline burst and spilled 20,000 barrels of oil into Talmadge Creek, a tributary of the Kalamazoo River. This was the largest inland oil spill, and one of the costliest spills in US history. Thirty-five miles of the Kalamazoo River were closed for clean-up until June 2012, and portions of the river continued to be dredged to remove submerged oil and oil-contaminated sediment.

While pipeline breaks are a risk, Mr. Kelly pointed out that the Kalamazoo River incident saw 20,000 barrels spilled, while the foundering of an oil tanker such as the Exxon Valdez dumps 5-10 million barrels into the waterways. About 43 million barrels of oil can be moved on one train. But trains are subject to crashing and burning and often follow routes through settled areas.

However, the price of Canadian oil is $15-$20 per barrel less than West Texas intermediate crude oil, and the US-Canada border would provide easy access routes if rising oil prices encouraged leaders to find solutions to the political and environmental issues.

Electricity Reliability

Mr. Kelly reminded the Forum of the blackout of 2003 that darkened most of the US North East. Fifty million people in 8 northeastern and Midwestern states plus Ontario had no electricity. In response, the US-Canada Power System Outage Task Force was formed to investigate the causes of the blackout and to make recommendations to prevent future blackouts.

Its recommendations led to the development of the North American Electric Reliability Corporation (NERC), a not-for-profit international regulatory authority whose mission is to assure the reliability of the bulk power system in North America. NERC’s area of responsibility is divided into 8 interconnected regions with linked grids that span the continental US, Canada, and the northern portion of Baja California, Mexico. Canada produces excess hydroelectric energy and could put more electricity into US grids. Ontario, for example, proposed a new grid to carry electricity into New Hampshire, but public opposition to power lines killed the deal.

 The Integrated Power Grids of the
North American Electric Reliability Corporation

Energy Security

Energy security is based on a country’s ability to get needed energy from reliable and sustainable sources at affordable prices. It has a major impact on the economic, military, and social security of a country, Mr. Kelly noted.

He contrasted the security issues for the 17 million barrels of oil that travel from the Mideast to reach the US. This route traverses the Persian Gulf, where pirates lurk, and then crosses the Straits of Hormuz, which Iran could close down. There is also always a risk of sinking on this route.

In contrast, pipelines are the safest and most environmentally friendly way to move oil, Mr. Kelly said. Furthermore, pipelines would connect the US to a trusted and friendly trade partner, right next door, who is our largest energy provider, shares our democratic values, and has significant interrelated commercial interests. “The US and Canada are deeply integrated for meeting oil and electricity needs,” Mr. Kelly concluded.

Carbon Pricing Strategies and the Environment

Jean-Yves Benoit, Director, Carbon Markets, Quebec Ministry of Sustainable Development discussed the options for using carbon pricing as a strategy to change carbon-producing consumer behavior. “Carbon pricing” is a market-based strategy for lowering emissions that contribute to global warming. Carbon pricing programs can be implemented through legislative or regulatory action at the local, state, or national level. Carbon pricing comes in two forms: a direct tax on emissions or a cap on emissions. British Columbia, for instance, has levied a tax on emissions from fuels like gasoline, natural gas and heating oil.

In 1990, Finland and Poland imposed the first “carbon taxes.” Today, nearly 40 nations, including the 28-member European Union, and many smaller jurisdictions are engaged in some form of carbon pricing. In this hemisphere, British Columbia, Quebec, California and nine Northeastern states (the Regional Greenhouse Gas Initiative--RGGI) have raised the cost of burning fossil fuels.

Under a cap-and-trade program, laws or regulations limit or ‘cap’ carbon emissions from particular sectors. Every source of emissions subject to the cap (for example, power plants or refineries) is required to hold allowances equal to the emissions they produce. Allowances are acquired through an auction or allocation and can be traded or sold. Because the allowances are limited and, therefore, valuable, those entities subject to the cap will try to cut their emissions as a way to reduce the number of allowances they have to purchase.

Greenhouse gas emissions are reported in a measure called MtCO2e or million metric tons of carbon dioxide equivalent. This measure can aggregate different greenhouse gases into a single measure, reflecting their potential to affect global warming.

Cap and Trade in Quebec

Climate change affects everyone, and a single country cannot fix the problem on its own; therefore, collaboration is essential to address the challenges of climate change, Mr. Benoit told the Forum. He reported that the Government of Quebec views the fight against climate change as a fundamental and top priority issue for Quebec’s future. Recognizing that pricing carbon in the economy is essential for dealing with the challenge of climate change, Quebec set up a cap-and-trade system for greenhouse gas (GHG) emission allowances in 2013.

