Canada: Unfair Variations On The "Polluter Pays" Theme?

Last Updated: February 7 2014
Article by Sara L. Bagg

The concept of "polluter pays" is rooted in the principle of fairness. According to the concept developers should be financially responsible for mitigating and remediating the environmental impacts of their projects, and therefore must be able to demonstrate in advance that they have the technical and financial means to assess and manage environmental risks. While the idea appears straightforward, the devil is in the detail. In practice there are variations of the concept which are arguably unfair.

Polluter Pays and National Energy Board (NEB) Authorized Activities

Take for example the proposed Financial Viability and Financial Responsibility Guidelines, slated to be released by the NEB in the Spring of 20141. These proposed Guidelines are intended to provide clarity concerning financial responsibility requirements for NEB authorized activities under the Canada Oil and Gas Operations Act (COGOA). Under the proposed Guidelines, prior to receiving authorization for onshore or offshore oil and gas activity, project proponents must demonstrate the capacity to act in a financially responsible manner. The NEB has full discretion over the amount of security required; and project proponents must demonstrate the ability to pay the full cost of addressing a "worst case scenario". The proposed Guidelines also stipulate that the NEB will require unfettered access to a portion of the funds provided as proof of financial responsibility in the form of an irrevocable letter of credit.  This portion must be equal or greater than the estimated cost of stopping and containing an incident. 

According to the Canadian Association of Petroleum Producers (CAPP) the proposed Guidelines would create a variety of unfair obstacles for project proponents2:

  • In spite of the differing degrees of risk and range of possible consequences when considering a "worst case scenario" event, in the case of onshore vs. offshore exploration or development, the proposed Guidelines fail to distinguish between these two distinct sets of activities. This failure could mean that smaller companies, who cannot afford offshore projects yet wish to conduct onshore exploration, will be prevented from acting as a result of onerous financial responsibility obligations.
  • The proposed Guidelines present a comprehensive list of required financial proof/risk management instruments, failing to recognize that companies both onshore and offshore operate under a comprehensive insurance regime already found to be acceptable in other jurisdictions around the globe.
  • Finally, the term "worst case scenario" used in the proposed Guidelines is not well defined and could result in uncertainty as to what the letter of credit requirements will be.  This again would be most significant for small or medium sized companies where the amount of the letter of credit may be a factor in determining whether to bid or drill.

The Example of Nunavut

A second example of potential unfairness resulting from the manner in which the security is assessed and held arises in Nunavut, where the risk of overbonding can occur3. Overbonding is where a project proponent is required to provide financial security to more than one payee in relation to the same reclamation requirements. The result is that the combined security posted across all instruments exceeds the combined liability.

Under the Nunavut Land Claims Agreement and the Nunavut Waters and Nunavut Surface Rights Tribunal Act (NWNSRTA) security is assessed and ordered by the Nunavut Water Board (NWB) during the water licensing phase of the regulatory process. The NWNSRTA further stipulates that the full amount of security ordered under the licence is to be held by the Minister of Aboriginal Affairs and Northern Development Canada (AANDC).  In accordance with Inuit Traditional Knowledge  the environmental elements of air, land and water are interconnected. Following this conception, the NWB's approach to assessing security is holistic and practical; the NWB requires licence applicants to submit a single reclamation plan with cost estimates to the NWB without segregating land and water reclamation4.

In cases where the federal government is the owner of the land being developed, the security is assessed by the NWB and then held by AANDC under the water licence. While additional security (above that held under the water licence) may potentially be determined to be required by AANDC as land owner, the federal government can easily coordinate the necessary security instruments. This coordination becomes more problematic where the land being developed is Inuit owned.

In the case of Inuit owned land, the law still dictates that the NWB security is to be held by the Minister of AANDC under the water licence.  Further, the Designated Inuit Organization (DIO) may seek land based security under the lease to mitigate their own risk of liability and protect Inuit interests.  This security under the lease then has the potential to overlap with that held under the water licence. In cases where the potential for overbonding has actually arisen the NWB has managed to resolve the issue fairly and to the satisfaction of all parties5, yet the risk of the problem still looms under the current regulatory regime6.

Whether the unfairness in these instances is real or only threatened, these laws and policies have the arguable effect of deterring development.  In their 2013 comments regarding the Draft Financial Viability and Financial Responsibility Guidelines, CAPP concluded that the proposed Guidelines "present unnecessary and unintended prohibitive barriers to exploration in a regulatory environment already fraught with uncertainty"7.  The sensitivity of the NEB to these issues of unfairness will be revealed in the Spring (2014) when the official version of the Guidelines is released.

With regard to the overbonding issue in Nunavut, the Prospectors and Developers Association of Canada has pointed out that overbonding "has the potential to act as a significant deterrent to the investment necessary for the development of the mineral resources of Nunavut, putting the territory at a potential competitive disadvantage in relation to other jurisdictions"8.  The NWB has long awaited legislative direction9.  In the meantime the Board's awareness of the issue and commitment to fair negotiations between interested parties is to the benefit of developers in Nunavut.

 Footnotes

1. Available on the website of the NEB at http://www.neb-one.gc.ca

2. These obstacles are outlined in CAPP's Comments to the NEB addressing the Draft Guidelines, dated October 31, 2013, available on the website of the NEB.

3. Sometimes called double-bonding

4. See for example the 2001 renewal of the Boston Licence, as cited in the Hope Bay decision (Reasons for Decision for 2AM-DOH0713)

5. See for example the decision in the case of the Doris North Gold Mine, (Reasons for Decision for 2AM-DOH071), where the NWB determined the security would be held jointly by the DIO and AANDC.  Also, in the recent licence application of Bafflinland Iron Mines Corporation (Reasons for Decision for 2AM-MRY1325) the NWB determined an amount of security up for review one year later at such time as the DIO leasing land to Baffinland my be able to provide a definitive amount of security to be held under a lease (which may then be deducted from the holistic amount set by the NWB).

6. While on May 8, 2013 new Nunavut Waters Regulations came into force, the Regulations do not address this issue.

7. While the Guidelines will apply to all NEB-authorized activities and regions covered by the COGOA, the need for a clarification of financial responsibility requirements under the COGOA emenated from the Artic Offshore Drilling Review.  Many of the comments of the draft version of the Guidelines by interested parties have a particular interest in development in the Canadian North and address specifically the effect of the Guidelines on Northern development.

8. See the Prospectors and Developers Association of Canada's Submission to the Nunavut Water Board in Relation to the Proposed Nunavut Waters Regulations available at http://www.pdac.ca/public-affairs/lands-regulations.

9. See the Canada Gazette, Vol. 147, No. 10 — May 8, 2013, which published the Nunavut Waters Regulations SOR/2013-69. The Regulatory Impact Analysis Statement which follows the Regulations in the Gazeete states: "The Nunavut Water Board strongly recommended to the Minister of Indian Affairs and Northern Development that Aboriginal Affairs and Northern Development Canada, in consultation with stakeholders, be directed to establish a process, including a firm timetable, to address the issue of security doublebonding in Nunavut. The Nunavut Water Board further recommended that any such solution be Nunavut-specific. This issue was also raised by Nunavut Tunngavik Incorporated". While the Regulations ultimately do not address the issue of overbonding AANDC acknowledges the issue in the Impact Analysis Statement and commits "to explore a timely and effective resolution to this very important issue".

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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