A Climate Test for Canada: Aligning energy project assessment with climate policy

The federal government is overhauling the National Energy Board (NEB), Canada’s pipeline regulator. As part of the NEB Modernization process, Environmental Defence commissioned a special report on how to design a “climate test”.   The climate test would ensure that major energy projects—like oil sands pipelines—fit within Canada’s climate commitments and make economic sense in a low-carbon world. On behalf of Environmental Defence my colleague and lead author Duncan Noble  and I explored what the details of a carbon test would look like. After reviewing the research and interviewing leading experts we concluded Canada’s needs a two part climate test.

Part 1: Include a climate test based on the economic viability of projects in a carbon-constrained world. This test would determine if the project is economically viable in a carbon constrained world. For a project to be economically viable, the long-run market price for the products it produces (e.g., oil or other fossil fuels) needs to exceed its long-run cost of production in a carbon constrained world. This part of the test would be based on best available global energy-economy-emissions models that include the future price of carbon and future supply and demand for oil and other fuels. This test requires a broader analysis of economic viability that considers market constraints and the effects of climate policy on the price of fossil fuels and production costs among other factors.

Part 2: Include a climate test based on carbon budgets. This test would determine if the project fits within a pre-defined carbon budget.  This requires a determination of national and sector carbon budgets in line with Canada’s 30 per cent GHG emissions reduction target (by 2030, from a 2005 base year) as well as the Paris commitment to limit global warming to 2°C/1.5°C.   This test would be conducted outside the NEB at a strategic level perhaps within a revised environmental assessment process or at a political level where broader stakeholder interests and sustainability impacts and benefits are evaluated.

To read the full report click on the white paper cover below.