Quebec’s cap-and-trade (C&T) system for GHG emission allowances is an economic tool that reduces total GHG emissions. An overall cap on GHG emissions is imposed annually on all emitters covered by the system. This cap is lowered gradually over time, generating absolute reductions in GHG emissions. Like the cap itself, the number of permits decline over time, becoming more expensive. Using market forces to encourage the cheapest reductions, the cap-and-trade system for GHG emission allowances provides flexibility to emitters with respect to the means of complying with requirements, thereby reducing overall mitigation costs.

Western Climate Initiative

One year after its founding, Quebec linked its system to California’s as part of the Western Climate Initiative, creating the largest carbon market in North America and the first to be designed and managed by sub-national governments in different countries. Ontario and Manitoba also are setting up carbon markets with the goal of linking it to the Québec-California joint market.

The carbon market is aimed at companies in the industrial and electricity sectors that emit at least 25,000 metric tonnes of CO2 equivalent each year (aluminum refineries, cement plants, electricity producers, etc.) and who are required to cover their emissions of GHG from their activities, as well as fossil fuel distributors who are required to cover GHG emissions related to the combustion of all the products they distribute in Québec (gasoline, diesel fuel, propane, natural gas, and heating oil).

 Carbon Market

Mr. Benoit reported that, currently, Quebec emissions are about 80 MtCO2e per year with the bulk (35 MtCO2e) coming from the transport sector. The goals for the program are to reduce GHG emissions from 1990 levels by 37.5% by 2030, and by 80%-95% by 2050. With income derived mainly from the carbon market, the Government of Quebec supports innovative strategies that foster the transition to a low carbon world. By 2020, Quebec will have invested more than $3.3 billion to implement the measures to reduce GHG emissions and better adapt to the consequences of climate change, Mr. Benoit reported.

Benefits of Quebec’s C&T System

The Quebec C&T system fulfills several objectives, Mr. Benoit said:

It informs and educates people about the impact of their choices on climate change and the environment by putting a price on emissions. Therefore, it is a robust tool for behavioral change

It earns revenue that can be allocated in the fight against climate change and is projected to bring $3 billion in income to the Green Fund between 2013 and 2020. This will support business growth in the industries seeking solutions to climate change, such as alternative energy sources or methane gas capture from coal mines

It flexes, allowing different designs for different situations so that it is adaptable to the specific needs of different states and provinces. For example, localities can decide which emitters require a C&T program

It maintains competitiveness by encouraging industry to use less energy to produce goods

It fosters collaboration by allowing trading among covered entities

It provides certainty by ensuring an efficient and predictable reduction in GHG emissions

By setting a price on carbon and by permitting the purchase and sale of emission allowances, the cap-and-trade system becomes the cornerstone of an integrated environmental approach aimed at encouraging the most cost-effective GHG emission reduction projects, and at helping Quebec develop a low-carbon economy that is less dependent on oil.

Mr. Benoit noted that the C&T system is part of a concerted Pan-Canadian approach to fight climate change. He reported that Canadian businesses and industries have accepted the C&T system and complied with mitigation and emission reduction strategies. Industrial-sector GHG emissions have declined by 24% compared to 1990 levels when the program started, without any reduction in production.

In concluding, Mr. Benoit recommended several resources for further insights on C&T, including:

Discussion

Sen. Kevin Meyer (AK): There is a lot of water and numerous hydro-power projects in Alaska. Is hydro considered a renewable resource?  We also have a lot of natural gas, but we’d need to build a pipeline to get it to market, and that’s a high-cost investment. Is it worth it?

Mr. Benoit: Hydro is definitely a renewable resource, as long as we have rain and snow replenishing our aquifers and we don’t run out of water.

Mr. Kelly: As for natural gas, there is a lot of gas in the MacKenzie Basin, but it is expensive to move that gas through a pipeline. Fracking is cheaper. Furthermore, the liquid natural gas (LNG) ports that were built to receive imported gas are now being used to export domestic LNG.

Eric Ebenstein (POET): You haven’t mentioned biofuels, in which the US is the world’s largest producer of ethanol. In 2005, renewal ethanol was created in the US. By 2015, 520 million barrels of foreign oil were displaced by domestic ethanol, which now represents 10% of the gasoline in the US. Canada is a big importer of ethanol.

Mr. Kelly: There are some issues with biofuels, for example, using land that could grow food to produce ethanol can drive the price of food up. There are trade-offs. Ethanol has a sustainability price, and if the price of corn goes up, it could become less cost-effective.

Eric Ebenstein: That is one of the big controversies. A number of studies have shown that ethanol has no effect on food prices.

Kevin Lynch (Iberdrola): What are the benefits and drawbacks of cap-and-trade vs carbon tax schemes?

