03/06/2013 05:14 EST | Updated 05/06/2013 05:12 EDT

Oil Sands Industry Is to Blame for Keystone Mess

Nearly 50,000 people, young and old, rallied in Washington, D.C., on February 17 to urge the Obama administration to take meaningful action on climate change. The focus was one that directly affects their northern neighbours: the Keystone XL pipeline expansion. Keystone would link Canada's oil sands with refineries in the southern U.S., accelerating fossil fuel extraction and the associated climate change impacts. Although the project is considered a crucial part of Prime Minister Stephen Harper's energy superpower vision for Canada, Keystone is facing increasing pressure and President Barack Obama will likely kick it to the curb.

How did we get here? How did Canada's major industrial sector, propelled by its longstanding successful commercial relationship with the U.S., end up in a position where what was once a "no-brainer" project is now headed to pipeline purgatory?

The simple answer is that high-powered activism in the U.S. compelled the Obama administration to do a double take. Obama was clear on being elected in 2008 that action on climate change needed to happen. After the setback for cap-and-trade legislation in 2009, those concerned about potentially devastating global warming upped the intensity and turned Keystone into a lightning rod. It didn't help that the public often sees the oil sands as largely tailings and huge open-pit mines. Those images helped frame the ugliness of fossil fuel addiction and painted the region as a real-life Mordor that had to be cleaned up. Activists bet that a victory over Keystone would galvanize their base into an enduring political force that was missing from the cap-and-trade debate.

In his first official meeting with an international counterpart, U.S. Secretary of State John Kerry undoubtedly discussed Keystone with Canada's Foreign Affairs Minister, John Baird. An interesting twist emerged as the American ambassador to Canada stated that Canada had made the situation difficult. Faced with growing public concern about climate change, the American administration needed justification for approving Keystone.

Thanks to a decade of inaction, Canada could offer nothing of significance beyond a mealy-mouthed commitment to regulate oil sands emissions. But Secretary Kerry knows as well as anyone that talk is cheap. So Canada is left holding the bag, the victim of the American elephant playing politics with itself. With its position resulting in limited to nonexistent political blowback in the U.S., it has become easier to deny the project and thus hasten the decline of the Canadian oil industry.

It wasn't always this way. Back in 2007 the Conservatives threw their support behind an intensity-based emission system that would not significantly harm the robust growth prospects of the oil sands industry while still achieving GHG reductions. At the time, it appeared the Conservatives made the right political calculus; mounting environmental and international pressure on the oil sands revealed the need for at least notional GHG regulations as the best shield against punitive policy.

Furthermore, after Obama's victory in 2008, Prime Minister Harper's first statement was to develop a cap-and-trade plan aligned with the U.S., likely fearing reciprocity or being shut out of negotiations that could significantly affect our trade relationship, oil industry and the broader economy.

Just as this positive step was to be taken and negotiations between industry and the government were reaching completion, circumstances prevented the corner from being turned. Thanks to timing, congressional politics and vocal opposition from small interest groups, landmark legislation for a U.S. cap-and-trade system imploded. Canada's government got a reprieve while the fossil fuel industry basked in victory, confident its network of climate deniers and legislative obfuscators and American fossil fuel industry counterparts had thwarted U.S. climate action.

Since then, the government has revealed its true reluctance to do something about climate change. It has vilified carbon taxes, eradicated expert organizations like the National Roundtable on the Environment and the Economy, aggressively lobbied to emaciate fuel standards in Europe and proposed inadequate piecemeal GHG regulations that will not get the government close to its 2020 emission target.

All this while gutting existing environmental safeguards such as removing environment assessment triggers from the Navigable Waters Act and making joint review panels lame ducks by deferring their decision-making authority to federal cabinet as a not so subtle torching of the legislative framework that could slow oil sands development. Canada has since enjoyed the ignominy of worst performing developed country on climate action, ahead of only a pariah, a petro monarch and an eastern autocracy.

Oil sands industry's two-faced approach missed the writing on the wall

The oil sands industry couldn't have been happier. For a decade, the industry has flummoxed any effort to contain its expansion, thanks to considerable political access to federal politicians and lots of support from the government of Alberta.

The industry has two faces when it comes to action. It claims that it agrees with climate policy and supports a carbon tax, and it rolls out shiny new technologies that may one day be employed to lower emissions and water use and all the unseemly detritus. It then secretly lobbies against climate policy. It moved aggressively against B.C.'s carbon tax when it was introduced and ensured that gas producers received a huge subsidy by not paying for fugitive methane emissions. It lobbies against the low-carbon fuel standards proposed in B.C. And it never seems to be able to deploy any real carbon-saving technologies, such as carbon capture and storage, saying that the economics don't work.

Canadian oil barons now find themselves kings of a rapidly sinking island. The industry never had an end-game. Perhaps in failing to look past the next quarterly report, they neglected to understand that both climate and politics are changing. Climate policy is a certainty as the grim effects of our changing climate start to sink in. The industry had no real plan beyond delaying, willing regulations and policies away and hoping that the vast canon of science proving that fossil fuel combustion is causing climate change is somehow not true.

Instead of moving quickly to develop actual regulations and to point beyond some pittance of a payment they make to Alberta under its toothless regulations they are now exposed and at the mercy of President Obama.

The timing couldn't have been worse. Not only have the politics changed but the market has as well. There's growing production from the U.S. Bakken oil fields and a slackening demand for transport fuels. The U.S. is recovering into a new energy consumption trajectory different from the oil-soaked, consumer debt-fuelled expansion of suburbs and personal vehicles. Now the continued growth in American oil consumption is being seriously questioned and some project the U.S. could be oil self-sufficient in the next 20 years. American imports of energy are down 14 per cent this year, signalling a fundamentally new relationship to Canada's energy exporters. The dynamics of the energy-security crutch -- the magic words used by the Canadian oil patch to obtain easy approval of pipelines, financing and projects -- seem to be significantly eroding.

The irony is that in successfully scuttling legislation over the past 10 years, the oil sands industry has set itself up for greater loss. The science behind climate change is indisputable and the need for policy responses will only intensify. Continuing to enjoy a free ride has been an effort in stopping the tide from coming in.

Turning the corner for real

Fortunately for the industry, it hasn't been triaged away as another industrial policy gone wrong -- at least not yet. Fossil fuels will continue to be a part of even an ultra-low carbon economy. The industry is well capitalized and innovative. It needs to move ahead of the ball and recognize that no amount of bullying and diplomacy from government will take the target off its back. Strict regulations on oil sands emissions need to be implemented without delay. The industry must shift from the business model of digging up carbon to developing carbon-saving technology, refining alternative fuels, paying for emissions and partnering with other industries and diversify into clean energy -- to move from producer of energy commodities to supplier of energy services.

The federal government needs to seriously rethink its climate change strategy. It places our country dangerously at risk of punitive policy such as tariffs for Canadian oil and other goods, not to mention the physical risk of climate change. The government needs to accept that the oil sands will have to scale back in size and scope as the world gets more committed to reducing carbon. The government's narrow view that the oil sands are the only driver of prosperity ignores the fact that we may be left with the world's largest reserves of a resource that nobody wants. The good news is that beyond the oil sands, Canada has abundant clean energy resources. If we act soon, there's no reason we can't achieve a clean-energy economy that would provide benefits for our economy, our environment and our future.