The following excerpt gives an overview of Canada’s exposure to global decarbonisation trends.
The full case study addresses the following issues:
• Exposure and risk
• Past and present efforts to decarbonise
• Trends and potential
• Cooperation with the EU
Canada is a major producer of oil, gas, and also coal. In 2019, it produced more than 5.6 million barrels of oil per day, equivalent to almost 6 percent of the world total and an increase of about 70 percent from 2009 levels. Canada’s gas production exceeded 170 billion cubic metres in 2019 (up from about 150 billion cubic metres in 2012), which represented 4.3 percent of global production. Coal production in 2019 amounted to about 50 million tonnes, down from 68.4 million tonnes in 2013 and accounting for less than 1 percent of global production (BP 2020; see also EIA 2019; CIA 2021). The production of fossil fuels plunged in 2020 in the wake of the Covid-19 crisis.
Canada also possesses signifcant fossil fuel reserves, especially oil and gas. Its proven oil reserves – primarily in the form of oil sands – are estimated to amount to nearly 170 billion barrels, which could support current production levels for another more than 80 years. They are the third largest in the world (after Venezuela and Saudi Arabia) and account for 10 percent of the global total.
Estimated gas reserves are less abundant and amount to 2 trillion cubic metres (BP 2020; see for other estimates: EIA 2019; CIA 2021). They could support current production levels only for another ten years. Canada also has significant reserves of shale gas that remain to be further explored. Proved coal reserves of about 6,600 million tonnes could support 2019 production levels for another 130 years (BP 2020; see also EIA 2019).
In accordance with its resource base, gas and oil supply a large part of Canada’s energy needs. Oil consumption exceeded 2.4 million barrels per day in 2019, equivalent to about 45 percent of production. Gas consumption amounted to about 120 billion cubic metres in 2019, up from about 90 billion cubic metres in 2009 and equivalent to about 70 percent of production. Coal consumption reached 13.4 million tonnes oil equivalent, down from almost 23.4 million tonnes oil equivalent in 2009 and equivalent to about 50 percent of production. Overall, about 62 percent of overall energy consumption is accounted for by oil and gas, about 4 percent by coal, about 24 percent by hydroelectricity, and the remainder by nuclear power and renewable energy other than hydro (BP 2020). Hydropower is the backbone of the electricity system, supplying around 60 percent of electricity consumption. Among the International Energy Agency (IEA) member countries, Canada has the highest energy supply per capita: total primary energy supply per capita in Canada in 2019 was 8.0 tonnes of oil equivalent versus an OECD (Organisation for Economic Co-operation and Development) average of 4.1 (IEA 2021).
Fossil fuel production and reserves display enormous regional differences across Canada. Gas, oil, and coal production and reserves are concentrated in the broader Western Canada Sedimentary Basin (in addition to oil production in the offshore oil fields in the Atlantic Ocean, which has been declining) and hence in Alberta (oil, gas, and coal), British Columbia (gas and coal), and Saskatchewan (oil and gas). By far the largest share of Canada’s proved oil (oil sands) and gas reserves are located in Alberta. Consequently, Alberta accounts for more than three quarters of Canadian oil and gas production. Energy exports are of great importance for Canada’s economy. In 2019, the country exported more than 50 percent of its oil production, about 30 percent of its gas production, and about half of its coal production. Shares of actual exports of production are even higher, as Canada also imports these fossil fuels (BP 2020).
Energy exports accounted for nearly a quarter of Canadian goods exports in 2019, with this share having fluctuated roughly between 20 and 30 percent since 2005, also as a result of price fluctuations (Government of Canada 2020a; World Bank 2021e; see Figure 7.1). The United States is Canada’s top energy trade partner. In 2019, the United States accounted for 90 percent (CAN$ 121.5 billion by value) of Canada’s exported energy products: 96 percent of Canadian oil and gas exports totalling over CAN$117 billion went to the United States. Most of Canada’s crude oil goes to the United States principally due to a lack of sufficient export capacity in Canada to send its liquids elsewhere. All of the country’s current natural gas exports go to the United States. Canada also imported energy products from the United States worth CAN$35 billion in 2019 (Government of Canada 2020a; see also EIA 2019).
The pressure to advance decarbonisation therefore depends to a significant degree also on the US demand for Canadian oil and gas.
Fossil fuels hence play an important role in Canada’s economy and government budget. Especially oil and gas industries are an important engine of the economy, with the overall energy sector (including electricity) accounting for about 10 percent of GDP (fluctuating somewhat with the oil price).
Fossil fuel exports accounted for less than 5 percent of GDP in 2019. The contribution of fossil fuels to the government budget was signifcant (but not dominant), accounting for more than 7 percent of all taxes paid by all industries over 2014–2018 averaging CAN$14 billion per year (Natural Resources Canada 2020). Government revenue for the fscal year 2018–2019 was CAN$332.2 billion (Government of Canada 2019). The sector employs approximately 280,000 people directly (and about 550,000 indirectly), accounting for 1.5 percent of total employment (Natural Resources Canada 2020).