Mr. Benoit: A carbon tax is easier to implement and easier to get voter support. You have the infrastructure in place and simply collect the tax with other taxes. In British Columbia, they imposed a carbon tax so the price of fuel increased, but they also decreased the income tax commensurately. The benefit of a C&T program is that it guarantees that GHG will be reduced by the amount set in the cap.

Mark Reed (Intuit): What factors drive the price of oil?

Mr. Kelly: The price of oil is no longer driven by the same factors that applied when the US was dependent on other countries for its oil supply. Back then, fires, unstable governments, and shipping disasters, all could affect the oil price. Now, with Iran back in the oil market, Saudi Arabia pumping at maximum capacity, and the US tapping its own reserves, there is excess oil in the market, and the scarcity model no longer applies.

Sen. Troy Fraser (TX): Texas has no cap-and-trade program and no carbon tax. We produce 60% of the chemicals in the US and are the largest producer of oil and gas. Yet we managed to reduce our carbon footprint more than California or Alberta by letting free enterprise work.  We cleaned up the diesel rigs and gas and coal sources and invested in wind and solar technologies.

Mr. Benoit: Reducing GHG emissions requires many complementary strategies. C&T is part of a comprehensive approach. In Quebec, we have not done the clean-up approach, but we are investing in energy alternatives. The advantage of C&T is that it gives a price signal so that people are aware of the impact of their consuming on carbon emissions. It also gives the government revenue to use to make changes. There are many ways to mitigate the human effects on climate change.

Speaker Biography

Stephen R. Kelly

Stephen R. Kelly is a Visiting Professor of the Practice at the Sanford School of Public Policy at Duke University. His specialty areas are energy, security, and North American issues, including trade, immigration and border management. He arrived at Duke in 2008 as the U.S. State Department Diplomat in Residence, and liked teaching so much he stayed on after officially retiring from the U.S. Foreign Service at the end of 2010.

During his 28-year Foreign Service career Kelly served at seven foreign postings on four continents. From 2004 to 2006, Kelly was Deputy Chief of Mission at the U.S. Mission to Mexico, one of the largest U.S. diplomatic establishments in the world. He focused in particular on the myriad border issues with Mexico, growing law enforcement and immigration problems, and on efforts to further North American integration. From 2000-2004 Kelly was Deputy Chief of Mission of the U.S. Mission to Canada. He also served as Consul General in Quebec City from 1995-1998, where he was the chief U.S. reporting officer on the Quebec Sovereignty Referendum of October 1995.

Other overseas postings include the Netherlands as political counselor, Indonesia as human rights officer, Belgium as a political and consular officer, and Mali, in West Africa, as a management officer.

Kelly is a graduate of Cornell University in Ithaca, N.Y., and holds a master’s degree in National Security Strategy from the National War College in Washington, D.C. His foreign languages are French, Spanish, Dutch, Indonesian and incipient Chinese. Before joining the Foreign Service, he served in the U.S. Peace Corps in Zaire and as a journalist for various U.S. newspapers, notably the Charlotte Observer, for whom he was the Raleigh and later Washington correspondent.

Jean-Yves Benoit

Mr. Jean-Yves Benoit Director of the Carbon Market, Quebec Ministry of Sustainable Development.

He graduated with honors from Montréal University and received a Master of science in Economics. He worked for many years in the private sector before joining Quebec’s Ministry of Sustainable Development, Environment, Wild Life and Parks in 2006. Jean-Yves represents the government of Québec in the Western Climate Initiative and is a member of the WCI Board of Directors.

For the last several years Mr. Benoit has been working on the establishment of a cap-and-trade carbon market in Quebec. This market will be a key driver for Quebec to achieve the targeted 20% reduction in GHG levels by 2020.

Because of their mutual commitment to the reduction of greenhouse gasses, Quebec and California have agreed to work to link their two markets in 2013. Mr. Benoit is the director of the Carbon Market Division leading the team that is responsible for both developing and implementing Quebec’s cap and trade system as well as linking Quebec’s market with that of California.

Other Summer 2016 Forum Highlights articles:

Stephen R. Kelly

Visiting Professor of The Practice

Sanford School of Public Policy

Duke University

Today, half of the oil imported into the US comes from Canada.

“We are fortunate that Canada, our major oil and electricity supplier, is both geographically close and politically friendly,” Mr. Kelly observed.

Exploiting the oil sands raises additional concerns about tailing ponds and toxic water quality downstream from these ponds, as well as a heightened risk of cancer.

Jean-Yves Benoit

Director

Carbon Markets

Quebec Ministry of Sustainable Development

Sen. Kevin Meyer

Eric Ebenstein

Stephen R. Kelly

Jean-Yves Benoit

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