Where do we go from here? Canada, Energy, & Climate
In August 2017, on a sunny Monday, I walked into a room at the UBC Sauder School of Business, starting a new chapter of my life in an MBA program. I introduced myself to students from around Canada, and across the globe. One of my most resonant memories on that first day was a land acknowledgement – UBC Vancouver is located on the traditional, ancestral, and unceded territory of the Musqueam people.
As the week went on, and as we engaged into deeper and deeper conversations about a range of topics, I felt the room get charged whenever energy and environment were mentioned in the same breath. At the time, the debate was very much alive over whether the Trans Mountain Expansion Project (TMEP) should go ahead. While still the subject of intense scrutiny, the debate around that particular project has somewhat dimmed in recent months, overtaken by COVID-19 and its far-reaching impacts.
As a transplant to Vancouver recently having arrived from Toronto, the questions I asked myself at the time persist in conversations I’m having today – for now, over video calls.
How did we end up here?
More importantly, where do we go from here?
And recently in particular, why is there such vociferous defence of the energy industry from its Canadian heartland, for what is sometimes described as a dying industry?
The debate around TMEP and other fossil-fuel related projects is more often than not a microcosm of the debate around Canada’s role in the climate movement and its ties to the traditional energy industry.
To begin to untangle this mess, let’s start in Paris.
The Paris Gap
In December 2015, the Paris Agreement was adopted by consensus. The goal of the agreement is to limit the global average temperature increase to well below 2°C above pre-industrial levels and to pursue efforts to limit the increase to 1.5°C. Under this new agreement, each country must determine, plan, and regularly report on the contribution that it undertakes to mitigate climate change. In Paris, Canada promised to reduce its greenhouse gas (GHG) emissions, the cause of climate change, by 30% from 2005 levels by 2030.
So, where are we globally relative to our Paris targets, knowing that measurement takes place over years, rather than months or quarters, as is the norm for other backward-looking reporting (like financial statements)?
We can clearly see a gap in the chart above, showing we’re not quite where we need to be - we clearly have work to do. How do we move beyond our existing pledges and targets to get to the pathways outlined through the Paris Agreement?
The first step is to get an idea as to where our GHG emissions are coming from.
As illustrated above, the energy sector is the largest source of the problem, followed by Agriculture, Forestry and Land Use (AFOLU). Let’s next narrow in on the energy sector. How can we break this down into where the energy use is coming from?
The Energy Sector
We can see that even within the last couple of years, coal, oil, and (natural) gas make up the majority (close to 80%) of the total energy used worldwide. How does total energy factor in here?
For starters, electricity use is a subset of total energy use, and can be generated by coal, oil, gas, bioenergy, or renewables, among other sources. Importantly, not everything can be easily replaced with electricity – at least not yet. A lot of energy uses don’t have technology solutions at a commercial deployment stage quite yet. One of the reasons that the energy mix is so dominated by fossil fuels is that transport and heating in particular are often harder to decarbonize than electricity. Transport currently relies heavily on oil, and heating on natural gas. There are fewer cheap and accessible energy options available to substitute in these sectors.
Now, how is this energy mix expected to change over the next few decades, especially with the rise of renewables such as solar and wind to provide electricity?
No Set Future
The following illustration outlines the likely change in energy consumption worldwide for one of two scenarios developed by the International Energy Agency (IEA): the Stated Policies Scenario.
In the Stated Policies Scenario, by 2040 relative to today we can see a small decrease in coal use, a similarly-sized increase in oil use, and a moderate increase in natural gas use. Renewables and bioenergy both experience significant acceleration in uptake over the next couple of decades. Even in the Sustainable Development Scenario, oil and gas will still play a role, as illustrated below. A significant ramp-up in decarbonization-related policy worldwide will be required in order to push us on a path closer to the IEA’s Sustainable Development Scenario, and even further to get to net zero emissions by 2050.
Note: the numbers don’t quite line up between the visualization above and the chart below due to the underlying IEA World Energy Outlook models developed in different years – 2019 and 2020, respectively.
A caveat to these models is that the IEA has underestimated the pace of adoption of renewables in the past. Regardless, however, the important message here is that oil and gas will likely play at least a reasonable, if declining role over the next few decades. So, where will that oil and gas be used, and who will produce it? Those are the tougher questions with which Canada finds itself in a quandary.
There are a range of end uses for fossil fuels, as displayed below, in a visual depiction of energy flows known as a Sankey diagram. The diagram is read from left to right, with fuel sources on the left as a starting point (production and imports aggregated for all countries per fuel source), and end uses as the final result on the right.
We can see that oil (in purple) plays a role predominantly in transport, and a variety of other uses, and is heavily traded. Natural gas (in blue) has significant use in primarily industrial and residential heating. The use of coal (in grey) is largely concentrated in generating electricity, with some industrial use as well. It’s therefore the transport and heating sectors that need to be addressed most urgently. In the absence of short term disruptive technology, policy breakthroughs, or a combination of both, as we’re now seeing in the automotive sector, it is expected that these sectors will continue to use primarily oil and gas products. Coal use is widely expected to decline worldwide as an electricity source alongside an uptake of renewables, energy storage, and energy efficiency measures.
The Last Barrel
If we know that oil and gas will play a role in the global energy mix for at least a few decades, where will it come from? We can see below that the world’s current top consumers of oil and gas products (NGLs are natural gas liquids) are the US, China, and to a lesser extent, India. Canada is high up on the list, but pales in comparison to the two global giants.
In contrast, Canada is placed fourth among oil and gas producers worldwide.
