Thank you, Mr. Chairman and honourable committee members.
EPCOR commends the efforts of this committee to develop effective environmental legislation addressing greenhouse gases and other emissions. It's clear that the results of your efforts here will have great significance for the future of Canada and the Canadian electrical industry.
For those who are not familiar with EPCOR, I'll just briefly introduce our company. EPCOR Utilities Inc. builds, owns, and operates power plants, electrical transmission distribution networks, water and waste water treatment facilities, and infrastructure in Canada and now in the United States.
Our Canadian operations include facilities in British Columbia, Ontario, and Alberta. EPCOR's generation fleet includes power generation from wind, biomass, run-of-river, small hydro, recycled energy, gas, and coal. EPCOR has been named one of Canada's top 100 employers for seven consecutive years, and it is headquartered in Edmonton, Alberta.
The EPCOR Power LP has the largest market capitalization in its sector and owns plants across Canada and the United States. EPCOR owns 31% of the LP and is the manager of its operations.
In 2000, EPCOR Utilities Inc. and a number of other Canadian companies formed what we refer to as the Canadian Clean Power Coalition, or CCPC. The CCPC was formed to investigate technological developments that could lead to significant reductions in greenhouse gas and other air emissions from the continued use of coal for power generation.
Today we wish to discuss our company's perspectives on the implications of Bill and the challenges and opportunities for managing air emissions from the electrical industry within Canada. Further, we would like to update you on the progress that the Canadian Clean Power Coalition has made on the development and deployment of new technology. EPCOR strongly believes that a rational regulatory framework has the potential to deliver major reductions in Canada's emissions profile over the long term.
While we are discussing emissions at the national level, electrical generation is regulated by the provincial governments and in some cases owned by those same governments. Not surprisingly, the dominant fuel types used to generate electricity vary quite broadly across the country, largely due to geography and resource availability. For example, Alberta, Saskatchewan, and the Maritimes depend heavily on coal-fired generation. Those regions lack significant hydro opportunities. Alberta in particular has a more than 1,000-year supply of low-sulphur sub-bituminous coal reserves. British Columbia, Quebec, and Manitoba have been blessed with an abundance of hydro, again based on their specific geographies. Ontario has benefited from a diverse fuel mix, including a significant share from nuclear.
Canada's electricity generators are individually and collectively capable of delivering substantial emissions reductions in line with those envisioned by the act and this committee. But the reality is that the reductions will take place in stages over decades, rather than over a few months or years. As you've heard from other presenters to this committee, our industry is highly capital-intensive, with large facilities and significant life spans. In addition, facilities have little ability to switch fuels without complete renewal of the capital asset in place.
In the late 1960s and 1970s, Canada experienced a significant build of power generation that now forms a significant portion of the generation across the country. Much of that generation is fueled by coal and will reach the end of its economic life between now and 2020. As such, the country will require another wave of investment in baseload power generation to replace this aging infrastructure.
EPCOR and others in the industry are strongly advocating an approach that takes advantage of this capital stock turnover and promotes the adoption of what we call best available technology economically achievable, or BATEA, when a plant is retired. Replacing our older power plants with today's best available technology that is economically achievable will lead to a dramatic and immediate reduction in emissions from power generation and is part of the pathway to near-zero-emission power generation. I would never say zero-emission power generation
This approach is already working today. In 2000, EPCOR did an extensive review of the technological developments in coal-fired generation. This review then formed the basis of our technology selection for EPCOR's Genesee Phase 3, or G3, application to the Alberta Energy and Utilities Board. That project was approved in 2001.
G3 employs the best available technology that is economically achievable, and it has been generating 450 megawatts net to the Alberta grid since March 2005. Through the investment of an additional $90 million, EPCOR was able to significantly reduce air emissions from this state-of-the-art facility. In comparison to a number of coal-fired facilities that retired in 2003 and 2004, G3 reduced emissions of NOx and SO2 by 63% and 80% respectively. In addition, G3's supercritical technology resulted in an 18% reduction in greenhouse gas emissions per megawatt hour, compared to the provincial average for coal-fired generation in the province. So there was a significant reduction in GHG emissions. Such technology substitution has great potential to reduce air emissions in Canada.
Let me return to the Canadian Clean Power Coalition. I’m pleased to be serving as the chairman of this coalition as we work toward the deployment of new technology options for coal-fired generation. Integrated gasification combined cycle, or IGCC, is the technology we are pursuing today, particularly in Alberta.
