Canada: Climate Change Rethink

This article originally appeared in the October 9, 2015 issue of The Lawyers Weekly.

In May of this year Alberta ended forty years of Progressive Conservative government by electing Rachel Notley's NDPs. Since then the price of oil has fallen sharply. Broad based layoffs in Calgary's oil and gas sector have started, with no signs of abating, and Goldman Sachs, the large US investment firm, predicts a dooms day scenario where oil falls to $20 a barrel. Amidst this uncertain economic storm the NDP government seeks to move forward with a new approach to Alberta's climate change policy. The government's proposed "re-thinking" begs some immediate questions: what is meant by a "re-thinking", what will these new policies look like, and what does all this mean for the oil and gas industry?

The "Re-thinking"

"The days of denial are over," said Alberta Minister of the Environment, Shannon Phillips, speaking at a conference on climate change. The NDP firmly believes that Alberta has a poor reputation on climate change, a reputation that must be rehabilitated if Alberta is to maintain market access in a world of ever increasing oil options.

To effect rehabilitation the government is focused on outcomes. Specifically, the NDP wishes to ensure:

  1. Alberta industry meets climate change targets, and
  2. Alberta gains global credibility on climate change. These are the dual pillars of the government's "re-thinking".

What will the new policies look like?

The NDP has, to date, taken three steps all of which indicate a willingness to set higher emissions targets and higher financial penalties for non-compliance.

First, in late June the government extended the Specified Gas Emitters Regulation (SGER). SGER was brought in under the previous government to address climate change through reduction targets. Under SGER, emitters releasing 100,000 tonnes or more of CO2 per year had to reduce their overall emissions by 12%. Reductions could be effected by improvements to operations, emission credits, buying carbon off-set credits or paying $15/per tonne of exceedance to a fund for research into carbon reduction technologies.

The NDP has extended SGER until 2017 and has increased the reduction targets and penalties. Large emitters must now reduce overall emissions by 15% in 2016 and 20% in 2017. Exceedances will cost $20/per tonne in 2016 and $30/per tonne in 2017.

The second step is the creation of an advisory panel on climate change led by Dr. Andrew Leach of the University of Alberta. The panel's stated objective is to canvass Albertans for their views on climate change, gather scientific research on the issue and present the government with a report and recommendations by late October or early November.

The third step is the creation of an advisory panel on royalties lead by Dave Mowat of ATB Financial. The royalty review panel will canvass Albertans on how oil and gas royalties are collected and what if any changes are needed. In short, the panel will determine if Alberta is getting a fair share of the oil and gas pie. The panel's report is due by the end of 2015, but the government has committed to not changing the existing royalty regime until 2017.

What does all this mean for the Oil and Gas Industry?

The government has taken immediate steps to increase the regulation of CO2 emissions and has commissioned reports that are scheduled to be completed prior to December 2015 when the Premier travels to Paris, France for the United Nations Conference on Climate Change. Clearly the government wishes to arrive in Paris with a new and tougher plan for tackling Alberta's greenhouse gas issues, in the hopes of meeting its objective of credibility on climate change.

The far more challenging objective is achieving actual reductions. It seems almost certain the NDP's "re-thinking" will mean increased costs for Alberta producers. With record low oil prices and no movement on the creation of pipelines for Alberta bitumen, the cost of doing business is already high. Additional cost pressure from climate change regulation could be problematic.

The government seems alive to this. The postponement of new measures on royalties and the extension of SGER until 2017 appears designed to allow oil prices to recover and give industry time to adjust to new realities. Also, the concurrence of changes to climate change policy and royalties in 2017 is not likely coincidental. The apparent political quid pro quo is simple and shrewd: the government can affect more stringent climate change policy while lessening financial impacts by not seriously altering the royalty regime. Success on climate change would be of greater political benefit than the risk associated with inaction on the royalty issue.

One final and likely change will be the scope of climate change regulation. Currently large emitters captured by SGER account for only 50% of all GHG produced in Alberta. The NDP will need to change this if it hopes to gain credibility or results on its "re-thinking" of climate change policy.

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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