Why Barack Obama is bad for Canada

The new President’s ambitions could have a devastating effect on our economy

Why Barack Obama is bad for CanadaWhen Barack Obama met with Stephen Harper in Ottawa on Feb. 19, his message on the oil sands sounded like it could have been written in Calgary. He talked about the need for government investment in new technologies to cut greenhouse gas emissions, and he wanted to work together to achieve it. “I love this country and think that we could not have a better friend and ally,” Obama said. “And so I’m going to do everything that I can to make sure that our relationship is strengthened.” He added: “We are very grateful for the relationship that we have with Canada, Canada being our largest energy supplier.” Tom Corcoran, a former Republican congressman from Illinois and head of a Washington lobbying outfit for the oil sands and other “unconventional” fuels, remembers the day: “It was encouraging and made us feel good.”

But it turns out that Obama has a knack for making people feel good when perhaps they ought to be watching their back. “Then the realities begin to take root when you look at what is taking place here in Washington,” says Corcoran. The reality is that Obama is leading an aggressive effort to remake American energy policy with potentially severe consequences for the oil sands, and by extension, the Canadian economy.

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The oil sands currently export about half of their production of 1.2 million barrels per day to the U.S. Over the next 25 years, according to the Canadian Energy Research Institute in Calgary, that production will more than double, to four million barrels per day, with most of that oil going to the U.S. For Canada, that will mean 380,000 new jobs—and an additional $1.4 trillion in GDP, which will kick off $252 billion in tax revenues, more than half of which would go to Ottawa.

So Canada has a lot at stake in the process that Barack Obama set in motion by calling on Congress to pass climate change legislation this year. In the House of Representatives, where the American clean energy and security bill has been drafted, Democratic leaders such as Speaker Nancy Pelosi and California’s Henry Waxman, the chairman of the energy and commerce committee, have Alberta’s oil patch squarely in their sights.

Oil sands production emits up to 15 per cent more greenhouse gases than the production of conventional oil, not to mention the toll it takes on the landscape. These concerns have caused American policy toward the oil sands to undergo a complete U-turn under Obama and congressional Democrats. The Bush administration saw the oil sands as a strategic continental resource. George W. Bush dispatched his energy secretary to Fort McMurray, Alta., to see the operations for himself, and the 2005 energy bill even included a section to partner with Alberta to share information on developing oil from U.S. tar sands and shale. But the 1,000-plus-page climate change bill now wending its way through Congress is full of potential uncertainty for Alberta and Canada.

The legislation, written by Waxman and Ed Markey, a Massachusetts Democrat, calls for reducing U.S. greenhouse gas emissions by a whopping 80 per cent by 2050. It also includes a cap and trade system, and a requirement that utilities get at least 15 per cent of their electricity from renewable fuels. “Alberta has an uphill battle,” says Liz Barratt-Brown, a senior attorney for the environmental group, National Resources Defense Council in Washington, who has been closely watching the oil sands issue. “These are large reductions. They change the way we use fuels. You can see the writing on the wall for tar sands.” Even more distressing for Canada, the bill includes provisions that would punish imports from countries whose carbon regulations are deemed by Washington to be less stringent than those of the U.S.—making it a potentially much more broadly protectionist act with implications for other sectors of the economy as well.

Those measures are meant to address the potential “competitive imbalance” created for some U.S. industries by the costs of compliance with the new cap and trade regime. In order to protect domestic industry and to mitigate so-called “carbon leakage”—factories moving to countries with less stringent rules—the legislation calls for a tariff to be imposed on imports of manufactured products from countries whose carbon reduction regulations are deemed not to be “at least as stringent” as those of America. Canada’s environment minister, Jim Prentice, has denounced the measure as “green protectionism.” He told Maclean’s that he is “confident that Canada at the end of the day will have environment legislation that is commensurate with that in U.S.” However, he warned, the legislation leaves open the possibility of abuse. “Once you have protectionist authorities in the legislation, there is always the possibility for mischief in the application in a way that is prejudicial to Canada.”

The provision would apply to goods, ranging from steel and pipes to pulp and paper, from a nation whose rules are not deemed “commensurate” with that of the United States. Obama may be a self-proclaimed multilateralist, but the provision holds the potential for a unilateral economic wallop—or at least allowing Washington a very heavy hand in the writing of climate rules of its trading partners. Worries Prentice, “Like beauty and fairness, the definition of ‘commensurate’ will apparently lie in the eye of the American beholder.”