The coalition recently began a 28-month front-end engineering design effort, or FEED, at EPCOR's Genesee site just west of Edmonton. This project is currently being funded by EPCOR and the Alberta Energy Research Institute. At the completion of the FEED study, coalition members will be able to evaluate the opportunity to build an IGCC plant in Alberta. Indeed, this study could accelerate the ability to deploy such technology.
Our hope is that an IGCC plant will allow us to have a relatively pure CO2 stream available for enhanced oil recovery, perhaps in the nearby Pembina oil fields. Such a plant would also improve air quality by dramatically reducing key air emissions. Compared to vintage coal-fired facilities, IGCC technology has the potential to lower emissions of NOx by 96%, particulate matter by 98%, and SO2 by 99%, for significant improvement in air emissions. While this technology is not commercially available at this very moment, we continue to believe it is important for industry and governments to keep investing in its commercialization.
In the context of the Clean Air Act, we believe it is important for government to continue its partnership with industry as we work on technology research and commercialization. It is equally important that the regulatory standards and targets set by government reflect an objective assessment of the best available technology that is economically achievable.
So where do we go now? While there is limited opportunity for companies like ours to make significant changes in the short term, we would support a policy environment that mandated near-term targets, as long as they weren't at the expense of longer-term real reductions. For many generators, the only option to achieve short-term reductions would be through the purchase of reductions from other sectors in the form of offsets. We believe the near-term target should ensure that power generators retain sufficient capital to invest in the commercialization and deployment of new technology like IGCC and carbon capture and storage.
As we mentioned earlier, we support a model for our industry that would require that a plant reaching the end of its economic life be replaced or perform to the same level as the best available technology that is economically achievable of the day. Genesee 3 is a perfect example of how this would work and the potential reductions that could be achieved.
In the short term, EPCOR would support the concept of a technology fund as one compliance mechanism for the electricity sector. You've already heard about this from TransAlta, so I won't spend any time on it, except to agree with TransAlta that this would be an effective way to overcome economic hurdles and accelerate capital stock replacement with new low-emission technologies.
Another compliance mechanism must be a robust domestic offset system and an active national emissions trading regime that allows real and verifiable international credits to be transacted. EPCOR is one of the most active Canadian participants in the offset market. We believe it can result in real and verifiable--third-party verifiable--reductions in greenhouse gas emissions. If it would be helpful, we'd be pleased to provide the committee with information on how we have approached offset trading to meet our Alberta requirements.
With such mechanisms in place, EPCOR could achieve the government's proposed target of a 65% reduction in greenhouse gas levels by 2050. We've already shown with Genesee 3 our ability to reduce NOx, SOx, and greenhouse gas levels significantly.
We are in agreement with TransAlta's estimation of the costs to the sector, so I will not address that further today.
EPCOR has demonstrated its commitment to deployment of new technology and leadership in searching for the next technology leap for our industry. We see tremendous potential for greenhouse gas reductions across the industry in the medium to long term. We are mindful that what could put those reductions at risk is a policy framework that is focused on short-term action in an industry that has a long-term timeframe at play.
We encourage this committee to focus on the medium- to long-term significant reductions that our industry can make. Don't sacrifice the long-term goal for the desire to show immediate action. Targets today must take into account the realities of the different sectors and their respective abilities to make changes in the short, medium, and long term. There is not necessarily one solution that fits all sectors.
Finally, we note that the bill does address provincial and federal equivalency. We applaud this, as it removes an additional source of uncertainty for our industry.
Thanks again for the opportunity to speak to you today. I'd be happy to answer any questions.
Thank you, and I thank the committee for allowing us to speak today. I know that you hear a lot of witnesses and that we must occasionally bore you, but I have to tell you that for us, it is really important to have a chance to be heard.
There's really only one policy issue we're facing, which is how to address climate change and keep jobs in Canada. That's the debate, and no one is saying that we should do one or the other. We all agree that we have to do both. We have to keep jobs in Canada, and we have to face climate change.
I am going to address this from three perspectives, all of which deal with jobs and the environment.
First, in the forest industry we have 900,000 jobs that depend upon healthy forests, so our jobs depend upon a healthy environment. And unless we address climate change in an effective way, those 900,000 jobs are threatened. In fact, they are threatened today by the pine beetle that's moving across Canada, and they are threatened by forest fires. So for the forest industry, this is not a future thing, it's not a theoretical thing. Effective action on climate change is necessary to have healthy forests, and without healthy forests, we don't have jobs.
