1. Climate Change & Canadian Policy APEGGA Edmonton, February 18, 2003 Rick Hyndman Senior Policy Advisor on Climate Change

2. 2 Outline Context: emissions, climate change and global energy Context: emissions, climate change and global energy GHG emissions & oil sands GHG emissions & oil sands Canadian policy & Canada’s contribution to international action on climate change Canadian policy & Canada’s contribution to international action on climate change Policy uncertainty facing energy intensive industry Policy uncertainty facing energy intensive industry Ratification, the Federal plan & large industrial emitter targets Ratification, the Federal plan & large industrial emitter targets What remains to be addressed What remains to be addressed

3. 3 Uncertainty about Economics, Technology & Climate Science Alarmists would lead you to believe this Recent critiques make it look more like this Probability of Change in Average Global Temperature by 2100

4. 4 What is the real issue? Meeting energy demand in the 3rd World 1990 20502100 Economic Model Projections of Global CO 2 Emissions (No Kyoto) China India USA W. Europe Russia & EE Mideast & OPECOther Japan Canada Australia, NZ

5. 5 If GHG emissions have to be reduced dramatically, what is required? Improve energy efficiency & conservation Improve energy efficiency & conservation Reduce non-energy emissions Reduce non-energy emissions Switch fuels to low & non-GHG-emitting primary energy sources Switch fuels to low & non-GHG-emitting primary energy sources Develop technology Develop technology  CO2 capture & storage to allow transition to H2 & electric economy initially using hydrocarbons  New non-emitting primary energy

6. 6 Implications for oil and gas Two sources of effects on oil and gas producers in the short- to medium-term: Two sources of effects on oil and gas producers in the short- to medium-term:  Global effort to reduce GHGs: bigger effort --> greater energy efficiency & more fuel switching --> lower demand for oil and eventually gas  Domestic policy - potential for costs to be imposed on industry for its own emissions --> production costs increase

7. 7 Canadian policy appears to be the larger risk The global effort: The global effort:  energy efficiency & renewables But, rising population and living standards in 3rd world  developing countries won’t intentionally forgo economic growth to avoid higher energy use  --> global oil and gas demand likely to continue growing for two or more decades & remain high Risk to Canadian producers mainly from Canadian policy being excessive & out of line with world effort Risk to Canadian producers mainly from Canadian policy being excessive & out of line with world effort

8. 8 The Kyoto Protocol as a global effort Kyoto will not significantly affect global emissions Kyoto will not significantly affect global emissions  With the US out, the aggregate of countries’ targets is only a few percentage points below business as ususal  The distribution of targets creates winners and losers: Russia - large surplus, Canada, Japan - large deficit A different approach will be required for significant global action A different approach will be required for significant global action  The form of Kyoto targets is unlikely to attract the US and developing countries to take on targets in the future

9. 9 Canada & Kyoto: the issue is the Target! Kyoto Protocol Targets % of 1990 Emissions US93%Russia 100% US93%Russia 100% EU92%New Zealand 100% EU92%New Zealand 100% Japan94%Norway 101% Japan94%Norway 101% Canada94%Australia108% Canada94%Australia108% Canadian economy more like Australia’s than EU, Japan & US Canadian economy more like Australia’s than EU, Japan & US A significant element of the difference is Canada’s role as a growing net exporter of oil and natural gas A significant element of the difference is Canada’s role as a growing net exporter of oil and natural gas

10. 10 Expanding natural gas production is part of the solution Natural gas is a transitional fuel: lower carbon intensity than coal and oil Natural gas is a transitional fuel: lower carbon intensity than coal and oil Increased Canadian production and exports allow a shift to lower carbon fuels in North America Increased Canadian production and exports allow a shift to lower carbon fuels in North America Increased production-related emissions in Canada more than offset by lower end use emissions in the US Increased production-related emissions in Canada more than offset by lower end use emissions in the US

11. 11 Canadian oilsands -- economic development and energy security 3 major global oil resources: 3 major global oil resources:  Persian Gulf  Oil sands  Venezuela heavy oil Global oil demand will grow for several decades, major primary energy for most of 21st century Global oil demand will grow for several decades, major primary energy for most of 21st century Like Venezuela heavy oil, oil sands are energy intensive to produce, but technology has reduced intensity Like Venezuela heavy oil, oil sands are energy intensive to produce, but technology has reduced intensity

12. 12 Production related GHG emissions Oil sands production is energy intensive, but technology is reducing intensity significantly Conventional Oil Oil sands mining or SAGD + upgrading Bitumen

13. 13 Oil sands production is more energy intensive, but end use emissions dominate

14. 14 Contributing to a global effort on climate change v. meeting the Kyoto target Improve energy efficiency & emission intensity Improve energy efficiency & emission intensity  NOT: shift energy intensive industry to countries without targets versus Sustained effort over decades built on prosperity & investment in energy supply and use technology Sustained effort over decades built on prosperity & investment in energy supply and use technology  NOT: Transfer capital to other countries to cover an inappropriate target

