Pathway to a Lower Carbon Economy –
One Year Later

(As originally appeared in CERI Commodity Report - Natural Gas,  November-December 2010)

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By James (Jim) Brown, Executive Director, Climate Change and Sustainability, Advisory practice, Ernst & Young LLP

Summary

Last year, as the world prepared to meet in Copenhagen in the ongoing process to negotiate a successor to the Kyoto Protocol, “Natural Gas: A Pathway to a Lower Carbon Economy”, featured in the November 2009 edition of this publication,1 explored the role of natural gas in North America’s transition to a lower-carbon economy. The past year was tumultuous; the European debt crisis worsened, Republicans gained control of the United States House of Representatives, and the global community was not able to conclude on a successor to the Kyoto Protocol. Despite these challenges, encouraging signs demonstrate that the first tentative steps towards the lower-carbon economy of the future are emerging on several fronts. Examples include a growing recognition of the importance of technology in reducing global greenhouse gas emissions, and increased awareness of the need to find the right balance between economic growth and environmental stewardship, while developing North America’s energy resources.

2010 – A Tumultuous Year

During 2010, much has changed, and at the same time some things have not changed. The outcome of the negotiations in Copenhagen was mixed, at best, and in the grand scheme of things, was overtaken during the course of the year as:

  • A deepening debt crisis in Europe took hold and led to bailouts in Greece and Ireland;
  • The economic and employment situation in the United States (US) remained somewhat precarious, with 9.8 percent2 unemployment in November, a 0.2 percent increase over October. Lacklustre economic performance, acrimonious debates in the US Congress over climate change, energy security, and the environment, a growing and vocal Tea Party movement, and apparent disillusionment with President Obama’s “yes we can” messaging, culminated in the Republicans regaining control of the US House of Representatives, and nearly winning the Senate, in the November mid-term elections.
  • On April 20, 2010, the Deepwater Horizon exploded and sank in the Gulf of Mexico. This tragedy, which resulted in 11 workers being killed, 17 injured, and the largest oil spill in US history, came only three weeks after the US Secretary of the Interior announced that offshore exploration and production would resume in the Atlantic,3 over the objections of environmental groups. The spill has since led to a significant decline in offshore drilling (see “US Gulf of Mexico Active Rigs” chart on page 20), as the approval process for new drilling is revamped by the US Administration; and
  • A growing recognition within the US, and internationally, that President Obama and the Democrats, who were not able to pass climate change legislation when they controlled the White House and Congress, are now facing a tougher scenario, in which the Republicans could frustrate attempts by the US Environmental Protection Agency (EPA) to regulate greenhouse gas (GHG) emissions by limiting program funding.

Indeed, some political pundits may well consider 2010 to be President Obama’s annus horriblis. No doubt some environmentalists were feeling that way about their 2010 when, during the UN Climate Change Conference in Cancun Mexico, Jun Arima, Japan’s Deputy Director General at the Ministry of Economy, Trade and Industry, publically confirmed that Japan “will not inscribe its target under the Kyoto Protocol on any condition or under any circumstances”.4 In the end, the international community did reach closure on what is being referred to as the Cancun Accord,5 which largely deferred the fate of Kyoto to the 2011 conference in South Africa, while at the same time reinforcing what was agreed in Copenhagen.

Moving Forward – An Update

“Natural Gas: A Pathway to a Lower Carbon Economy” questioned whether the global community could reach an agreement to curb anthropogenic GHG emissions without the major emitters, led by the United States and China, first agreeing to take action. What was seen in Copenhagen, and again in Cancun, is also expected in South Africa a year from now; without full participation from the largest emitting nations, regardless of whether they are developed or developing, a binding global agreement is unlikely.

As nature abhors a vacuum, many sub-national and national governments share this sentiment and are, individually or collectively, at various stages of designing and implementing systems suited to their own circumstances to reduce GHG emissions. On a broad scale that includes growing, and ever more comprehensive, GHG reporting requirements, which often require third-party verification, through to regulated systems designed to reduce GHG emissions which include:

  • US Regional Greenhouse Gas Initiative (RGGI);
  • Western Climate Initiative (WCI);
  • European Union Emissions Trading System (EU ETS);
  • Alberta’s Climate Change and Emissions Management Act;
  • British Columbia Carbon Tax; and
  • Ontario’s Green Energy Act, to name a few.

What is notable about each of these is that they have broadly “stayed the course” over the past year, at a time when the international community continues to try to reach a global agreement. In fact, in the case of WCI, voters in California rejected Proposition 23 which, if enacted, would have effectively stopped the implementation of California’s Global Warming Solutions Act (AB32), and severely hobbled advancement of the WCI.

In the 2009 article referenced earlier, four areas of improvement were identified to better exploit the benefits of natural gas, as the long transition to a lower carbon economy begins. These areas, which are aligned with the broad intent of various sub-national and regional regulatory systems, include the development of a natural gas dialogue, reframing the role of government, developing equipment standards, and establishing a technology fund. What progress has been made in each of these areas?