We haven't waited for governments to show the way or to regulate us. Our industry has reduced its greenhouse gas emissions by 44% since 1990, seven times Kyoto, without regulation, and we intend to keep doing more. We've done a similar thing on air quality; we've improved it by 60%. We've moved away from fossil fuels, and now 60% of our energy comes from renewable fuels. We produce enough renewable energy in our mills--just in our factories, in the mills across Canada--to replace three nuclear reactors.
The forest industry, because we recognize how important nature is and how important the environment is, has not waited for regulation. We have moved, and we have moved quickly, and we have done what we had to do to reduce greenhouse gas emissions by 44%--seven times Kyoto. That's the first perspective on jobs and the environment.
The second is that any time we have a law, a regulation, or a penalty that drives production out of Canada, we are not helping the environment; we are merely displacing the gas emissions from Canada to a third country. In the forest industry, every time you close a mill, that slack will be taken up by a country that is not controlled by Kyoto--by Brazil, by China, by Russia--which can emit to its heart's content. We are not helping to address climate change by driving production out. What we have to do is keep production here in a cleaner way, and the only way to keep production here in a cleaner way is to retool industry. That is the policy imperative.
How do you retool industry quickly enough so the jobs stay here and the greenhouse gases go down? In the forest industry we've done the retooling by switching from fossil fuels to renewable fuels. In other industries there will be other solutions. But it's the speed of retooling that is the critical point in keeping jobs here and in addressing climate change.
We have some specific suggestions for speeding up retooling, and none of them is terribly surprising. What do you need to retool? You need mountains of money. You have to buy new equipment, so you need capital, and that's it. If you have access to capital, you can retool. Unfortunately, for manufacturing in general in Canada and for the forest industry, capital is scarce, because we're not making a heck of a lot of money. So any incentives that government can give--tax breaks or any sort of incentive--or any financial signal that makes it easier for us to accelerate buying the new equipment that would reduce greenhouse gases, will keep jobs in Canada and address climate change.
A system that has regulations without any accommodation for the need to retool, the need for capital, won't work. All it will do is drive businesses that are at the edge to China, and the greenhouse gases will come from there and the jobs will stay there. So we need a strong regulatory regime, but we need the regulatory regime together with a tax incentive system or some other incentive system that will make it easier for businesses to buy the equipment necessary to quickly retool.
On a regulatory regime, there are a few things that have to happen. The first is that reductions made since 1990 have to be recognized, and fully recognized. I don't care if the base year is 1990 or 2000, but whatever it is, the calculation has to respect what's already been done. Industries that have not waited for regulation should not be punished by the government by pretending everything we did doesn't count, and industries that have done nothing until government forces them should not be rewarded by having where they are now considered to be the baseline. It is a fundamental question of integrity in government regulation that those who have acted before regulation have their efforts recognized. Otherwise it sends a simple message to industry--don't do anything unless we force you, because if you do, what you've done will turn out to be the floor for further improvements.
Two, a regulatory regime must involve the capacity to trade credits and to offset, because without market mechanisms we won't find least-cost solutions. If it's detailed regulation, if it's the heavy hand of officials and bureaucrats, doing their best, trying to figure out how to regulate, finding the solutions, it will never work as well as having market mechanisms. We need a trading and an offset regime that allows us to find least-cost solutions. I promise you that industry will find the best and smartest way of doing it if there is an economic incentive, which trading gives us.
Finally, on equivalency, we don't care who sets the standard if it's an intelligent standard, and we don't care who enforces it, but we don't want the province and the federal government coming and tromping all over our mills doing the same thing. So set a strong, intelligent federal regulatory machine and let the provinces enforce it. Let the provinces set the regime and the feds enforce it. We don't care, but let's not have both orders of government doing the same thing. When we say “equivalency”, we don't mean that you recognize every single standard set by a province. If it's a federal standard, everybody has to meet it, but it doesn't have to be enforced by federal regulators. It can be. We don't care who enforces it, but we don't want two sets of regulators tromping through our mills. One is quite enough. We'll meet the standards without having all those guests.
I want to draw the committee's attention to a submission from the environmental groups. This is a strange document because it is agreed to by the Sierra Club--I can list who's on here--Greenpeace, Nature Canada, World Wildlife Fund, and Ecojeunesse. They've all agreed for the first time, so this is an amazing document. I want to tell you that the Forest Products Association of Canada agrees with it too. It might be possible, actually, to take it seriously and do it.
