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Canadian Oil Sands: Energy Security and Climate Change Concerns Can be Reconciled, Says New CFR Report

May 21, 2009

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May 21, 2009—In the midst of heated debate over the future of the Canadian oil sands, a new report from the Council on Foreign Relations (CFR) says that prudent greenhouse gas regulations can safely limit emissions while allowing for robust development of the oil sands.

The report argues that oil sands production delivers both energy security benefits and climate change damages, but warns that both are often overstated. “For the near future, the economic and security value of oil sands expansion will likely outweigh the climate damages that the oil sands create,” it says, “but climate concerns cannot and must not be ignored, and will become more important over time.”  Policymakers, it emphasizes, must carefully balance the two concerns.

“Smart regulation can place a fair and reasonable price on the oil sands’ greenhouse gas emissions, providing the right incentive to reduce them,” says Michael A. Levi, CFR’s David M. Rubenstein senior fellow for energy and the environment and the report’s author, “but ill-conceived regulation could undermine U.S. and Canadian climate and security goals.” He argues that it is important to integrate U.S. and Canadian cap-and-trade systems, while warning against the risks of a Canada-only cap-and-trade scheme and against an ill-designed U.S. low-carbon fuel standard.

The Canadian Oil Sands: Energy Security vs Climate Change, the latest publication of CFR’s Center for Geoeconomic Studies, explores the energy security and climate change implications of expanded oil sands production, assesses the trade-offs between them, projects the likely impact of different policy measures, and makes recommendations for U.S. lawmakers on how to craft balanced policy.

In the contentious debate about oil sands—a massive but emissions-intensive source of oil— some argue that the United States should discourage the development of oil sands because its operations generate more climate-damaging greenhouse gas emissions than conventional oil production. Others argue that the United States should actively encourage their development because it would strengthen U.S. energy security with a supply of oil from a friendly and stable neighbor.

This report contends that both arguments are exaggerated—but neither is without merit. On the climate side, the report argues that the development of Canadian oil sands are is not the “climate catastrophe” that some claim. While oil sands’ life cycle greenhouse gas emissions—those entailed in production, transport, refining, and ultimate use—are greater than those associated with conventional oil, Levi points out that the total emissions from oil sands production in Canada are equal to less than 0.1 percent of the global total—“a small piece of the [global] emissions picture.”

Levi assesses six dimensions of energy security, including oil prices, vulnerability to supply shocks and terrorism, and wealth transfers to hostile states. He concludes that even while “the energy security benefits of robust Canadian oil sands production are real,” the Canadian oil sands are not central to energy security. “Because oil is essentially traded on a global market, [the security benefits of oil sands are] not as large as some might intuitively assume. Oil sands exploitation will not fundamentally change the global oil picture.” Nonetheless, the report finds meaningful benefits from oil sands in moderating global oil prices and in cutting damaging wealth transfers.

The report emphasizes that global economic conditions and Canadian policy will remain the major factors shaping the oil sands’ future. But because the United States is the natural destination for oil sands products, U.S. policy will be important. It urges U.S. policymakers to balance its energy security and climate goals by working with Canada to promote strong incentives to cut the emissions associated with each barrel produced from the oil sands, without directly discouraging production itself.

Levi argues that U.S. policy should center on four basic elements:

•    “Link U.S. and Canadian cap-and-trade systems: Fair and stable carbon pricing in Canada would help both countries reap the benefits of the oil sands while mitigating their damages. Linking the cap-and-trade systems that are likely to evolve in the two countries is the best way to do that. The United States should also ensure that Canada is able to initially provide a small number of free emissions permits to oil sands producers. This would mitigate a risk of allowing carbon pricing to raise world oil prices (delivering windfalls to low-cost producers) while maintaining most incentives for oil sands operators to cut emissions.”

•    “Tread carefully with any low-carbon fuel standard: The United States should design any low-carbon fuel standard—an increasingly popular potential regulation that would require specific cuts in the average emissions associated with every unit of transportation fuel—so that the oil sands, which should already face a reasonable carbon cost, are not penalized again (and perhaps much more heavily) for their higher emissions. An ill-designed scheme could burden the oil sands (along with several other U.S. oil sources) in ways that would damage U.S. energy security without providing commensurate climate benefits.”

•    “Focus U.S. technology support on higher-payoff areas: There may be pressure for the United States to provide funds for research, development, and demonstration efforts in carbon capture and sequestration (CCS) or nuclear power for the oil sands. While basic technical cooperation is always valuable, these would generally not be U.S. dollars well spent. The scale of the other energy and climate problems facing the United States demands that U.S. energy innovation support focus elsewhere, including in CCS for power plants (a substantially distinct problem) as well as in renewables, transmission, and efficiency.”

•    “Resist the misuse of other U.S. environmental regulations to constrain oil sands: So long as the oil sands are expected to face a fair carbon price, the United States should resist attempts to use U.S. environmental regulations to block permitting of oil sands-related pipelines or refineries on climate grounds. Some may also try to use such regulations as a back door to dealing with the local social and environmental effects of oil sands development in Canada. Decisions on how to deal with these local effects —many of which can be disturbing—should be made by the affected communities in Canada rather than forced by outside U.S. action. The direct effects of pipelines and refineries on communities in the United States should be dealt with on the same basis as the effects of other oil-related infrastructure.”

For full text of the report, visit: http://www.cfr.org/canadian_oil_sands/

Michael A. Levi is the David M. Rubenstein senior fellow for energy and the environment at CFR. He is director of the CFR program on energy security and climate change and was project director for the CFR-sponsored Independent Task Force on Climate Change. Levi was previously fellow for science and technology at CFR, and, before that, a nonresident science fellow and a science and technology fellow in foreign policy studies at the Brookings Institution. He is the author of two books, On Nuclear Terrorism and The Future of Arms Control, and is a frequent contributor to newspaper opinion pages and magazines. Levi holds a BSc from Queen’s University (Kingston), an MA in physics from Princeton University, and a PhD in war studies from the University of London (King’s College).

Council Special Reports (CSRs) are concise policy briefs that provide timely responses to developing crises or contribute to debates on current policy dilemmas. CSRs are written by individual authors in consultation with an advisory committee. The content of the reports is the sole responsibility of the authors.

The Council on Foreign Relations is an independent, nonpartisan membership organization, think tank, and publisher dedicated to being a resource for its members, government officials, business executives,  journalists, educators and students, civic and religious leaders, and other interested citizens in order to help them better understand the world and the foreign policy choices facing the United States and other countries.

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