Canadian energy policies

Official Name: Canada.

Summary: Canada is a leading global energy producer, ranking second among uranium producers, with the fourth-largest oil reserves. It is also a leader in natural gas exports and as a hydroelectricity producer.

The development of energy policy in Canada has been closely tied with establishing and preserving national identity and maintaining the balance of power between federal and provincial jurisdictions. Distributional powers between the federal and provincial governments were established during the confederation of Canada and the formulation of the constitution in 1867. Provinces retained control of natural resources and oversaw the generation, transmission, and distribution of electricity inside their geographic boundaries. The electricity sector is primarily vertically integrated and run by provincial crown corporations. The federal government has authority over general taxation and all aspects relating to interprovincial and international trade. Additionally, the federal government has the constitutional right to annul provincial legislation and take over provincial responsibilities if necessary.

With Canada’s confederation, energy policy focused on establishing a strong domestic coal sector by limiting coal imports from the United States. The 1879 National Policy imposed tariffs on American energy imports, giving domestic coal a competitive advantage. Nova Scotia provided eastern provinces with coal, while Alberta supplied the west, but Ontario continued to source its supply from Pennsylvania, despite the government’s attempts to limit American imports. Concerns over growing imports from the United States and energy security issues surfaced after World War II. The Canadian government responded by establishing new measures, such as transport subsidies, to promote domestic coal and overcome the geographical challenges for energy transport across Canada’s vast regions. However, overproduction persisted and worsened in 1947, when oil was discovered in Leduc, Alberta. Consequently, coal’s dominance in the energy mix fell, and demand for coal did not recover until two decades later, in the mid-1960s. By 2022, Canada produced 0.87 quadrillion Btus of coal, most of which was exported.

Meanwhile, nuclear energy was beginning to emerge with the passing of the 1946 Atomic Energy Control Act, which moved the management of uranium resources from the provinces to the state. In 1953, a feasibility study was conducted on the Canada Deuterium Uranium (CANDU) reactor design, initiating a Canadian nuclear program that would eventually become one of Canada’s major sources of electricity generation. Although the federal government oversees nuclear regulation, research, and development, as well as nuclear waste management and liability, provinces have the authority to decide whether to invest in nuclear energy.

Petroleum and Gas

The 1950s were an important incubation period for the petroleum and gas sector. Energy policies focused on developing this sector through the establishment of favorable prices and tax incentives. In 1959, the National Energy Board was created as a regulatory and advisory body to the federal government and retained federal jurisdiction over interprovincial pipelines and power lines, electricity exports, and energy resource marketing. Several years later, the National Oil Policy was formed to protect the local oil market from foreign competition. The federal and provincial governments promoted industry and economic growth in western Canada, but the uneven development imposed higher direct costs on other areas of the country, resulting in highly dispersed energy prices. Additionally, the federal government received limited revenues from the petroleum and gas industry because of low energy prices and tax incentives. Thus, provincial authority over natural resource management was reinforced, which enabled Alberta, Ontario, and Quebec to implement provincial energy programs for hydropower, nuclear energy, and oil extraction and refining.

Canada’s struggle with issues of national unity among the diverse provinces and territories and attempts to strengthen its independence from American political and economic influences continued throughout the 1970s. The Arab oil embargo in 1973 caused oil prices to spike in the global market, igniting a power struggle between the federal and provincial governments to control oil and gas prices and the increasing revenues. The federal government attempted to control prices by halting price increases on domestic oil for six months in September 1973 and restricted oil exports by placing export taxes in order to subsidize oil imports from eastern provinces and guarantee that Americans paid fair prices for Canadian oil. Western provinces responded through their own regulatory measures, placing controls on production and resource prices, such as setting royalties to retain more revenue. The federal government reacted once again by passing the Petroleum Administration Act, which gave the federal government greater authority over oil and gas prices and modified the Income Tax Act to prevent provincial royalties from receiving corporate income tax benefits. Additionally, the federal government established Petro-Canada in 1974 with the intention of influencing price regulations and policies, taking over foreign companies (including British Petroleum and Petrofina), developing offshore and northern oil exploration, and facilitating tar sand development.

While the power struggle was occurring on the home front, oil prices continued to increase on a global scale, placing further strains on attempts to control domestic prices. Within Canada, wealth was unevenly distributed, as the eastern provinces (Ontario and Quebec) had high expenditures from consuming more than half of the country’s oil needs, while Alberta generated high revenues as the country’s largest oil producer. At the cross-national level, wealth creation did not remain in Canada but flowed out to the Americans, who owned a large percentage of the oil and gas sector. Consequently, the National Energy Program (NEP) was created to “Canadianize” the oil and gas sector, increase oil independency, and retain a larger part of revenues in Canada. The federal government established taxes to fund Petro-Canada’s acquisitions and were partial toward non-Canadian firms when approving oil exploration grants.