I also want to draw your attention to our annual report. In the back flap you'll find our sustainability report, which gives all the details of the forest industry's environmental performance--the pretty, the less pretty. We're holding ourselves accountable. We're being transparent. It talks not just about our 44% reduction in greenhouse gases, our 60% improvement in air quality, our 40% reduction in what goes to landfill, but it talks about all our environmental measures, and we're pretty proud of it.
Chairman, members of the committee, thank you.
Thank you, Mr. Chairman. Good morning, honourable members, and thank you for the opportunity that you've given Mr. Wishart Robson, from Nexen, and myself, to speak to the community on behalf of the ICON Group.
Since this is a complicated subject and my French isn't very good, my comments and my answers to your questions will be in English.
We've provided you in advance with a slide deck that you may want to follow through as I give my initial remarks, and you might refer to it in questions.
The ICON group is comprised of 14 companies whose names appear in slide 2 in your package. We are in the electricity generation, oil sands, industrial, and chemical sectors. These companies have a strong interest in carbon capture and storage, or CCS, as we refer to it. We're working towards creating a functioning, long-term, integrated carbon dioxide network—hence our name, ICON. That network would be able to handle large volumes of carbon dioxide at minimum overall cost.
ICON is not a single project. It is a set of policies, regulations, and ultimately private and public sector investments to make large-scale carbon capture and storage a reality.
CCS presents a tremendous opportunity for Canada, and we're here today to highlight the key considerations with respect to CCS as your committee considers modifications to the proposed Clean Air Act.
Slide 3 describes, in a very simple way, how carbon capture and storage works. Carbon dioxide from large industrial sources of any variety can be separated from the flue gas and compressed and dried for transportation. You can use a conventional high-pressure pipeline system to deliver that carbon dioxide hundreds or conceivably even thousands of kilometres. Then the carbon dioxide is injected into rock formations two to three kilometres underground where it will remain for thousands of years. We can also inject carbon dioxide into older, declining oil fields, and this technique, which would improve oil recovery and reduce the need for water injection, is called “enhanced oil recovery”, or EOR.
The IPCC from the United Nations has said, in a big report that was published in May 2006, I believe, that carbon capture and storage can be a safe, long-term, and cost-effective way to reduce carbon dioxide emissions.
CCS is very important for Canada as it's potentially the most substantive way for Canada to directly reduce greenhouse gas emissions within a five- to ten-year timeframe. This was indicated by the National Round Table on the Environment and the Economy in a report that was done last summer. Some of their analysis is shown in slide 4 of your deck.
CCS will assist with the transformation of our economy to a lower carbon energy economy. It's necessary to realize clean coal as a low environmental impact energy source, as Mr. Lewin referred to. It will allow for more sustainable growth of Canada's oil sands resources, and it will allow for the use of coal, coke, or bitumen, when gasified, to replace the limited sources of natural gas we have and to free those up for other uses in the economy.
In short, carbon capture and storage is a made-in-Canada solution. The investment will occur here, the carbon dioxide reductions will occur here, and the technology development can occur here. Canada can fulfill its potential as an energy superpower and lower its GHG emissions at the same time by deploying technologies like carbon capture and storage. Canada could become a world leader in this approach to GHG reduction.
Slide 5 shows a breakdown of the carbon dioxide emission sources in Canada. What we'd like to point out is that of the total commissioned sources in Canada, nominally half of them would have the potential to use carbon capture and storage as a technique. The other sources of emissions, which tend to be more widely distributed from residences and small commercial activities, as well as transportation, really aren't suited to carbon capture and storage. For those types of emissions, we look for energy conservation, for switching to lower carbon fuels, and other means to reduce carbon dioxide.
With carbon capture and storage, companies can achieve carbon dioxide reductions that are greater than their reasonable share of national targets, but we need a mechanism to reward and incent this behaviour. This will lessen the burdens for other sectors of the economy that don't have CCS available while ensuring that Canada can achieve meaningful reductions.
Adoption of CCS must also be balanced with Canadian competitiveness to ensure that investment remains in Canada. This is particularly true with respect to oil sands upgrading, which needs to be competitive with locations in the U.S., where this activity could alternatively take place.
The ICON study showed that there are benefits in planning a large-scale system for carbon dioxide capture and storage from the beginning and building it in phases. This is shown on slide 6. We estimate that up to 20 megatonnes, or 20 million tonnes, per year could be captured and stored by around the year 2015. This is equivalent to removing from million vehicles from the road, or about 25% of our light vehicle fleet in Canada.
ICON envisions an open access pipeline system that would connect multiple capture and storage locations. The map you see on slide 6 shows a conceptual routing--this certainly hasn't been decided--from source to end-use for the Alberta portion of the ICON network.