When we examine oil and gas producers worldwide, few measure up to Canadian producers when we take environmental, social, and governance (ESG) factors into account. The following three charts display Canada’s and Canadian company ESG ratings relative to other major oil and gas producers.
Aside from ESG ratings, context is important. In 2007, Alberta became the first jurisdiction in North America to impose a carbon price on to its industrial emitters. In 2016, the Canadian federal government announced that all provinces and territories would be required to have a carbon price in place by January 2018, a target date later revised to 2019. All provinces and territories have the flexibility to create their own carbon pricing solutions to deal with GHG emissions in their own jurisdictions. The Greenhouse Gas Pollution Pricing Act (GGPPA) was formally passed into law by the Parliament of Canada in the fall of 2018, setting a baseline carbon price at $20 per tonne of CO2e in 2019, rising $10 per year to $50 per tonne of CO2e in 2022. In late 2020, the federal government announced alongside a suite of new climate-related policies that its intent is for the carbon price to rise to $170 per tonne of CO2e by 2030.
It’s also important to note the complementary suite of policies that Canada is adopting to pursue additional GHG emission reductions in the energy sector, including a Clean Fuel Standard, to incentivize the supply of fuels in the country to become less GHG-intensive on a fuel by fuel basis. Most provinces and territories have a wide range of additional policies to encourage GHG reductions sector by sector.
There’s also the economics for Canada. While on the decline in recent years, the GDP contribution of the energy sector to Canada’s economy in latest Canadian statistics reaches close to 8.5%. For our most resource-intensive Western Canada provinces, this percentage closes in on 5.5%, 30.9%, and 22.7% for BC, Alberta, and Saskatchewan respectively.
It can then hardly be seen as a surprise that the future of the energy sector is a struggle for Canada. Why should it be another country that produces that fabled “last barrel of oil”?
Room for Improvement, and room to grow
Critics of the Canadian energy industry often point to specific projects that are mired in controversy with some Indigenous communities as evidence that these projects should not continue development. These criticisms are often justified with the complex and challenging history of Canadian governments of all levels with Indigenous communities, and the impacts oil and gas projects have had on these same communities. One doesn’t have to look far to see the violence inflicted on members of the Wet’suwet’en First Nation by the RCMP over the Coastal GasLink project in northern British Columbia, or the arrests of members of the Secwepemc Nation due to their opposition to the Trans Mountain Expansion Project along the existing pipeline corridor from Alberta to Burnaby, BC.
As an example, in an open letter dated October 2020, a group of Indigenous women and organizations called on the CEOs of major financial institutions to stop financing, investing and insuring oil and gas related projects related to oilsands: “The tar sands sector poses grave threats to Indigenous rights, cultural survival, local waterways and environments, the global climate, and public health,” the letter says.
These controversies, however, are hardly uniform across Indigenous communities (and indeed, often not consistent within them) in Western Canada.
There are several examples of approaches to oil and gas projects in Canada that have made strides in the spirit of Reconciliation with Indigenous Peoples. Steel River Group acknowledges that First Nations, Inuit, and Métis all play a critical role in the stewardship of Canada’s economic development, and endeavour to enhance ownership opportunities for Indigenous communities on major projects, through an innovative and successful People-Public-Private-Partnership (P4) Model. Leaders of the Haisla Nation state that the LNG Canada project in northwestern BC has helped the community rise up from poverty to a place of managing wealth. The Indigenous-led Project Reconciliation is a potential equity purchaser of the Trans Mountain pipeline alongside more recently announcing that it is fast-tracking another initiative to soon launch an up to $1-billion sovereign wealth fund that would see First Nations communities partner with Corporate Canada to invest in energy transition projects.
In making strides to improve the E, S, and G components of ESG, it’s hopeful that investors will recognize efforts in Canada and reward them accordingly.
The Road Ahead
When we return back to the global scale, it’s quite evident that oil and gas will continue to play a role in energy demand for the next few decades. It’s equally clear that there’s more work that needs to be done to achieve GHG emission reductions anywhere close to a scale that would be meaningful to meet our Paris targets. That’s where the energy transition comes in – and Canada’s also on the leading edge when it comes to this transition.
More than 400 jurisdictions across Canada have declared a Climate Emergency. Some of these jurisdictions, like the City of Vancouver, have very concrete and specific plans to shift away from fossil fuel demand in the more challenging transportation and heating sectors, despite existing technological and financial challenges.
Part of the plan to address these challenges is often to direct both public and private investment into clean technology solutions that can scale up quickly to commercial stages. Cities across Canada are quickly emerging as hubs for the development of clean technology solutions, ranging from energy efficient thermostats to hydrogen infrastructure to carbon capture and storage to batteries for maritime applications.
Disruptive technology will inevitably be an important contributor to GHG emission reductions – but we can’t count on it either. While the iPhone was simply a concept in Steve Jobs’ head about 15 years ago, vehicle-to-grid integration also looked very promising at the time – the two technologies have clearly had divergent paths in scale of adoption.
So where does that leave us? We have to decide – what kind of Canada to we want to be? Do we need to choose climate action over oil and gas production? Or can the two be reconciled and even complementary towards the energy transition?
The chart below hit me when I first saw it - the US and China represent the largest share of GHG emissions worldwide. That’s the story we know very well.
But if we look closer and add up Canada and other Global North countries, excluding the US, our collective share of GHG emissions is close to that of China on its own. We have a responsibility to reduce our emissions, and we are doing our job to be held accountable to it.
If Canada can embrace its role worldwide – as a leading producer of responsibly produced fossil fuels for the next few decades, and as equally a leader in enabling an energy transition and GHG emission reductions within and outside of our borders – we can finally move forwards.