For as much as Canadians love Obama, is it possible he doesn’t love us back? His climate change legislation comes at a time of severe protectionist sentiment in Congress and an erosion of trust in Canada in response to “Buy American” provisions in the US$787-billion stimulus bill. When he met with Harper, Obama vowed that his administration would adhere to commitments in international trade agreements. But American municipalities and states have demanded only American-made steel and manufactured goods in their procurement contracts. Canadian municipalities voted this month to retaliate by excluding U.S. suppliers from municipal contracts unless the Harper government can negotiate an amended trade agreement with Washington within four months.

Notably, the Buy America provision was born in Congress, the same body that’s been tasked by Obama to work out the exact details of the climate bill. So the President’s position on Canada may be less antagonism than a case of not-so-benign neglect. Either way it’s worrisome for a country that relies on the U.S. for 70 per cent of its exports. “The problem for foreign countries is they need the President to exercise leadership and restraint on the legislatures. He’s still got to be a check on sectional interests,” says Chris Sands, a specialist in Canada-U.S. relations at the Hudson Institute, a Washington think tank. “I think there was a mutual exchange of goodwill in February, which was encouraging, but goodwill alone is not enough if it doesn’t translate into actions. Friends don’t cut each other off at the knees.” He adds: “We are running out of the honeymoon period with Obama both in the U.S. and Canada where people are willing to cut him slack. And the frustrations are beginning to build.” Or perhaps Canadians are getting what they asked for: a centre-left politician who promised to do something about climate change and even mused about amending NAFTA. After all, it was his opponent, John McCain, who in the middle of a presidential campaign trekked to Canada to give a speech defending free trade.

On a trip to Niagara Falls on June 13, U.S. Secretary of State Hillary Rodham Clinton met with Foreign Affairs Minister Lawrence Cannon and defended the Buy American provisions, saying the bill is “not being enforced in any way that is inconsistent with our international trade obligations.” Technically, she is correct. NAFTA does not preclude measures like the Buy American provisions. (It was the Canadian provinces, in fact, that chose not to bring government procurement into the deal in 1993.)

Clinton, however, said the administration would “take a hard look as to what more we can do to ensure that the free flow of trade continues.” And earlier this month, Canadian diplomats from across the U.S. were rounded up and deployed to Capitol Hill for a series of close to 80 meetings with lawmakers and staff members, armed with maps of individual states and congressional districts that showed precise numbers of American jobs that depend on trade with Canada. But the battle is certain to be a long one. For its part, the U.S. Chamber of Commerce wrote a letter to Obama arguing that U.S. water and waste-water manufacturers alone stand to lose US$3 billion if the provisions are enforced, while hundreds of steelworkers in Pennsylvania could lose their jobs because their employer produces some of its steel abroad. Meanwhile, at least two other bills in Congress are copying the language and its supporters want the provisions to remain intact long after the recession ends. Stephen Harper has called the increase in protectionism “the biggest risk we have to global economic recovery.”

The fact that the Democrats control Congress, and that they’ve historically been more protectionist minded, is part of Canada’s problem. The other part is that Canada is trying to promote what many Democrats consider “dirty oil” at a time when Washington is finally ready to do something about climate change. Henry Waxman, co-author of the pending climate bill, is a hard-charging Democrat whose southern California district includes Hollywood. He’s long been sounding alarms about the oil sands. After the Democrats took over Congress in 2006, he interpreted a provision of a 2007 energy bill to ban the U.S. government—America’s single largest consumer of fuel—from buying from refineries that use fuels producing more emissions than conventional oil. Initially, the law was aimed at preventing the U.S. Air Force from contracting to buy liquid fuels made from coal. But Waxman declared it also banned the U.S. government from purchasing fuel extracted from oil sands. Despite aggressive lobbying by Canada and Alberta, the law remains in place—while efforts continue to modify it. “It was a sneak attack,” says Corcoran.