While carbon capture and storage will likely start in western Canada, including B.C. and Saskatchewan, we also think that our system approach is well designed to work anywhere in Canada. In particular, we believe there's potential to extend the concept to Ontario and the Maritimes, where you have similar large point-source emitters and suitable geology.
A network like this will be the key to the success of carbon capture and storage. When you compare it to individual projects, a network approach allows for economies of scale and optimized long-term efficiency, and, most importantly, it minimizes the environmental footprint of the pipelines and the other infrastructure that you would build.
However, such a scheme does require participation by various industry sectors and coordinated input from governments. Specifically, Canada's overall GHG reduction plan must work to encourage CCS.
Slide 7 talks about shared responsibility. A successful integrated system will include three elements: the large-scale capture of CO2 from industrial point sources; a pipeline system to connect those sources to end uses; and the storage infrastructure, and there are really two pieces to that. There are EOR fields that can be used as a customer base and to support some of the costs in the short term, but more importantly, direct storage that provides no revenue source to the system is going to be essential to achieving large-scale volumes of CO2 reductions.
Left to market forces, very little CCS will proceed, even with tightening CO2 emission constraints. The risk profile and economics of large-scale CCS are simply unfavourable. There's a transition role for governments to help enable this to take place in the future, and a true three-way private-public partnership with two levels of government is essential.
Slide 8 refers to some of the policies that you might want to consider as you're looking at Bill It's important that innovation be considered by both industry and governments when constructing the CCS infrastructure, and using both existing and new technology at a large scale while we wait for market mechanisms related to CO2 to develop.
The full range of policies and mechanisms should be considered to deploy this technology. Companies should retain the option to undertake CCS along with other compliant strategies. We don't want to see CCS mandated, and we don't want regulations that would discriminate based on technology sector or geography.
Companies that can embrace CCS should have no greater compliance burden than other sectors of the economy, and the policy must work to incent direct storage and CO2 capture. It's in these areas that we face significant hurdles.
Continuing on slide 9 with policy principles, companies that elect to use carbon capture and storage may be able to achieve reductions greater than their reasonable share of national targets. So a mechanism to reward and incent this behaviour is needed. Any trading or offset system that's designed needs to work to support this idea.
I'd also like to make the point that we're at the stage of deployment. Significant research has already occurred on some of this technology, and some of it is well understood. We believe any technology fund mechanisms that are proposed should be focused on large-scale deployment and not on direct research.
The government has a transitional role to help CCS right now. At these early stages, the risk is the highest and our understanding of the scale, technology, costs, and timing is the lowest.
Just in closing, then, the ICON Group has done a substantial analysis of how a carbon capture and storage network could function. We encourage the federal government to confirm CCS as a key part of Canada's environmental strategy and to make the ICON concept a priority.
I'd also like to make it clear that capture companies are willing to pay their fair share of the costs of CO2 reductions. We do not expect to profit from CCS if that is the chosen compliance mechanism for any company.
Developing an integrated CO2 network will be a transformative environmental step, one that can be most effectively taken as a private–public partnership. We would like the federal government to work with us and the provincial governments to develop the scope, size, and policy options that will enable ICON. Collaboration is essential, and the ICON companies are ready to engage the government in substantive discussions.
Thank you for your attention. I eagerly await your questions.
Thank you very much for giving me the opportunity to talk to you today. It's really a pleasure.
I'm going to start by giving you some general background on CO2 capture and storage. I'll give you a sense of what's changed, what's happened, and why people are talking about this seriously.
First of all, at the very top level, I see CO2 capture and storage not as a means to enhance oil recovery, although that is a perfectly useful thing to do, but principally as a way to manage the CO2 emissions from fossil energy, as part of a global climate strategy. The fact is that we have to essentially eliminate global CO2 emissions over the lifetime of my children if we're to avoid really dramatic climate change. It is simply not plausible that we can switch away from fossil energy at the pace we would need to, so the ability to manage the CO2 emissions from fossil energy systems while we also build non-fossil energy systems is a crucial component of our ability to cut emissions very quickly in the face of the climate challenge. That's the top-level view.
Fifteen, or now almost twenty, years ago, when I first encountered this topic in my days as a grad student at MIT, there were just a handful of papers and a few academics interested, and nobody took it seriously. Now we have a large amount of R and D and many serious projects. We have the IPCC “Special Report on Carbon dioxide Capture and Storage”—for which I was the most senior Canadian lead author—and a whole series of other reports.