Different from other fossil fuel exporting countries, Canada possesses a highly developed and diversified economy. Fossil fuel production and export are significant (especially, as mentioned previously, in Alberta, Saskatchewan, and British Columbia), but the Canadian economy has other significant sectors to build on (see below).
Canada has also provided significant subsidies for fossil fuels. Data on these subsidies are hard to come by.
Canada’s federal Auditor General in 2017 expressed frustration at his inability to gain access to government documents which would allow him to determine the extent of the country’s subsidies for the oil, gas, and coal industries.
The International Institute for Sustainable Development estimated that Canada’s annual fossil fuel subsidies – including tax breaks and direct cash – in 2013–2015 amounted to CAN$3.3 billion annually. Tax expenditures occurring at both the federal and provincial levels represent a combined minimum total of CAN$2.5 billion annually (CAN$1.6 billion at federal level), while direct spending includes budgetary transfers the Canadian government provides to producers of oil, gas, and coal (Touchette 2015). The International Institute for Sustainable Development found in 2018 that federal subsidies had declined somewhat in 2016–2018 compared to 2015 but that this decline was not the result of a subsidy reform and may not be lasting (also because subsidies interrelate with oil prices) (IISD 2018a). The Canadian government has also drawn criticism because a significant amount of spending for the recovery from the Covid-19 crisis went to the production of fossil fuels (Climate Action Tracker 2021).
Canada is, as a result of the significance of its oil and gas sector, exposed to variations in oil and gas prices to some extent. Declining oil prices after 2014 have left a mark on economic development. GDP per capita in constant 2010 US$ stagnated from 2014 to 2016 (at approximately US$50,000) and rose slightly to about US$52,000 in 2019, before declining to US$48,600 in 2020 due to the Covid-19 crisis. GDP growth slowed from 2.9 percent in 2014 to 0.7 percent in 2015 and 1.0 percent in 2016. GDP growth picked up with the recovery of world oil prices in 2017 (3 percent) but fell again to 1.9 in 2019 before a recession of minus 5.4 percent in 2020 as a result of the Covid-19 pandemic (World Bank 2021c, 2021d).
Accordingly, the government budget situation has also seen significant fluctuations. Canada’s public debt-to-GDP ratio rose from 85.7 percent in 2014 to 91.8 percent in 2016, before dropping slightly to 90.1 percent in 2017 and 86.8 percent in 2019 with the recovery of oil prices. The ratio jumped to 117.8 percent in 2020 as a result of the Covid-19 crisis (Trading Economics 2021). Given the diversification of the Canadian economy, oil price fluctuations have left their mark on economic development and the government budget but have overall remained manageable, as they could be balanced by other sectors of the economy.
Canada also harbours significant investments in oil and gas that may become ‘stranded’. Reflecting its resource base, Canada has a vast network of more than 840,000 km of oil and gas pipelines. Pipelines mainly serve to transport oil, natural gas, and liquefied natural gas from Alberta west to British Columbia, north to the Northwest Territories, east to Quebec, and south to the United States (Texas). Several major additional pipeline projects are under construction or in planning, including the Trans Mountain expansion and Enbridge’s Line 3 replacement project. Over the years, indigenous groups, environmentalists, municipalities, mayors, and labour unions have increasingly opposed and legally challenged new pipeline projects over fears of contamination and climate change (Hughes 2018; The Canadian Encyclopedia 2018).
After years of political controversy, TransCanada’s contentious Keystone XL project was abandoned by the developer in June 2021. In January 2021, during his first day in office, US President Joe Biden had revoked the permit for the pipeline issued by former president Donald Trump. The project would have significantly increased oil transport capacity to the United States at a cost of US$5–8 billion but faced severe criticism from environmentalists (Puko and Monga 2021).
Also beyond oil and gas pipelines, Canada is continuing to make considerable investments into fossil fuels. These in particular concern the production of oil from the large oil sands deposits, especially in Alberta. They also include investments in liquefied natural gas (LNG) terminals. In 2018, total Canadian energy assets amounted to CAN$685 billion (up 5 percent from 2017, mainly due to an increase in assets abroad in the United States and Mexico), of which assets worth CAN$452 billion (or 66 percent) were in Canada (Natural Resources Canada 2020).
The risk of stranded assets is far lower in the power sector. This is not least the result of the dominant role of hydropower in the Canadian electricity system.
About two-thirds of Canada’s total electricity production comes from renewables, and hydropower alone accounts for about 60 percent (with wind, biofuels, and solar providing for the balance).
Hydropower generated 384,600 GWh in 2018, with an emphasis on Quebec, Manitoba, and Newfoundland and Labrador. Nuclear power provided a further 15 percent of total electricity in 2018. Coal and gas provided the remainder and were concentrated in selected provinces, contributing to electricity production in particular in Alberta, Saskatchewan, and Nova Scotia (Natural Resources Canada 2020). Canada is one of the co-founders of the Powering Past Coal Alliance and has committed to a phase-out of coal in electricity production by 2030. In 2018, it adopted performance standards for coal and natural gas-fed power stations to this end. Accordingly, it plans to significantly increase the use of renewables (including wind and solar, but also further expanding the use of hydropower and biomass) in power generation (Oil Change International 2015; Hughes 2018; Climate Action Tracker 2021).