The first draft of the climate change bill was even tougher on the oil sands. Waxman wanted to create a new national version of the bold new “low carbon fuel standard” regime that had been adopted in his home state. California law limits the carbon content of gasoline sold in the state—and requires that the “carbon intensity” of fuels be reduced by 10 per cent by 2020 with greater cuts thereafter. The cuts are achieved by blending the fuel with more expensive biofuels, or by paying for offsets. The rub for Alberta was that in measuring the “carbon intensity” of a fuel, California looked not only at the tailpipe emissions—which is the same for oil sands and conventional fuel—but took a sweeping “cradle-to-grave” approach from production to combustion. Because the energy-intensive production process of the oil sands emits more greenhouse gases than drilling for conventional oil, their “carbon intensity” is higher. Canada advocated against the law and Ambassador Michael Wilson wrote to Gov. Arnold Schwarzenegger to argue it discriminated against oil sands. But environmentalists say that’s the point. “In order for the standard to be effective, it has to discriminate. Otherwise you are missing a huge part of the carbon intensity,” said Barratt-Brown.

The California standard itself was relatively harmless since Alberta ships very little oil to California. (Most U.S-bound oil sands production goes by pipeline to the Midwest or the Great Lakes regions.) But more than a dozen states have already said they will follow suit. An early supporter of the policy was Barack Obama, who in May 2007, while still a senator, introduced his own legislation calling for a low-carbon fuel standard (it did not pass), and now applauds California’s efforts. When Waxman included the same standard in Washington’s climate change bill, Canada and Alberta lobbied fiercely against it. But Obama brought in all the Democrats on the energy committee to a personal meeting at the White House and pressed them to pass the bill out of the committee by the end of May. This time Alberta got a reprieve. The bill passed out of committee by Obama’s deadline, but the fuel standard provision was dropped in order to secure enough votes.

Nonetheless, the idea of a national low-carbon fuel standard is not dead. “The expectation is the Democratic leadership in the House will attempt to put the low carbon proposal back in the bill,” says Corcoran, the lobbyist. Whether there is enough support to pass it is unclear. “The issue is not going to go away. [Oil sands] are viewed as big emitters and any big emitters are going to be on a list in the mind’s eye of a lot of people,” says Sheila Hollis, a Washington lawyer who specializes in energy and has advised several provincial governments.

The potential impact of the U.S. legislation poses another dilemma for Canada: should it wait to see what its biggest energy customer comes up with before setting in stone its own legislation—or should it forge ahead independently, and be a leader not a follower? For Obama, climate change legislation is one of the hallmarks of his ambitious agenda. He has said he wants a climate change bill on his desk to sign in time for the mid-December United Nations climate change conference in Copenhagen, both to show that the U.S. is making progress and to pressure countries such as China and India to do their share.

Between then and now, the bill has to go through eight other powerful House committees, and the Senate has to draft, debate and pass its own legislation that will have to be reconciled with the House version. There is still a lot of horse-trading to be done, in other words, and even once a final bill is passed and signed by Obama, many of its provisions will be open to interpretation by various executive agencies, including the Environmental Protection Agency.

Some in the oil patch argue Ottawa should wait to see what Washington comes up with. “There are so many uncertainties still lingering over this issue that to race into a final design without seeing the impact on trade, commerce, and energy transfers would be premature,” says Murray Smith, a former Alberta energy minister and former representative in Washington who now sits on the boards of several energy companies. Gary Mar, Alberta’s representative in Washington, says it is crucial that the Canadian system is deemed comparable to the American: “The concern is that if you don’t have a system that is recognized as comparable then you get into the possibility of the U.S. putting up all kinds of trade barriers—things like carbon duties as material enters the U.S.” But at the same time, Alberta’s environment minister, Rob Renner, warns that Canada should “not get so far ahead of the U.S. in implementation of a climate change initiative that we become uncompetitive and impose significant costs on our economy.”

Prentice plans to have announced a greenhouse gas emissions plan for all sectors of the economy before the Copenhagen meeting. The details of the regulations will be worked out in 2010, with an eye on what the U.S. is doing, and will be implemented in 2011. “Those decisions will be made on the basis of Canada’s national interests. But we will be fully mindful of what is going on with our major trading partner. It is certainly the case that we will want to know what U.S. legislation looks like.”

Meanwhile, Alberta is engaged in a delicate task of trying to influence America’s domestic climate change legislation to go easy on oil sands while still trying to look green. Mar insists that Alberta is not flat-out opposed to cap-and-trade or even a low-carbon fuel standard. “We don’t necessarily object—it depends on what principles are set out in the bill,” he says. The best case scenario for Alberta would be a bill that does not single out oil sands or unconventional fuels for tougher treatment, and an outcome that would recognize Canada’s own efforts, whatever they end up being, as “comparable” to the U.S. system. So far, Rob Renner thinks the province is not getting a fair shake. “We believe we are not getting a fair reflection in the court of world public opinion about what we are doing here in Alberta. We are more regulated and responsible than what is being portrayed. But we can do better. And we are striving,” Renner told Maclean’s.

