Freeman Spogli Institute for International Studies Program on Energy and Sustainable Development Stanford University


January 26, 2009 - In the News

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David G. Victor, Director at PESD

Victor says President Obama may call for carbon fuel standard, Alberta oilsands producers concerned

Appeared in Canadian Business, January 26, 2009

Have you tried crossing the Canada-U.S. border lately? These days, it can be considerably more complicated than is the case in, for example, the European Union, which encourages international study and offers a free market for labour. As Ken Oplinger, the president of the Bellingham Chamber of Commerce in Bellingham, Wash., points out: "Recently, the folks working on that new rail-link in Vancouver needed extra help. So they brought in some workers from eastern Europe. But there were people just across the border who would have happily done that work for them."

Worse yet, many believe that since the 2001 terrorist attacks of 9/11, the border has "thickened"--wonkish talk for a border that's more stringently policed, and hence tougher and slower to cross. The Canadian Council of Chief Executives raises this issue regularly--most recently in an open letter from CEO Thomas D'Aquino to U.S. president-elect Barack Obama. Sarah Hubbard of the Detroit Regional Chamber argues that the U.S. focus on curbing illegal immigration "has resulted in significant problems moving goods and services"--particularly for the auto industry in the Detroit-Windsor corridor.

Clearly, when it comes to border issues, there's room for improvement. But talk of changing the relationship earlier this year didn't sound particularly progressive. During the U.S. primary election season, Obama said he'd use the threat of reopening the North American Free Trade Agreement as a "hammer" to negotiate "standards" for labour and the environment. He only ever discussed NAFTA in the vaguest of terms, however. Meanwhile, one of his top economic advisers, Austan Goolsbee, busied himself reassuring Canadian officials that his candidate's fiery talk was just rhetoric. Since the spring, such talk has died down; Obama even hinted in an interview with Fortune in June that renegotiating the 1994 treaty wasn't a top priority.

More importantly, in the campaign's aftermath, many on both sides of the border are realizing that American voters just elected a leader whose positions embody classic centrist Canadian values--affordable health care, fair treatment for labour, concern for the environment and a multilateralist foreign policy. In theory, that presents a significant opportunity to improve the relationship. North American policy expert Steve Clemons, of centrist Washington, D.C.-based think-tank the New America Foundation, believes Canadians can, in fact, expect a "revitalized" relationship with the United States under President Obama.

What would this "revitalized" relationship look like? Clemons didn't go into detail, and none of the members of Obama's transition team contacted by Canadian Business were free to speak. So we turned to Washington insiders for perspective on what an Obama administration would do on NAFTA.

Tiffany Moore was the assistant United States Trade Representative in the administration of George W. Bush. Now a lobbyist at Venable LLP, she says clues to Obama's outlook on trade are in his picks for key roles. "He's chosen Bill Richardson for Commerce, who is a free trader," says Moore. "But where you really figure out the policy direction on trade is his pick for USTR." Though Obama hasn't yet named his top trade rep, D.C. buzz centres on Xavier Becerra, a Democratic congressman from Southern California. Becerra voted for NAFTA but later said he regretted doing so. He's opposed other trade deals--but voted for the one negotiated in 2007 with Peru. Obama has also picked economist Lawrence Summers, a staunch free trader, as his top economic adviser.

So the outlook on trade is unclear. But many on the U.S. side of the border, including Hubbard of Detroit's chamber, think it would be "a real mistake" for Obama to wade into that issue, given the enormous value of the trading relationship. (A report earlier this year from the Canadian-American Business Council put annual bilateral trade at $597 billion.)

Another potential flashpoint is energy policy. Canada is the top energy supplier to the U.S., and both countries have a vested interest in keeping things that way. Two days after Obama was elected, Prime Minister Stephen Harper presented him with a comprehensive proposal on tackling climate change--while leaving the oilsands out of the discussion. Harper is clearly concerned that pressure from environmentalist lobby groups threatens the U.S. market for Alberta's dirty oil. He's right: such groups have found receptive ears in high places.

At a conference on clean technology in Washington, D.C., in mid-September, Obama's top energy adviser, Jason Grumet, indicated that the Obama campaign was considering a low-carbon fuel standard for the United States. (A low-carbon fuel standard evaluates the carbon content of a fuel from well to wheel, sets a bar for that fuel's carbon content, and requires that fuels distributed within that market not exceed that bar.) That, of course, poses an interesting challenge for oilsands producers, as emissions from synthetic crude are more CO2-intensive than conventional crude. "Absent the ability to sequester the carbon emissions during refining, the incremental carbon from oilsands crude would have to be offset by the sale of an equivalent amount of low-carbon fuels," Grumet told a roomful of clean-tech executives. "Depending on the stringency of the standard, the additional cost would diminish--and eventually eliminate--the market for high-carbon fuels in the U.S."