1. Canadian-US Natural Gas Dialogue

In light of the tumultuous year that 2010 was, it is not surprising that a joint Canadian-US natural gas dialogue has not yet developed. That does not mean, however, that the two governments were not collaborating. In April 2010, the Canadian and US governments announced car and light truck performance requirements that harmonized standards between Canada and the US.6 But a formal Canadian-US natural gas dialogue aimed at taking action on resolving public concerns about gas production, enhancing transmissions and storage infrastructure, amending taxation systems, promoting natural gas in the transportation sector,7 and advancing distributed heat and power, did not open up.

2. Role of Government

National, state, and provincial governments have become increasingly engaged in the debate over unconventional gas development. For example, in response to growing public concern about the exploration and development of Quebec’s shale gas resources, the Quebec Ministry of Environment’s Bureau d’audiences publiques sur l’environnement (BAPE) convened a series of public consultations on the development of shale gas. EY accepted an invitation to share the company’s view with the BAPE panel, and on November 16, 2010 Sonia Lacombe, Leader of Climate Change and Sustainability Services for EY in Eastern Canada, offered the following perspective:

  • Further exploration is required because the amount of natural gas that is contained within the region remains unknown, and hence it is questionable whether or not development is economic.
  • Exploration should be allowed to continue once regulators are satisfied that the exploration program is employing best technical practices.
  • If economically viable reserves are identified, an assessment of the economic benefits (including local, regional and provincial benefits generated through capital investments, job creation, taxation, and royalties), costs, risks, and risk management needs to be performed.
  • Engaging with stakeholders, and clearly communicating what the government has decided, why, and what the risks and benefits are, is needed to garner social acceptance of whatever decision is taken.

The debate about whether or not to develop unconventional gas and, if so, how to do it, often evokes strong emotions. In the end, a degree of balance between development and environmental stewardship appears to be the result. For example, in response to opponents of hydraulic fracturing, the New York State Assembly passed Bill A11443B,8 which suspends all hydraulic fracturing for natural gas and oil until May 2011, in order to ensure adequate review and analysis of the effects of this type of drilling on water quality, air, environmental, safety, and public health. Outgoing Governor Paterson (D) ultimately issued an Executive Order9 freezing any permits for highvolume, horizontal hydraulic fracturing until studies are completed by July 1, 2011, noting that hydraulic fracturing of conventional vertical wells has been performed in New York for 40 years without demonstrable environmental damage.

On a regional scale, the US Delaware River Basin Commission, a federal-state government agency consisting of the US federal government and the states of Pennsylvania, New York, New Jersey and Delaware, issued draft Natural Gas Development Regulations10 on December 9, 2010. These regulations established standards, requirements, conditions and restrictions to prevent, reduce or mitigate depletion and degradation of surface and groundwater resources and to promote sound practices of watershed management including control of runoff and erosion.

Taken individually, these steps (including, for example, mandating disclosure of “fracking” fluids11) can be seen as furthering the argument for and against unconventional natural gas development.

Collectively, however, these steps signal an emerging balance between developing important and valuable resources, and the need for environmental stewardship. They also signal an emerging (and welcomed) awareness that the use of natural gas, and other fossil fuels, have an impact on the environment, regardless of where it is produced, and that opens the door to a wider debate about the need to conserve, and the role that technology can play in achieving that goal.

3. Equipment Standards

In 2010, the Canadian government proposed wide ranging amendments to existing Canadian Energy Efficiency Regulations.12 These amendments include updated minimum energy performance standards (MEPS) as part of implementing the government’s Clean Air Regulatory Agenda, which was first published in 2006.13 While these regulations do not include anything like a “natural gas equivalency”, under which equipment performance would be measured relative to how GHG efficient it would be if the equipment consumed natural gas, they do represent a step forward in improving Canadian energy efficiency.

4. Technology Fund

The important role that technology plays in slowing, stopping, and reversing global GHG emissions continues to grow, and that point is illustrated by the fact that the word “technology” appears 97 times in the Cancun Accord,14 yet was only used twice in the Kyoto Protocol.15 It is reasonable to conclude that past overly ambitious expectations that GHG emissions could be reduced quickly and sharply, are being replaced by a more informed, pragmatic, and practical view that is based on an improved understanding that:

  • The cost of replacing older, less efficient, capital assets with existing lower carbon technologies before the asset has reached its normal retirement age, can have significant adverse economic impacts on the owners of those assets, as well as the local community who depend upon the facility for jobs; and
  • Developing, demonstrating, and deploying new innovative lower carbon technologies can, and will, take decades. Pricing emissions will accelerate technological innovation, as the entrepreneurial spirit of engineers and scientists will be focused on finding more efficient ways and means to use energy (with its associated emissions), as will government programs such as Scientific Research and Experimental Development tax credits.16 But other novel means of encouraging technological innovation have also been advanced, for example, Alberta’s Climate Change and Emissions Management Corporation (CCEMC). The CCEMC was established under the Alberta Climate Change and Emissions Management Act to fund energy efficiency, renewable energy, cleaner energy production, and carbon capture and storage projects. Funding is received from Alberta’s large industrial emitters that exceed regulated GHG emission targets, and choose the option to pay $15 per tonne of excess emissions to the CCEMC through the government of Alberta. As of June 2010, the CCEMC has provided funding for 16 projects, with a total cost of $71 million.17

