Extracting cash from the resource sector

Since the mid-1980s, Norwegian law made it illegal for any corporate entity to extract oil or gas from Norway’s continental shelf other than in partnership with a government-controlled entity. StatHydro owns control of over 66% of Norwegian production capacity. 

Also, Norway completely phased out its resource royalty regime over a 10-year period ending in 2006. Now, every private sector developer of oil or gas pays a 77% tax on income earned from resource production (no royalties). I think Norway got this right, but I would probably be banned from Alberta, BC and the Maritimes if I made this my priority message.

It might be worth noting that the UK went part-way to the Norwegian scheme in 2005 or so. The UK cut (but did not eliminate) royalties and introduced a 55% tax on corporate income from offshore oil and gas production. This was initially supposed to be the first step to full transition to the Norwegian policy (including mandatory domestic ownership, but not necessarily government ownership). But the political scene in Britain is so bad, right now, that this policy shift is now stalled where it is. 

In the meantime, BP’s GHGs in the UK have increased over 24%, BP sits on a big stockpile of freely allocated EU CO2 allowances (in spite of the massive increase in GHGs at regulated installations), and BP’s overall output in the UK is way down.

Many of us have also forgotten that since the mid-1970s the US Congress can sue any US petroleum refinery operator if that operator elects to cut back their US production from historical levels. I am not aware of any application of that law since the mid-1980s, but it is still on the books and could well come into use again in the near future.

Canada’s GHG emissions track record better than most

But this leads me to the real problem in the Kyoto/Copenhagen negotiations. How can Canada agree to a new treaty that allows BP to bank that much free EU quota having increased EU GHGs proportionately more than the Canadian oil-patch has increased?  (As an aside, GHGs/unit of output are up for BP’s and Shell’s Canadian operations, too.) 

While total GHGs are up for all Canadian Oil and Gas producers—at least the others have realized a reduction in GHGs/unit of output. I am not suggesting that reducing the GHG rate is enough, but when two of the largest global producers—BP and Shell—are sitting on surplus European GHG quota stockpiles while they grow their GHGs in both intensity and absolute terms, something is very, very amiss.

Norway has elected not to cover O&G production under their domestic cap and trade regime. And every European refinery—whether or not it is covered by the EU ETS—is 100% exempt from all energy taxes (not just CO2 taxes…ALL energy taxes) in the UK, Denmark, Sweden, Finland, Norway, Germany, France, Spain and Italy.

Obviously, if we properly regulated the O&G sector GHGs in Canada, while Europe continues to freely allocate bankable GHG quota surpluses to and exempt BP, Shell, Total, et al. from 100% of energy taxes, then when we link our Canadian GHG market to the "Kyoto" market all we do is set up Canadian independent producers for a massive asset write-down—BP, Shell, Total, Norsk Hydro, etc. take all at a discount.

The Day After Copenhagen

My guess is that Europe and the developing nations will maintain the Kyoto Protocol through a second commitment period, without the US, Canada or—likely—Japan.  The reason that Canada cannot cooperate with such a proposal is that it would impose on us an obligation to buy GHG allowances covering our full 1st period shortfall, which allowances we would have to source from nations that were over-allocated a free quota in the first place and made no effort to cut GHGs.

There is no way the Canadian population would accept a $6 billion one-time transfer from the Canadian treasury to eastern Europe and Russia—which is what the European negotiators are effectively calling for.

My guess is that the government of Canada (whether Conservative or Liberal) will have no choice but to exercise its option to withdraw from the treaty on one year’s notice.  I am guessing that if Europe presses too hard, that notice will be served in late 2010.  For many years I have asked experts to tell me what the implications are of a withdrawal during the first commitment period. I have not received a clear answer yet.

But after such a withdrawal, I think WTO rules will then dictate that our exports will be vulnerable to sanctions if they are more GHG intensive than the domestic GHG intensity for the production of the same class of goods in the nation that proposes a sanction.  WTO rules do not permit nations to sanction others for not participating in a treaty. The WTO would uphold some new tariffs on some carbon-intensive Canadian exports, but in most classes Canadian production is much less GHG -intensive than the domestic products we compete with in our export markets. So it is in Canada’s best interest that our government leaders get us on to this international trade playing field sooner rather than later.

Canada is making itself irrelevant.

If Canada takes no domestic action, or, in fact, aligns the Canadian market with the US in the manner proposed to date by the US Congress, Canada will become irrelevant. But if Canadian regulators promulgated domestic product standards aligned with the policy commitments that the EU member states have agreed to, then we not only remain relevant, we will have mounted the perfect defense against the aggressively protectionist trade measures (and rather ineffective GHG reduction measures) that are the EU and US "cap and trade" proposals.
 
The real risk here is that we will end up with two competing systems and, worst of all, inconsistent systems. A proper mess that moves everything off the climate change mitigation timeline.

If the US Congress proceeds with cap and trade as currently proposed, Canada has to have a different system. US cap and trade imposes compliance obligations in US DISTRIBUTORS (producers and importers) of carbon-intensive goods. The US proposed rule also allocates a free quota to US producers of regulated products and US consumer groups.

The day after the rule is in full effect, every unit of Canadian energy, building products and food exported to the US will be covered by a new tariff even though in most product classes our exports are less GHG intensive than the US producers who hold free allocations covering at least part of their liabilities. This has nothing to do with global GHG reduction, it is about stripping wealth from the nations on which the US and EU are becoming increasingly dependent for energy, building products and food.

The only way to fight this is for Canada to promulgate domestic product standards that are consistent or more stringent than those in place or in development in the EU (20% renewable content mandate for all energy—not just electricity—distributors, new efficiency standards for buildings and vehicles) and the US (new source performance standard for new power generation capacity, 20% renewable content mandate for electricity distributors, conservation/demand-side management standard for electricity distributors, new energy efficiency or equivalent emission standards for buildings and vehicles). 100% of the GHG "reductions" that will be realized in the EU and US over the coming decades will derive from these mandatory product standards—which include credit banking and trading. 

There is no incremental GHG reduction associated with either the EU or US-proposed GHG quota (allowance) allocations. The quota regimes have the sole purpose of imposing an indirect trans-border charge on LESS (not just more) GHG intensive imports.

Once we have our product standards in place we can defeat the protectionist EU and US quota allocations in international and US courts.  Given the equivalence or superiority of our product standards, we can demand, under NAFTA, that the US accept Canadian RECs, RINs and CAFE credits as equivalent to US certificates. This is the best and fastest way to a continental then global market for environmental goods and services that is fair and generates competition for low-carbon technologies.

The only way to fair and free markets is to abandon any consideration of GHG quota allocation and quota-based supply management for energy, building products and food.

We are dead if we say "yes" to quota.  Canada can change the world in a very good way if we take the lead in no-quota market-based regulatory regimes.