The NEP invoked negative responses from oil-producing western regions in British Columbia, Alberta, and Saskatchewan. Financial resources were diverted from the western provinces, the strongest oil producers, and only selected Canadian energy firms benefited from generous government subsidies. Foreign firms were allowed limited participation in the energy sector, thus driving up Canadian ownership of oil reserves from 25 percent in 1980 to 40 percent in 1985. The price for Canadianization of the oil and gas industry was high. For instance, Alberta retaliated by holding back approvals for tar-sand and heavy-oil projects and took the federal government to court over gas taxes on exports, which eventually led the state to adjust the NEP price and tax measures to more closely match global prices. When global oil prices fell in 1983, oil and gas investments significantly dropped and the federal deficit increased partly from oil and gas subsidies, which eventually led to the abandonment of the NEP.

Despite tight federal and provincial government regulations, the energy sector was marred with instability, prompting a change in energy policy; 1986 marked the beginning of free trade negotiations between Canada and the United States, which gradually came into force in 1989. As a part of the Free Trade Agreement (FTA), tariffs were to be phased out over ten years, and both countries would have easier access to energy resources. Oil, gas, and energy prices were set at a low price between the partners, which fostered more energy trade by removing barriers to trade and guaranteeing Americans improved access to Canadian energy sources. The FTA was essential in providing much-needed investments for developing energy resources in remote regions of Canada.

In 1994, Canada joined the North American Free Trade Agreement (NAFTA) with the United States and Mexico, which was an expansion of the FTA. NAFTA reinforced the liberalization of energy trade, canceling tariffs and restrictions on energy trade products and setting price caps or ceilings on energy import and export prices. Each partner, however, was allowed to constrict energy exports in cases of supply constraints, conservation, and price instability, as well as for national security.

The 1990s were an era of market liberalization in the Canadian energy sector. Early in 1991, the federal government began to sell its shares in Petro-Canada, and in 2004 it sold the final 19 percent of its shares. Additionally, a number of provinces have unbundled the generation, transmission, and distribution responsibilities into separate functions, and some have also encouraged competition within the power generation sector, creating a market for private independent power producers. Furthermore, the Canadian natural gas sector significantly increased production as the market became more closely joined with the United States and Canadian producers explored opportunities there.

Hydro58.7%Coal17.2%Nuclear14.4%Gas6.2%Oil1.5%Biomass1.3% Wind 0.6%Waste0.0002%Solar PV0.0001%Tidal0.0001%Note: Total of 651,324 gigawatt-hours in 2008Source: International Energy Agency

Energy Consumption and Electricity Mix

During the early twenty-first century, the energy sector has developed into an important industry, generating 9.7 percent of the country’s gross domestic product (GDP) in 2021, or $226 billion, according to government data.

In terms of exports, energy accounted for 32 percent of the overall exports and was a top contributor to Canada’s positive trade balance. At the same time, Canada has made significant improvements in energy efficiency and shifts from energy-intensive industries to service-based sectors. According to the International Energy Agency (IEA), final energy consumption in the industrial sector leveled off between 1970 and 2008.

According to Natural Resources Canada, in 2019 secondary energy consumption, meaning domestic end-use, increased 20 percent from 2000 to 2019. The industrial sector remained the heaviest user in 2019, at 28 percent. Transportation comprised 22 percent, residential 12 percent, the commercial sector 9 percent, and agriculture 2 percent.

Primary energy consumption growth, although moderate, has been followed by a decrease in electricity emissions. Electricity emissions fell by 68 percent between 2000 and 2020 because of increased generation from non-emitting, or renewable, sources, as cited by Natural Resources Canada. The electricity generation mix in Canada depends heavily on renewable—especially hydro—and nuclear energy sources. In fact, among the top electricity-generating countries in the world, Canada ranks first in percentage of total electricity from non-emitting, or renewable, sources, with 83 percent of electricity coming from non-emitting sources in 2020. Further, renewable electricity generation in Canada grew 23 percent from 2010 to 2020, due to large increases in solar and wind generation. Coal, oil, and gas together comprised 17.5 percent of the electricity mix in 2020.

Hydropower has played a prominent role in electricity generation since the 1970s and has been the primary source of renewable energy, generating 60.2 percent of the electricity in Canada in 2020. That year, Canada was ranked the third-largest producer of hydroelectricity in the world, accounting for 9 percent of the world’s total hydroelectricity production. Hydraulic energy has been developed in regions with favorable conditions in British Columbia, Manitoba, Ontario, Quebec, and Labrador. Large hydroelectric dams have helped to keep consumer electricity prices among the lowest in developed nations.

Nuclear energy is the second-largest fuel source in Canada, comprising 14.6 percent of the overall electricity mix, partially because of the abundant uranium resources. Canada is the second-largest uranium producer. In 2021, it accounted for approximately 10 percent of the overall global output, according to Natural Resources Canada. All uranium resources are situated in northern Saskatchewan and supply fuel for nuclear reactors both in Canada and abroad.

Natural gas provided 10.7 percent of the electricity generation in 2020, as indicated by Natural Resources Canada. In 1990, gas production amounted to 325 billion cubic feet (99 billion cubic meters); by 2002, production had increased by 73 percent to 564 billion cubic feet (172 billion cubic meters). After 2002, gas production became flat, but Canada remained the fifth-largest natural gas producer by 2021 due to an increase in well productivity resulting from technological advances in drilling. In 2021, 46 percent of natural gas production was exported, mostly to the United States.