Conclusion

“Natural Gas: A Pathway to a Lower Carbon Economy” concluded that our future will include a lower-carbon economy, but the transition will take decades, reflecting the need to gradually replace existing capital stock as it reaches the end of its life, with new lower-carbon technologies that, in many cases, are not currently economically viable. The past year, if marked for anything, will be seen as a year of emerging enlightenment during which the importance of developing, demonstrating and deploying economically viable lower-carbon technologies came into prominence. Coincidentally, the need to balance the environmental impact of unconventional natural gas development with its environmental and economic benefits became better understood by the general public and its governments. Progress is being made in advancing the use of natural gas as part of the transition to a lower-carbon economy, and central to that progress is an emerging recognition, among governments, that a balance needs to be struck between development, environmental stewardship, and sustainable economic growth.

Endnotes

1  Brown, James D., “Natural Gas: A Pathway to a Lower Carbon Economy”, Canadian Energy Research Institute Commodity Report – Natural Gas, November 2009.
2  United States Department of Labor, Bureau of Labor Statistics, Table A-1, “Employment status of civil population by sex and age”, December 3, 2010, www.bls.gov/news.release/empsit.t01.htm, Accessed on December 8, 2010.
3  United States Department of the Interior, “Preliminary Revised Program – Outer Continental Shelf Oil and Gas Leasing Program 2007–2012", March 2010.
4  “Japan stands firm on Kyoto in Cancun”, United Press International, December 2, 2010, www.upi.com/Science_News/Resource-Wars/2010/12/02/Japan-stands-firm-on-Kyoto-in-Cancun/UPI-44481291324499/, December 8, 2010.
5  “Outcome of the work of the Ad Hoc Working Group on Long-term Cooperative Action under the Convention”, UNFCCC, http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_lca.pdf, December 13, 2010.
6  www.ec.gc.ca/default.asp?lang=En&n=6F2DE1CA-1&news=F124D43E-8AAF-4435-8CB3-C7F37D6B8B54.
7  The “Promoting Natural Gas and Electric Vehicles Act of 2010”, S.3815, was tabled in the Senate. The Bill, which provided tax incentives, and other financial measures, to accelerate the adoption of  natural gas and electric vehicles, was withdrawn by co-sponsor Senator Hatch (R-Utah) who objected to funding this through increases in the Oil Spill Liability Trust Fund Levy.
8  New York State Assembly, http://assembly.state.ny.us/leg/?default_fld&bn=+A11443%09%09&Summary=Y&Actions=Y&Votes=Y&Memo=Y&Text=Y, December 10, 2010.
9  “Statement from Peter Kiernan, Counsel to the Governor”, New York State, December 11, 2010, www.ny.gov/governor/press/121110KiernanStmt.html, December 13, 2010.
10  “Natural Gas Development Regulations”, State of New Jersey, December 9, 2010, www.state.nj.us/drbc/naturalgas-draftregs.pdf, December 10, 2010.
11  Geman, Ben, “interior mulls policy on disclosure of gas ‘fracking’ fluids”, The Hill, November 30, 2010, http://thehill.com/blogs/e2-wire/677-e2-wire/131151-interior-mulls-policyon-disclosure-of-gas-fracking-fluids, December 13, 2010.
12  “Regulations Amending the Energy Efficiency Regulations”, Canada Gazette Part I, Vol. 144, No. 24, June 12, 2010, www.gazette.gc.ca/rp-pr/p1/2010/2010-06-12/html/reg4-eng.html, December 14, 2010.
13  “Government Notices”, Canada Gazette Part I, Vol. 140, No. 42, October 21, 2006, www.gazette.gc.ca/archives/p1/2006/2006-10-21/html/notice-avis-eng.html, December 14, 2010.
14  “Outcome of the work of the Ad Hoc Working Group on Long-term Cooperative Action under the Convention”, UNFCCC, http://unfccc.int/files/meetings/cop_16/application/pdf/cop16_lca.pdf, December 13, 2010.
15  “Kyoto Protocol to the United Natio ns Framework Convention on Climate Change”, UNFCCC, 1998, www.unfccc.int/resource/docs/convkp/kpeng.pdf, December 14, 2010.
16  “SR&ED tax credit eligibility”, Ernst & Young LLP, www.ey.com/CA/en/Services/Tax/Business-Tax/Business-Tax-Advisory/Business-Tax-SRED-Eligibility, December 14, 2010.
17  www.ccemc.ca/funded-projects, 14 December 2010.


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