US Energy Policy Could Cost Canadian Tar Sands $800M

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At yesterday’s press conference between President Obama and Canada’s Prime Minister Stephen Harper, they said they were opening talks on clean energy. For the sake of its economy, in particular the tar sands industry, Canadians better hope the talks go well.

The Economist’s Intelligence Unit anticipates Canda’s 2009 GDP will drop 1.6%. With a drop like that looming, Canada wants to do all it can to keep trade relations open with the United States. (The U.S. economy is supposed to drop 2.5%.) So, of course much of the talks yesterday centered on NAFTA revisions and ‘Buy American’ provisions in the stimulus bill, but the bigger concern is Canada’s tar sands, which account for almost half of Canada’s oil production.

The tar sands give off two to three times the emissions of standard means of getting oil. While technology is being developed to cut back on this, it is still a long ways off. In the here and now, the U.S. government is preparing legislation that will add costs to the tar sands manufacturing.

Today Harry Reid confirmed that the next major piece of legislation that Congress will work on will be an energy bill. Yesterday, FBR Research reported that its sources say a heavy duty climate change bill will be rolled out in the first half of 2010. That bill will involve a $10 to $15 per metric tonne of carbon dioxide surcharge.

A problem for Canada is that lawmakers want to count emissions on a lifecycle basis according to Book. This means they’ll account for a machine’s full lifecycle of emissions. Canada’s government would prefer to be charged based on emissions intensity, which is emissions per GDP. This means if GDP goes up, so do allowable emissions.

Trying to account for the premium that would get slapped on tar sands production versus regular oil production is tricky. Depending on who’s counting and how it’s being counted–lifecycle, absolute, intensity–you could have it causing 15 per cent more emissions or 300 per cent more emissions. FBR used a 40% premium as a proxy for the yet to be written rules. That number came from a 2007 paper by U.C. Berkeley Professors Adam Brandt and Alex Farrell. With a premium like that, if tar sands are producing 1.5 million barrels a day it could cost an extra $800 million for Canadian oil sands industry (see table below).

Canada is the largest supplier of oil to the US, so anything that hurts the tar sands economy will also hurt the American economy.

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