-A A +A

Even if it’s a good punchline for late-night comedians, there is nothing inconsistent about building pipelines while reducing greenhouse gas emissions. Stranding Canadian oil by blocking pipelines is damaging to both the energy industry and the Canadian economy as a whole. Moreover, it is an ineffective way to reduce our carbon emissions—a price on carbon is the most economically efficient policy tool we have.

By internalizing greenhouse gas externalities in economy-wide decisions, carbon pricing ensures that everyone considers their incremental impact on the global climate. It allocates emission reductions to the activities with the so-called lowest cost of abatement. If oil can be economically produced while facing a carbon price, governments shouldn’t stand in the way of building pipelines to get oil to market.

To a certain degree the federal government has adopted this mantra. But it has dropped the ball on getting pipelines built. The delay in market access has cost our economy billions and caused a crisis in our petroleum-producing provinces.

Western Canada faces its current takeaway constraints on crude oil because Ottawa failed to listen to the courts on the constitutional duty to consult Indigenous peoples. In her reasons in both the 2016 Federal Court of Appeal decision on Northern Gateway (Gitxaala) and the 2018 decision on the Trans Mountain Expansion, or TMX (Tsleil-Waututh), Justice Dawson found the same fundamental error: rather than engage in meaningful dialogue, cabinet sent “note-takers” prior to making its decisions.

The economic consequences of the uncertainty around pipeline approvals are stark. Investors have fled and capital for Canadian petroleum companies is scarce. It’s not a matter of a risk premium; investors simply cannot price the politics.
Constrained egress for Canadian oil has had real consequences for production, capital investment and workers. While capital investment in oil and gas are rebounding stateside and worldwide, Canada’s oil patch remains depressed. Earlier this year, the C.D. Howe Institute report “A Crisis of Our Own Making” highlighted the downdraft on planned investment in oil and gas projects, which fell by $100-billion between 2017 and 2018. While the last year has seen announcement of new natural gas projects, actual construction activity will not recover rapidly.
The report also pointed out how the then-proposed revamp of environmental/impact assessment legislation under Bill C-69 would amplify political risk for projects. Bill C-69 removed the dividing line of “significant adverse environmental effects” before political decision-making kicked in. Amendments to Bill C-69 by the Senate made the legislation better—for example, by enhancing the independence of the new Impact Assessment Agency—but projects still face a political “public interest” decision.
Greenhouse gases are the unavoidable flashpoint in today’s federal-provincial tensions. The final report of Canada’s Ecofiscal Commission, “Bridging the Gap,” showed that carbon pricing is the most efficient and lowest cost approach to reducing greenhouse gases. The federal government has commendably advanced measures to price carbon nationwide. But, in its drive to reduce greenhouse gases, Ottawa risks playing fast and loose with both economic principles and the Constitution’s division of powers.
Ottawa’s measures split the principle from a uniform economy-wide carbon price. The Institute report “Speed Bump Ahead” highlights the high cost of reducing greenhouse gases through the prescribed renewable content requirements under Ottawa’s proposed Clean Fuel Standards. As elaborated in my recent publication “Moving the Coal-posts,” federal output-based carbon pricing for power generation favours coal generation over natural gas and diminishes investment incentives for renewable power. Ottawa’s carbon pricing “backstop” is also on potentially shaky constitutional ground.
While majorities of the Saskatchewan and Ontario courts of appeal saved the backstop for now, there is increasing recognition that these decisions contradict previous constitutional case law. The Institute’s recent report “Living Tree or Invasive Species? Critical Questions for the Constitutionality of Federal Carbon Pricing” points out a way forward to maintain a coherent approach to the constitutional division of powers. In the upcoming appeals, the Supreme Court can displease everyone by “splitting the baby” but also avoid handing Ottawa all the cards.
Today, the bonds of our federation face the greatest strains in a generation or more. Navigating these challenges at the intersection of energy, the environment, and our economy will define this government. The path Canada chooses now will determine our fortunes for decades ahead.
Grant Bishop is associate director of research at the C.D. Howe Institute.