He wants American legislators to know that Alberta has a $15-a-tonne tax on CO2 and is putting the money into an emissions management fund aimed at developing carbon capture and sequestration technology, not to mention billions more in climate change initiatives. “Our premier is committed,” Renner says. “I’m committed to staying as visible as I can in Washington. We simply have to be cognizant of the fact that we are a relatively small sprocket in this giant wheel.”

Alberta has assembled a cavalcade of officials and hired lobbyists—including former American ambassadors to Canada—to track the issue aggressively as the bill moves through Congress. At a cost of US$40,000 per month, Alberta has also hired two firms—DLA Piper, with former U.S. ambassador Jim Blanchard, and MCapital, with Paul Frazer, a former senior official at the Canadian Embassy in Washington, to provide “strategic advice” and to help monitor the legislation. (Saskatchewan has also gotten in on the act, hiring David Wilkins, Bush’s ambassador to Canada, to watch its own oil sands and uranium interests.) This mobilization has drawn fire from U.S. environmentalists. “It’s discouraging to see them so actively engaged in promoting the tar sands when I think they know it’s incompatible and will undermine our efforts to address one of the serious threats our planet faces,” says Barratt-Brown, who recalls seeing Canadian and Alberta officials popping up at hearings all over Capitol Hill. But those on the other side of the debate say the Canadian effort is not nearly enough. “We need help,” says Corcoran. “I think it would be beneficial for the Canadian commercial interests to get involved in this battle. You have to get around to every legislator to educate them, answer any questions they have, respond to arguments in favour of low carbon fuel standards that Waxman and Pelosi and others are making. It’s hard work. It requires resources. I think it would be money well spent.”

Alberta’s and Canada’s representatives are currently touting two recent studies. One, by the respected Cambridge Energy Research, notes that the emissions profiles of the oil sands are comparable or better than some other sources of U.S. oil supply. And another report by the New York-based Council on Foreign Relations makes the case that the oil sands are a strategic source of energy and more secure than sources in the Middle East, Venezuela or Nigeria. It also makes the point that American economic interests are better served by importing oil from Canada—because for every dollar spent, more gets returned to the U.S. through cross-border trade and even direct profits. Smith argues that the U.S. will need to keep importing oil even as it transitions to a greater share of renewable sources: “Conventional oil supply in North America continues to decline by at least three per cent per year. You have to replace that and right now oil sands are still your best bet,” said Smith.

There are many other potential impacts of the legislation on Canadian energy producers. The climate change bill includes a provision to hand out free emissions credits to the coal industry, rather than auctioning them, which reduces the relative attractiveness of the clean-burning of natural gas over coal. (The legislation’s emphasis on developing solar and wind, however, could help natural gas, since both those sources can be unreliable and natural gas is used to cover gaps in generation.) Canadian officials are also fighting to get hydroelectricity from Canada approved as a renewable resource. “We have the capacity to bring on as much as 25,000 megawatts of hydroelectricity over the next 25 years from Newfoundland, Quebec, Manitoba, and B.C. It’s a significant contribution. We need to make sure that it is a continental regime that develops,” says Prentice.

Some observers say the Alberta oil patch needs to hedge its bets. “I think it’s a great opportunity for Canada to start exploring a Canadian energy market strategy,” says Murray Smith. “Right now we import 1.3 million barrels a day from places like Kuwait, Algeria, Norway and the North Sea. With the new pipeline structure going in, it is conceivable that we could send Alberta crude to Eastern Canada and we could work on our own carbon profile.” The other strategy, of course, is to explore new markets—such as sending oil to West Coast ports where it can be exported to Asia. “We think the U.S. is the natural market for Canadian energy exports. But if that good relationship was threatened in some way, and if it made sense in the market, then folks would find ways to export to other markets,” says Tom Huffaker, vice-president for policy and environment at the Canadian Petroleum Producers’ Association. That, of course, would mark a stark shift from the decades spent focused on the United States. It might also mean that U.S. climate legislation resulted in Canadian oil being sent to Asia by tanker, which would increase emissions even more. “You’d end up with an outcome that would be less economically efficient and less carbon efficient,” said Huffaker. “I think irony is a reasonable word for that.”