15. 15 Why was there such uncertainty last year ? Focus on Kyoto target without a plan involving consumers in covering the gap Focus on Kyoto target without a plan involving consumers in covering the gap Industry was left to believe that it was exposed to the liability for any gap Industry was left to believe that it was exposed to the liability for any gap Persistence among some stakeholders of ideas about allocation that suggested growth would be penalized Persistence among some stakeholders of ideas about allocation that suggested growth would be penalized

16. 16 Kyoto Ratified but Federal Plan does not attempt to achieve Kyoto target 1990 2010 M tonnes CO 2 e 600 2000 Current EmissionTrend ? Kyoto Target570 Mt 810 Mt Uncovered 60 Mt Other Policies & Programs 125 Mt Large Emitter targets  55 Mt Likely Unrealistic by >40 Mt 835-40 Mt Gov’t projection in 2001 699 (P) 726(Actual) * ?

17. 17 Federal Government assurances about policy approach for industry Targets will be intensity based Targets will be intensity based Government assumes risk regarding the success of everything beyond the intensity targets: Government assumes risk regarding the success of everything beyond the intensity targets:  Action Plan 2000  Forest & agriculture sinks  New programs  Projection of business as usual CO 2 price risk CO 2 price risk Volume risk Volume risk

18. 18 What did the $15 price & 15% volume risk limits do? CO2 price risk guarantee: CO2 price risk guarantee:  In complying with large emitter targets, companies’ cost will be no more than C$15/tonne CO2  Companies face the lower of the international market price or C$15/tonne Volume risk guarantee: Volume risk guarantee:  Under the target system, large emitters reductions will be no more than 55 Mt (15% of business as usual)  Oil and gas sector will not be hit disproportionately: Oil & gas intensity targets will be no more than 15% below projected business as usual (BAU) for 2010 Oil & gas intensity targets will be no more than 15% below projected business as usual (BAU) for 2010

19. 19 15% Below Business as Usual requires purchase of credits to meet targets No Intensity improvement 2005-10 Intensity Change 2005-10 0%/yr -1%/yr Business as Usual -3.7%/yr Large Industrial Emitter Target System 55 Mt reduction or 15% below BAU would require 3.7% per year improvement in intensity 2005-2010

20. 20 Downside impact of Large Industrial Emitter Target System Maximum cost impact per barrel at the price and volume risk limit can be approximated as: Maximum cost impact per barrel at the price and volume risk limit can be approximated as:  projected emissions in tonnes CO 2 e per bbl for 2010 under business as usual improvements in intensity  multiplied by 15% and $15/tonne Publicly stated estimates: Publicly stated estimates:  Suncor: C$.20 -.27/bbl  CNRL: C$.17/bbl  Western Oil Sands Trust: C$.21/bbl

21. 21 Key elements of Intensity Target System still need to be addressed Key elements of Intensity Target System still need to be addressed Longer-term policy certainty Longer-term policy certainty  Early assurance by governments that policy beyond 2012 will not undermine competitiveness of Canadian industry Details of intensity targets Details of intensity targets Compliance options: Compliance options:  How facilities can meet targets National system - joint federal-provincial National system - joint federal-provincial  Reliance on existing regulatory structures

22. 22 Other aspects of policy Complementary measures outside target system Complementary measures outside target system Innovation, research & technology should be a key focus Innovation, research & technology should be a key focus

23. 23 What next? Optimistic (given Canadian ratification):  Kyoto seen as an initial international step that has to change to fit the US and developing countries.  Federal-provincial coordination on policy that addresses competitiveness but doesn’t meet the Kyoto target -- neither industry nor taxpayers face a liability for the Kyoto gap Pessimistic  Federal government focuses on Kyoto target -- looking for someone to pay the bill for the gap  Federal-provincial conflict, continuing threat of costly future policies

24. 24 What is required for a best case outcome? Plan to address the long-term risk of climate change Plan to address the long-term risk of climate change Shift focus: Shift focus:From  Primary concern with the short-term numbers, 570 Mt, 55 Mt, etc To  Emission reduction policies that will move Canada ahead in the short term, be effective in the long-term and allow Canada to contribute to the international effort in a way that is in its interest  Adaptation strategy  Contribution to research on climate science

25. 25 What is required for a best case outcome? Ensure efficient, harmonized federal-provincial policies, programs and regulatory frameworks Ensure efficient, harmonized federal-provincial policies, programs and regulatory frameworks Design policies for industry that will make Canada a more attractive place to invest and to develop, apply & export world class technology Design policies for industry that will make Canada a more attractive place to invest and to develop, apply & export world class technology Be proactive in international negotiations in pushing an approach that fits Canada & developing countries, and will attract the US Be proactive in international negotiations in pushing an approach that fits Canada & developing countries, and will attract the US