Could the Camel be Dead Already?
The addition of GHG emissions to the Energy East Hearing List of Issues, and TransCanada’s response.
Late last month, the NEB issued a letter outlining some changes to the List of Issues it would consider in its hearings on TransCanada Pipeline’s (TCPL) Energy East Application. In response, TCPL has asked for and been granted a 30 day suspension on the proceedings in order to the possible impacts of this development on its application. This all follows a decision from earlier in the year in which all previous rulings on the Energy East pipeline (dating back to 2015 or so) were thrown out and the process was reset at square 1.
As a quick review, the Energy East proposal comprises two related applications in front of the NEB. One of these proposals is to convert about 3,000 km of existing natural gas pipeline (between Alberta and southern Ontario) to transport crude oil rather than natural gas. The second is to construct 1,500 km of new pipeline to transport crude oil the rest of the way from southern Ontario to the Canaport petroleum terminal southeast of Saint John, New Brunswick. The fact that the proposal includes an asset transfer from natural gas service to crude oil service is important, and I come back to it below.
The first major stumble for Energy East came earlier this year, when it was announced that the process would be forced to re-start from scratch. NEB Panel members Peter Watson and Lyne Mercier were accused of having a conflict of interest from meeting privately with a paid TCPL consultant to discuss public opinion around Energy East. At that point the initial NEB panel had already made decisions on the completeness of the application, the list of participants for the hearing and the list of issues that would be included in the NEB’s environmental assessment of the project.
Due to the conflict of interest, another panel was convened to replace the compromised one, and the decision was made to restart the whole process from scratch.
As a part of the restart the new panel set out to determine the list of issues to be covered. In May it released a draft List of Issues, soliciting public input. In response the NEB received and reviewed around 820 submissions (about 120 original submissions and 700 form letters). As expected, many of these letters referenced greenhouse gas emissions (among other aspects) as a critical item to be added to the NEB’s draft List of Issues.
This brings us to last month’s letter in which the NEB itemizes four new additions to the List of Issues for Energy East:
- Consideration of greenhouse gas (GHG) emissions
- Impact of GHG laws and policies
- Potential effects of power lines
- Potential effects of project-related marine shipping
Issues 3 and 4 make perfect sense to me and they warrant inclusion in the process. These are exactly the type of issue that public consultation is intended to discover. In the NEB’s own words, it “…considers the public interest to refer to a balance of economic, environmental, and social interests, including human health, that changes as society’s values and preferences evolve.” Public consultation tells the NEB (and the project proponent) how society’s values and preferences are changing. The project proponent (TCPL) cannot be expected to anticipate which aspects that might conflict (or support) the public interest, this is why we have the NEB and also why the NEB conducts this type of consultation.
With that said, I am concerned by issues 1 and 2. I want to be clear here, I’m not concerned in a “why include these issues?” way. My concern is really related to the question “how are these issues going to be included?”
I completely understand why the public called for these issues to be added and why the NEB felt they were appropriate to include. These additions should not come as a surprise to anyone who familiar with the Canadian oil and gas industry. In May 2016 the Major Projects Management Office mandated that Environment and Climate Change Canada, in cooperation with the NEB, would “Assess the upstream greenhouse gas emissions associated with this project and make this information public.” It does not seem unreasonable that TCPL, or any other pipeline proponent, should be required to provide estimates on the potential environmental damages caused by a project. However, the NEB needs to exercise sound judgement in how (or even if) information on indirect GHG emissions will affect its decisions on this and any future pipeline applications that come before it.
Canadian economists (or at least the majority of us) tend to sound like a broken record when we talk about policies to reduce GHG emissions. I will take this opportunity to reaffirm my place in the chorus: Carbon pricing is among the most efficient (lowest economic cost per tonne) means of reducing emissions.
Several provincial governments and now the Canadian federal government have taken this advice to heart. The Alberta Progressive Conservative government under Premier Ed Stelmach introduced Canada’s first carbon price in the form of the Specified Gas Emitters Regulation in 2007. In 2008, Alberta was leapfrogged by a much broader carbon price in the form of BC’s broad-based carbon tax introduced by the BC Liberal Party under Premier Gordon Campbell. More recently the Alberta NDP under Premier Rachel Notley is implementing a more BC-styled broad carbon tax and the federal Liberal government under Prime Minister Justin Trudeau has announced that there will be a federal backstop essentially forcing all provinces to have some form of emissions pricing in place by 2018.
This means that rejecting a pipeline like Energy East in order to limit emissions would be an inappropriate use of the NEB’s regulatory authority. Within the context of the Federal carbon pricing backstop, Canada has already committed to using arguably the best available tool to reduce emissions, so what is left for the NEB to consider?
If I were advising the NEB on their List of Issues, I would argue that the first item on their list of new additions (consideration of greenhouse gas (GHG) emissions) is redundant, especially in light of their second new item (impact of GHG laws and policies). A caveat here is the existence of unpriced emissions. In general, even a broad carbon tax typically only covers combustion emissions so there may be scope to separately consider emissions that are not covered by conventional carbon pricing. However even here, other federal and provincial bodies are in the process of setting formal policies. It is also worth noting that for pipeline related emissions, non-combustion sources are likely to be a fairly small proportion of total emissions.