But more than all that talk, we have two major projects that operate today that are putting CO2 underground beyond the business as usual. These have nothing to do with enhanced recovery. In both these projects, money was spent for the sole purpose of avoiding atmospheric emissions. There will be one more such project on line by the end of this calendar year, and there are a host of serious projects starting up around the world. In a meeting in the next month, it looks like the European leaders will commit to something like six of them. These are power-plant scale projects.
So a lot is happening on this topic. Why has it moved so fast? The answer is not innovation. We did not get from where we were fifteen years ago on this topic to where we are today by innovation. The reason we moved so quickly is that we realized that in fact CO2 capture and storage consists of an assemblage out of a toolbox of pre-existing technologies that already exist at the billion-dollar commercial scale. It's a new way to do the plumbing, a new way to think about fossil energy.
Let me tell you about some of the pieces that already exist in that toolbox. They existed fifteen years ago and they exist today, and they are the underlying reason why we can say with some confidence that we are ready to deploy this technology. It's not that we know everything, it's not that there are no risks, and it's not that the costs won't be big; it's that we're ready to go.
The reasons are the following. These are a list of the component technologies that already exist.
Gasification is not an experimental technology. There are 60 gigawatts—the equivalent of 60 king-sized coal-fired power plants—of gasification technology worldwide. A significant fraction of that is coal, and the rest is asphaltenes, petroleum coke, and other things.
There is hydrogen production from natural gas. It's roughly more than 1% of the global primary energy use, and the technology for capturing from modern plants is well understood and costed at the industrial scale. I'm not saying it's cheap, but the point is that you can build these things with industrial performance guarantees today.
The long-range transport of carbon dioxide over thousand-kilometre distances and its injection kilometres underground are things that already exist courtesy of the enhanced oil recovery world. This means you can go to many well-developed petroleum provinces in the world and get contractors to actually build you pipelines, build you injection systems, and deliver them at a cost that's well understood. This isn't theory.
What is theory is connecting all those components up in a new configuration, to enable use of fossil energy with minimal CO2 emissions. That's new, and there certainly are uncertainties, but the reason to take it seriously is that we're assembling this out of a toolbox of things that already exist at full and proven commercial scale.
The conclusion is that CCS in broad terms around the world is ready for large-scale deployment. There's certainly more R and D to do. R and D could reduce costs and reduce risks, but the best way to make progress in understanding this technology at this point is to cut some metal, to actually build some projects.
That's not to say there aren't real uncertainties. For example, while I say gasification is widely deployed, issues about gasifying the particular coals we have in Canada that have some particularities of, say, high sodium content mean there really are challenges—challenges like the folks at EPCOR would have to face—and uncertainties about how to manage projects. That said, this still is not fundamentally an R and D venture at this point. This is a venture of actually building real hardware.
That's the very top-level overview. What does it cost? In the electric sector in the centre of the big economies, based on costs of about five years ago and for large plants, a very rough answer is that if you compare a new coal-fired power plant with CCS to a new power plant without, you are looking at a cost differential of something like 2¢ U.S. per kilowatt hour. Those were the costs of five years ago, and they amount to about a 20% cost increase for consumers buying the electricity. That's quite a statement. That's saying that for the electric power sector, which, after all, is more than 40% of global CO2 emissions—it's the same number in the U.S., although less in Canada because we have so much hydro and nuclear—you could take a major bite out of emissions, going a long way to matching the climate problem for costs of that order. Those, as costs, we can really afford to pay as a society. In the U.S., that comes out to 0.75% of the GDP. That's a good news story.
The bad news story about these costs is that the costs of building large industrial have increased everywhere in the world, driven most of all by Chinese growth and growth elsewhere. Both the costs for steel and concrete and the cost for what we call EPC, or “ensuring procurement contracts”, have all gone up. I gather that the costs of EPCOR's new plant, which is basically a copy of their old plant that you heard about, are almost double what the previous costs were. The costs of CCS will similarly be higher if executed right now.
On the other hand, nobody knows what costs will do in the future. My guess is that we're not going to see that doubling go on forever. The Chinese economy will stumble, and we'll see those costs go down again or more EPC companies will enter the market.
One thing you have to distinguish here—and it's a challenge for policy-makers—is that you're going to get one answer from academics and another from industry guys, when the answer is that they're both right. The industry guys are telling you the correct numbers right now in Alberta, and they're very high. I'm telling you some longer-term, average numbers for larger plants in the U.S. Those are also pretty reasonable, and they're different for reasons that we understand.
