Canadian Government Nationalises Pipeline, Fuelling Debate on Fossil Fuel Subsidies and Trade

7 June 2018

Last week, the Canadian federal government purchased the Trans Mountain pipeline and expansion project from energy infrastructure company Kinder Morgan for C$4.5 billion (US$3.5 billion), calling the move essential for reaching new markets and creating jobs, amid environmental concerns from climate policy stakeholders.

Under the agreement, the government takes ownership of the existing pipeline, which carries crude and refined oil from the central province of Alberta to the west coast of British Columbia. The government also takes over the pipeline expansion project, a “twinning” of the existing line, which will increase carrying capacity from 300,000 to 890,000 barrels per day.

Kinder Morgan halted construction of the project in April, given strong opposition from environmental groups and indigenous communities, as well as a legal challenge from the provincial British Columbia government.

On 8 April, the company announced it was suspending all non-essential spending on the pipeline expansion. Kinder Morgan gave the Canadian government a 31 May deadline to resolve the political problems with British Columbia, setting in motion a rapid negotiation period that ultimately culminated in the purchase.

“The project became too risky for a commercial entity to go forward with it; that’s what Kinder Morgan told us,” said Prime Minister Justin Trudeau in a Bloomberg Television interview last week.

Finance Minister Bill Morneau said, “When we are faced with an exceptional situation that puts jobs at risk, that puts our international reputation on the line, our government is prepared to take action,” according to comments reported by Reuters.

In addition to immediate protests from various environmental groups, over 800 Canadian businesses signed a petition pushing back against the purchase, according to Global News.

The petition criticised what it termed “a dangerous and unnecessary pipeline project,” calling the purchase “out of step with the future prosperity of Canada, and out of sync with the wishes of Indigenous people.”

John Horgan, the British Columbia Premier, also indicated that the province would continue to pursue legal action to establish its right to restrict increased shipments of oil to its ports, according to comments reported by Reuters.

Government highlights “business case” for purchase

Despite judicial uncertainty, Trudeau emphasised the prudence of the pipeline purchase, saying, “there is a very strong business case for this pipeline,” particularly in relation to trade, given the currently limited options for selling Canadian oil abroad.

“Because we only have one market – the United States – for our oil resources, we lose about C$15 billion (US$11.6 billion) every year,” said Trudeau, noting that Canada faces a cap when selling to its southern neighbour.  “We are going to ensure that [the pipeline] gets built so that we can get our resources to new markets through a responsible pipeline,” he said, referring to the potential of selling this pipeline’s outputs to other Pacific economies.

Trudeau also defended the pipeline within a broader environmental context, saying “growth of the economy and protecting the environment go together,” while cautioning against forcing a choice between them. He added that “in order to be able to protect our environment, we do need to be able to have a strong and growing economy.”

He pointed to the government’s climate change plan, which he said includes a national price on carbon emissions in collaboration with Canadian provinces, as well as a multi-billion dollar oceans protection plan that he deems “world-class.”

G7 commitments to phase out “inefficient fossil fuel subsidies”

Some commentators have characterised the government’s purchase as counter to a G7 commitment to phase out inefficient fossil fuel subsidies. Canada currently holds the rotating presidency of the G7, with the annual leaders’ summit kicking off in Charlevoix this Friday.

At its Pittsburgh Summit in 2009, the G20, which includes the G7 countries, committed to “rationalise and phase out over the medium term inefficient fossil fuel subsidies that encourage wasteful consumption.” At its 2016 summit, the G7 further committed to eliminating inefficient fossil fuel subsidies by 2025.

Mark Campanale, executive director of the Carbon Tracker Initiative, described the pipeline purchase as “government subsidising a market failure,” according to comments reported by Climate Home News. He expressed concern that as economies transition to clean energy technologies, “taxpayers will be left with a wasting and stranded asset.”

Similarly, Shelagh Whitley, head of climate and energy at the Overseas Development Institute (ODI), characterised the government purchase as a subsidy, since “the free market is not willing to bear this [environmental risk] any more.”

How to characterise the government purchase is in part a definitional issue, experts say. G20 and G7 commitments have not clearly defined what constitutes an “inefficient fossil fuel subsidy” or even a “fossil fuel subsidy” in general, as reported in an ICTSD Brief on the subject. (Editor’s note: ICTSD is the publisher of Bridges.)

According to the Canadian federal government, once the pipeline expansion is complete, there will be a significant increase in revenues due to higher corporate income taxes and oil royalties.

The government also plans to sell the pipeline eventually, possibly at a profit. Richard Mason, a fellow at the University of Calgary’s School of Public Policy and the former CEO of the Alberta Petroleum Marketing Commission, has argued that a completed pipeline would command a good price, according to comments reported by Global News.

Even so, analysts have noted that the private market was struggling to complete the pipeline expansion without government intervention, and have questioned whether supporting this project will actually lead to better prospects for exporting these fuels to other markets that are further afield.

Further complications include uncertainty about the timeframe of phasing out fossil fuel subsidies. While the government purchase of the pipeline comes before the G7’s self-imposed 2025 phase-out deadline, some experts warn that the infrastructure project has the potential to lock-in increased oil production for decades to come.

How the G7 and G20 will address fossil fuel subsidies at their summits this year remains to be seen. While the G7 summit kicks off this weekend, this year’s G20 will be held in Argentina from 30 November to 1 December.

Environmental groups issue G7 subsidy scorecards

Ahead of this weekend’s G7 summit, a group of environmental non-governmental organisations, including Overseas Development Institute, the Natural Resources Defense Council, and others, released G7 fossil fuel subsidy scorecards for the G7 member countries, excluding the EU, which is a non-enumerated G7 member. Some EU member states are part of the G7 in their individual capacity.

According to the report, G7 governments give at least US$100 billion per year in subsidies for the production and use of fossil fuels. The report urges countries to take greater action to phase out fossil fuel subsidies; calls for defining and fully documenting subsidies; and warns against their failing to create accountability mechanisms for the countries’ commitments.

Among the seven countries examined, Canada ranked third best overall across seven indicators, which include different types of subsidies as well as transparency and commitments. However, Canada ranked lower on support for oil and gas production, as it provides more fiscal support (per unit of GDP) to oil and gas production than all other G7 countries.

The report also notes the countries’ commitments to the UN Sustainable Development Goals (SDGs), which call for “rationalis[ing] inefficient fossil-fuel subsidies” in SDG 12. It further cites the UN’s Paris Agreement on climate change requirement for countries to make “finance flows consistent with a pathway towards low greenhouse gas emissions and climate-resilient development.”

Turning the various commitments on fossil fuel subsidies into concrete action remains a big challenge. Some experts suggest dealing with this issue in the WTO, arguing that its binding nature, enforcement mechanism, and experience in negotiating sectoral subsidies disciplines could help advance reform. In a first step, a group of 12 WTO members issued a joint declaration at the 11th Ministerial Conference in Buenos Aires, Argentina, last December.

ICTSD reporting; “Trans Mountain pipeline will attract buyers if Ottawa can complete expansion, experts say,” GLOBAL NEWS, 31 May 2018; “Trans Mountain pipeline was too risky for Kinder, Trudeau says,” BLOOMBERG, 29 May 2018; “Over 800 businesses slam Trudeau government’s purchase of Trans Mountain pipeline,” GLOBAL NEWS, 30 May 2018; “Canada to buy Kinder Morgan oil pipeline in bid to save project,” REUTERS, 29 May 2018; “Canada oil pipeline buyout ‘subsidising a market failure,’” CLIMATE HOME NEWS, 31 May 2018.

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