Basically, the NEB does not need to directly consider any of the priced GHG emissions resulting from a pipeline’s approval, since it will already be considering these emissions indirectly through its consideration of GHG laws and policies and in fact, more generally, through its usual consideration of the business case for the pipeline (which now including the pricing of emissions).
As part of the NEB’s process, the project proponent needs to show that any new facility will be used and useful (or some variation on that language). This is a general tenant of the NEB’s hearing process for new facilities and is in fact enshrined in their governing legislation. Quoting from section 52.2 of the National Energy Board Act:
(2) In making its recommendation, the Board shall have regard to all considerations that appear to it to be directly related to the pipeline and to be relevant, and may have regard to the following:
(a) the availability of oil, gas or any other commodity to the pipeline;
(b) the existence of markets, actual or potential;
(c) the economic feasibility of the pipeline;
(d) the financial responsibility and financial structure of the applicant […]
(e) any public interest that in the Board’s opinion may be affected […]
Given the existence of carbon pricing in Canada or expectations that other jurisdictions we export crude oil to might impose similar policies, we might expect a reduction in demand (or supply) for western Canadian crude oil that would be transported on the Energy East pipeline. In that case, the effects of carbon pricing would show up in (a), (b) and (c) and don’t need to be considered separately (under (e)).
While the NEB has not yet provided much detail on how they will consider greenhouse gas emissions or the impact of GHG laws and policies, what concerns me is their statement that “In considering such indirect GHG emissions, the Board will focus on the quantification of incremental upstream and incremental downstream GHG emissions, as well as incremental emissions resulting from third-party electricity generation.” If the NEB is concerned with quantifying these emissions, that may mean they intend to quantify the total cost of these emissions (using either an explicit dollar value, or some other normative value which will be implicitly weighed against other aspects of the proposed project outcome). But, the federal backstop carbon price ensures that this cost actually exists and will be paid by a combination of firms, consumers and the project proponent itself. The imposition of a carbon price takes what was an externality (an environmental cost faced by the general public as a side effect of the project) and turns it into a cost that is directly faced by firms. If the GHG emissions were not priced they would remain a true externality and would therefore be worthy of direct assessment in the NEB hearings. But, if the externality is priced, then it becomes part of the business case faced by firms actually involved in the application (TCPL, its shippers and their customers or suppliers).
Last week, TCPL asked the NEB for a 30 day suspension on its assessment of the Energy East pipeline in order to review the possible impacts of these developments. Some are speculating that TCPL may decide to scrap the application altogether. Could the introduction of GHG emissions to the List of Issues be the straw the breaks Energy East’s back?
I don’t think so.
If TCPL decides not to pursue Energy East further it will more likely be that the company no longer expects a favorable market for the project.
I mentioned above that a significant proportion of the Energy East proposal is an application to take a portion of TCPL’s mainline natural gas capacity and convert this to crude oil use. In March of this year, TCPL held a successful open season on its natural gas mainline adding an additional 1.5 petajoules per day of volume to that existing system (at long term contracted toll of $0.77/GJ/d). This is indicative that the natural gas mainline, underutilized in recent years, is experiencing something of a resurgence. Because the Energy East proposal requires a fairly dramatic reduction in mainline natural gas capacity, an improving market for the natural gas mainline means a higher opportunity cost (and by extension a weaker economic case) for Energy East.
Add to this the approval and likely construction of the Trans Mountain pipeline expansion, the resurrection of TCPL’s own Keystone XL proposal and persistently low oil prices post 2014, and it may be that converting increasingly popular natural gas capacity to crude oil service is not as attractive a proposition as it used to be.
Notwithstanding the quagmire that has befallen Energy East due to a full panel reset and an unprecedented (but not wholly unjustified) change to the list of issues for consideration, procedural changes may not be to blame should the proposal be abandoned.
If TCPL scraps Energy East, it is more likely a signal that the camel has been dead for some time, crushed by fundamental economic forces.
 The TCPL natural gas Mainline is actually multiple pipelines running in the same right of way. The proposal is to convert some of these parallel pipelines from natural gas to oil.
 NEB Letter dated August 23, 2017 [File OF-Fac-Oil-E266-2014-01 02] https://apps.neb-one.gc.ca/REGDOCS/File/Download/3321432
 For a particularly well-articulated argument see Trevor Tombe’s MacLean’s article on the subject. http://www.macleans.ca/economy/economicanalysis/blocking-pipelines-is-a-costly-way-to-lower-emissions/
 See for example the “Proposed federal methane regulations for the oil and gas sector” from May 2017, https://www.canada.ca/en/services/environment/weather/climatechange/climate-action/technical-backgrounder-proposed-federal-methane-regulations-oil-gas-sector.html
 The School of Public Policy has a forthcoming paper on the subject.
 NEB Letter dated August 23, 2017 [File OF-Fac-Oil-E266-2014-01 02] https://apps.neb-one.gc.ca/REGDOCS/File/Download/3321432
 This converts to 1.4 billion cubic feet per day. Compared to average a total available capacity of 6.4 billion cubic feet per day and an average 2016 throughput of 2.8 billion cubic feet per day. Suggesting that that mainline may be moving from a capacity utilization of about 44% in 2016 to as high as 66% in 2017 (numbers are approximate).