Coal was historically one of the largest fuel resources in Canada, though it has declined significantly during the early twenty-first century, comprising 5.7 percent of the total electricity generation in 2020. Coal-fired electricity generation in Canada decreased fully 54 percent from 2010 to 2020, as the generation of renewable energy sources grew amid environmental policies aimed at reducing overall greenhouse gases (GHGs). This was accomplished, in part, through Ontario's coal phase-out action plan, which began in 2001. Canada produced 46 million tons of coal in 2020, of which 57 percent was metallurgical coal used for steel manufacturing and 43 percent was thermal coal used for electricity generation, mostly in Alberta and Saskatchewan.

Conclusion

Canada has the fourth-largest oil reserves in the world, with around 166 billion barrels, and is expected to meet Canadian energy demands for the next two hundred years. Oil in Canada exists primarily in the form of crude bitumen, and 97 percent of the resources are found in oil sands in the Western Canadian Sedimentary Basin, which runs through Manitoba, Saskatchewan, Alberta, part of British Columbia, and Northwest Territories’ southwestern region.

However, pollution from oil extraction has been an environmental issue. The Canadian Association of Petroleum Producers has recognized that the oil sands emit 12 percent of Canada's total GHG emissions. Moreover, the oil and gas sectors together in Canada are responsible for about 27 percent of the country's greenhouse gas (GHG) emissions. Thus, the industry has made efforts to address the problem by developing new technologies to cut GHGs; emissions intensity per barrel decreased by 33 percent from 2000 to 2020 as a result of such technological improvements. In December 2023, the government proposed a cap-and-trade system to achieve net-zero emissions by 2050 by reducing greenhouse gas emissions in the oil and natural gas sector. If adopted, the program could begin in 2030.

Nonhydro renewable energy sources are becoming more important in Canada, with wind as the second-largest renewable energy source used for electricity generation. With the implementation of provincial renewable energy policies such as Ontario’s feed-in tariffs and coal phase-out plan as well as federal policies likes the Greenhouse Gas Pollution Pricing Act, biomass, biofuels, and solar power have also developed rapidly.

The quantity and mix of energy resources not only enhance Canada’s energy security but also form a valuable source of export revenues. Exports to the United States made up 91 percent, or $139.8 billion, of total energy exports in 2021, according to Natural Resources Canada. In 2021 alone, Canada exported 46 percent of the marketable natural gas production and 77 percent of its crude oil production to the United States. The United States is therefore highly dependent on Canadian gas and oil, importing 99 percent of its gas from Canada and 62 percent of its oil from Canada in 2021.

Over the past decades, Canada has developed its wealth of energy resources from conventional and unconventional sources, establishing one of the world’s leading hydraulic electricity sectors. Canada has also become a global leader in renewable energy production by investing in innovative technologies in the energy sector. Furthermore, as one of the largest suppliers of uranium for nuclear energy with one of the world’s largest oil reserves, Canada’s stable political and economic environment will continue to provide a secure source of fuel for global energy production.

Bibliography

Bregha, Francois. “Energy Policy.” In The Canadian Encyclopedia, 20 Oct. 2014, www.thecanadianencyclopedia.ca/en/article/energy-policy. Accessed 30 July 2024.

"Canada 2022." International Energy Agency, Jan. 2022, www.iea.org/reports/canada-2022. Accessed 30 July 2024.

Canadian Association of Petroleum Producers. “Oil Sands.” www.capp.ca/en/oil-natural-gas-you/oil-natural-gas-canada/oil-sands/. Accessed 30 July 2024.

Dewees, Donald N. “Electricity Restructuring and Regulation in the Provinces: Ontario and Beyond.” Presented at the CCGES Transatlantic Energy Conference, York University, Toronto, September 9–10, 2005. ideas.repec.org/p/tor/tecipa/tecipa-205.html.

Duquette, Michel. “From Nationalism to Continentalism: Twenty Years of Energy Policy in Canada.” Journal of Socio-Economics 24 (1995).

Energy Fact Book 2022–2023. Natural Resources Canada, 2022. www.nrcan.gc.ca/sites/nrcan/files/energy/energy‗fact/2022-2023/PDF/Energy-factbook-2022-2023‗EN.pdf. Accessed 31 Jan. 2023. .

Energy Information Administration. “Canada.” www.eia.gov/international/overview/country/CAN. Accessed 30 July 2024.

Hufbauer, Gary Clyde, and Jeffrey J. Schott. “NAFTA Revisited: Achievements and Challenges.” The Peterson Institute for International Economics, October 2005. www.piie.com/publications/chapters‗preview/332/07iie3349.pdf.

National Energy Board. Industrial Energy Use in Canada: Emerging Trends. Calgary, AB: National Energy Board, 2010.

Natural Resources Canada. Energy Efficiency Trends in Canada, 1990 to 2008. Ottawa: Office of Energy Efficiency, 2011.

Sinclair, Peter R. Energy in Canada. Don Mills, ON: Oxford University Press, 2011.