In December, David Victor, a Stanford law professor and one of those closely involved in the Obama campaign's policy discussions on the low-carbon fuel standard, confirmed it is "likely" to happen. "And it could be very harmful to the tar-sands," he acknowledged.

If proposed, however, such a policy will face stiff domestic opposition in the U.S. A report issued by the U.S. Chamber of Commerce in November, titled A Transition Plan for Securing America's Energy Future, specifically includes oilsands synthetic crude in its proposal. "To achieve energy security, there must be vigorous competition among a variety of fuels and technologies," the report states. On page 16, it urges the president and Congress to "expand...production of fuels from oil shale, oil sands, unconventional natural gas, and other frontier hydrocarbon fuels." The report explicitly recommends that Congress repeal Section 526 of the Energy Independence and Security Act of 2007, a law that currently prevents the U.S. government (including the military) from utilizing non-traditional transportation fuel sources, such as oilsands synthetic crude.

Even so, that lobby will come up against an equally formidable force: both the White House and Congress will be dominated by pro-environment Democrats in 2009. On Dec. 11, Obama named his energy team: Steven Chu, a Nobel Prize-winner for physics, as his energy secretary, and Nancy Sutley, deputy mayor of Los Angeles, as head of the White House Council on Environmental Quality. As former trade rep Moore points out, the outgoing chair of the House Committee on Energy and Commerce, John Dingell of Michigan, largely championed the automobile industry. Now, it's Henry Waxman, an environmentalist from California--the first state to set a low-carbon fuel standard.

In the face of such uncertainty, Alberta's government isn't taking chances. Also on Dec. 11, the province announced new measures to promote renewable fuels, including a standard requiring the province's gasoline to contain 5% ethanol and diesel to contain 2% renewables. According to environment ministry spokesman Chris Bourdeau, the province already legislated emissions caps for the largest polluters, in 2007. Those who pollute above the cap can, among other things, pay into a fund that will help finance more energy-efficient technologies. (So far, a paltry $40 million has been collected.) "We've also committed $2 billion to carbon-capture and storage projects," Bourdeau says--referring to the process by which carbon emissions are liquefied and buried deep underground.

Stanford's Prof. Victor applauds such efforts--in particular the technology fund. "Canada is one of the leaders in this area," he says. However, Victor adds, "if the U.S. starts to put limits in place, and that's a big 'if,' the current Canadian policies will not be viewed as adequate. There will be a lot of pressure on Canada to do more." That said, with the economic crisis uppermost in policy-makers' minds, Victor acknowledges that any effort to stiffen standards on greenhouse-gas emissions is going to take "a long time."

Clearly, the Obama presidency offers Canada an interesting prospect: an American neighbour run by a politician who, on many issues, is farther to the left than his Canadian counterparts. However, Obama's transition team and economic adviser picks demonstrate a wide range of positions on everything from NAFTA to Afghanistan. In theory, imaginative Canadian politicians should have plenty of room to retool the relationship in a more positive vein.

The downside is that the U.S. economy, technically in recession for the past year, is hemorrhaging jobs. And the number of trade skeptics in Congress continues to grow. According to public interest group Public Citizen, the fair-trade bloc in the House and Senate increased to 42 (from 37 elected in 2006) after the Nov. 4 federal election. They will face significant pressure from constituents in coming months to enact legislation that protects jobs. And constitutionally speaking, Congress is the body that decides what happens on trade deals. That means this bloc is potentially more significant to Canada's prospects than any of Obama's campaign rhetoric.

Not even these politicians, however, describe themselves as anti-trade. And no one has yet proposed erecting tariff barriers along the 49th parallel to protect jobs; doing so would put many more jobs, plus that $597-billion-a-year trading relationship, at risk. Which is why it's in everybody's best interests to ensure Canada and the U.S. keep the faith and "revitalize" the relationship--not "thicken" it further.

Topics: Business | Carbon capture and storage | Climate change | Coal | Energy | Energy security | Immigration | Natural gas | Oil | U.S. foreign policy | Afghanistan | Canada | Peru | United States | Western Europe