It's important to say that the cost increases for things like this apply to a bunch of the competing technologies that we would install to reduce CO2 emissions as well. The costs of wind power installations, the costs of nuclear power plants, and the costs of a bunch of other large capital technologies that would have low CO2 emissions, have all increased in ways that are roughly proportional. That is a challenge for regulators who wish to move forward, but we must move forward if we're going to deal with the climate problem in a serious way.
I can say a little bit about risks and capacity. I think I'll just say the following things, and then I'm happy to take more questions.
Capacity for CO2 storage is not the issue. We have tons of capacity. There are legitimate and serious concerns about costs and risks, but I do not think they're legitimate concerns about capacity.
On local risk, the IPCC report said that with appropriate site selection, blah, blah, blah, the local health, safety, and environmental risks of geological storage would be comparable to the risks of current activities, such as natural gas storage—which is widely used around the world and has been for about a hundred years—enhanced oil recovery, deep underground disposal of acid gas, etc. The point is that this is a lot like other industrial things—and there's more to that statement than you might think. The risks of those activities are very small in well-regulated countries where there are effective environmental intervenors and the effective rule of law, like Canada.
It's quite surprising when you look at the actual fatality rates in this industry. The numbers are actually low compared to many other industries. The risks of those things in Russia or Nigeria are very big. What that tells you is that the risks are not directly related to the hardware but are related to the management systems around the hardware. That's an important lesson.
So if you ask me, as an academic, what the risks of CO2 storage are, my only honest answer is that it's up to you, the regulators, and it's up to us, the society. There's no closed open-and-shut academic answer. It depends on how and where you do it.
Let me make a few last comments on CCS in Canada. Canada had an early lead in the science and some of the technology around CO2 capture and storage. In my judgment, we have lost that lead. Without decisive government action, we will soon lose any chance to regain it. Around the world, I travel to visit companies and occasionally am asked to consult for companies and governments around the world. I see people getting ready to cut metal. In Canada, I don't, and that really is depressing. We've had a lot of talk. In some ways, I think the Kyoto process has stood in the way of Canadians thinking clearly about what to do.
In the U.S., there is a real sense that we are moving toward regulating CO2 emissions in a serious way. There is a real chance the bill will get through this session of Congress and be signed. In Canada, we're stuck with this bipolar argument. On the one hand, there seem to be people who really think we could meet something like Kyoto, which would need a 35% cut that would have to be executed in three years, because it's only three years until the 2010 midpoint. That would be essentially impossible in the modern developed economy. And then there are other people, like some of my neighbours in Calgary, who deny that we have a problem at all and don't believe the science. With that level of polarization, it's very hard to make sensible policy. Meanwhile, in some cases, the rest of the world is actually moving closer to doing it.
A few last comments. On policy mechanisms, my view is that the central policy mechanism must be something that leaves people free to innovate, and that means a strong price signal. I personally favour a carbon tax, but cap and trade mechanisms and many other mechanisms are appropriate things to do. That has to be the number one thing to do.
Fundamentally, individuals in their homes and companies know better how to cut emissions than you folks around the table do. The role of government is to set the targets in the form of cap and trade, or taxes, not to tell people precisely how to do it. Nevertheless, for large, lumpy capital cost technologies like this, you will need specific incentives. They may not be specific monetary incentives, but some combination of monetary and regulatory incentives to make them happen.
Finally, I have one comment in thinking about the people on my right and left here, in thinking about the Alberta carbon dioxide capture and storage story. The overwhelming political focus right now is on oil sands. Nevertheless, most of the emissions from Alberta's electricity sector are still much bigger than the emissions from the oil sands. The cost of squeezing those emissions out by CCS is lower for electric power companies in the Edmonton area than it is for oil sands companies, and that's a real challenge for policy-makers.
I'll answer your first question first.
The reason why I and I think many policy-makers in the U.S. now are rethinking taxes seriously is that when you look at what happened with the European emissions trading system, it certainly hasn't been a total failure, but even the people who are in the middle of creating it, folks like Michael Grubb, agree that it actually has been very ineffective in incenting real emissions reductions.
There are some real advantages to taxation because it is so simple. The objective here is, after all, not to beat people up; it's to actually help the environment, to reduce emissions. Taxes are a very administratively efficient way to put in even pricing all across the whole economy for carbon emissions to the atmosphere, to tell people they can't use the atmosphere as a free dumping ground, and to do that in a way that's stable.
Part of the problem with the European system is extreme instability in prices, and there are a bunch of political reasons for that, as you may know. For instance, the German government has suddenly backed out of really clamping down on emissions.
So I think there's no question that a cap and trade system can work, and a bunch of these things could work. The devil's in the details. We could make a cap and trade system that would work, but I think there are a lot of reasons to think a tax system might work. My sense of the people in Washington right now is that taxes used to be completely off the table, and now people are scratching their heads and saying, “Well, if we're actually going to swallow this bullet, there might be better ways to do it than cap and trade, and tax might be it.”
Remember, it could be revenue-neutral. A government could introduce a tax and, say, eliminate the GST, so on the day it was done it was revenue-neutral.
So I don't know exactly what this government will do in two days or two weeks, whenever it finally announces its policy, and I really don't care to speculate. I think the bottom line is that Canada has spent something like 10 years grandstanding about this with very little to show for it.
I'm not blaming the former government or the previous government; it really doesn't matter to me. My job is to help people make decisions that actually cut emissions.
That's a good question. Thank you.
The Canadian forest is mature. It's extremely mature. In fact, most of Canada's forests are older than nature would let them be because of fire suppression. A mature forest tends to be a net emitter rather than an absorber of carbon dioxide.
That being said, to the extent that we can create new forests, for example, through aforestation of areas that are marginal agriculturally or that are otherwise being used for less valuable purposes, the creation of new forests would sequester more carbon.
The other way we could sequester more carbon would be to manage our forests in a more intensive way to grow more volume, which of course the foresters have always wanted to do. In Canada, we've been a bit reluctant because we like to sustain the natural ecosystems rather than maximize carbon storage in the forest.
A third way of sequestering is sequestering in product. When a tree grows and we process it into paper, all the carbon is still in the paper, and at the same time a second tree is growing. So through a natural process of harvesting, regeneration of the forest, and product creation, you get sequestration.
That being said, Kyoto does not recognize sequestration in products, only in living material.
In the forest industry, our basic job is carbon management. We live inside the carbon cycle. We harvest, regrow, harvest, regrow. So for us, carbon cycle management is part of life.
The bottom line is, can we reach our Kyoto targets by depending on sequestration in the forest? The answer is no. We can reach our Kyoto targets by emitting less carbon dioxide, which requires massive retooling of industry.
That's a great question, and I wish I had a really great answer.
I think if you'd asked me a few years ago, I would have stuck to the idea that you just have to put in a price or a regulatory cap and trade. I have no big opinion between them. I think the reality in a relatively small country is that we do need to do some level of picking technologies. But we need to be very careful about how we do it.
One of the reasons I said the Australians and the Norwegians are essentially ahead of us in this technology now--and the Australians have actually had auctions for pore space--is because they're smaller countries and they just freely picked winners.
We have to be very careful about that. I certainly wouldn't advocate picking CCS as the overall winner, because I don't think it is. I think the potential for wind power, say in Quebec, is just huge. And there are many other ways throughout the economy that we can squeeze carbon out. CCS is by no means a magic bullet.
What I think we need to do is this. On the one hand, we ought not to pick winners, but on the other hand, we really do need to get over the hump and incent a couple of projects. I think we need to get industry to be the principal agent on those projects so an individual industry player really feels it has its survival, or at least the economic viability of that project, at stake.
There is a problem with government demonstrations. They sometimes demonstrate that technology is more complex than it really is. If industry really is doing something, they do it in a simple way, if they're watching their costs.
I think we should look at mechanisms that don't choose an individual winner such as ICON--not that I have anything against it, I think it's a great project--but that provide a prize for the first major projects to actually begin putting CO2 in the ground for storage.
For example, I've had conversations with some senior people at NRCan suggesting that we not have a reverse auction, but we actually say there is going to be a certain number of dollars per tonne for the first x million tonnes you put in the ground through storage. Then that number goes down. That automatically gives an incentive to first movers. The first movers get the high price and the later movers get the lower prices.
You also have to think about oil prices. There was a comment about the very large profits the oil companies are making. That depends on a fluctuating oil price. If you want to craft a policy that provides a prize for CO2 storage, you might want to have that prize go down as oil prices go up.
At this point we could see oil prices go back to $30 a barrel and the oil companies could have a much less profitable year. On the other hand, we could see nuclear weapons used at a Saudi terminal and we'd have a price of $200 a barrel. Nobody knows what is going to happen.
You need to put a policy in place that doesn't bind you, and the policy should essentially give less incentive at higher oil prices.