NEW YORK—Further development of Alberta's famous oil sands will be neither the climate disaster that activists fear nor the energy security panacea that proponents suggest it is, the Council on Foreign Relations concludes in a new report.

The reality of the oil sands in the international energy and climate picture suggests both the United States and Canada would be wise to develop climate policy in tandem, or at least link whatever independent cap-and-trade programs for greenhouse gases each government may develop, a researcher at the New York-based think tank says.

"There is a compelling case, even absent the oil sands, for harmonizing U.S. and Canadian carbon pricing schemes," writes Michael Levi, senior fellow for energy and environment at CFR. "The oil sands factor, in both its energy security and climate change dimensions, only makes that case stronger."

The simplest way to do this would be to allow cross-trading of emission allowances between two systems, leading to carbon prices that are roughly the same on both sides of the border, Levi says. A combined cap-and-trade system would be even better.

It is unlikely that Canadian oil sands can free the United States of its dependence on Middle Eastern oil, the report concludes. But as the only non-OPEC source with the potential for large production growth over the next several years, the tar sands have very strong energy security implications -- meaning U.S. policymakers should not impose any restrictions on their development through such means as low-carbon fuel standards or special import tariffs, Levi concludes.

The council's analysis suggests the oil sands are unique in that they hold the potential to reduce OPEC's revenues, thus weakening the cartel and those members that often undertake policies hostile to U.S. interests. If the oil sands could replace 2 million barrels per day of OPEC production, that would lead to a $70 billion per year cut in revenue to OPEC states, even with prices at $100 a barrel.

"If, over the long term, Canadian oil sands growth displaces production in places like Iran or Venezuela, or drives down the prices that such states receive for each barrel of oil they sell, it will weaken them," Levi says.

Importing more oil from Canada and less from the Middle East would also probably drive down the United States' current account deficit, the scholar writes. Due to the close proximity of the two North American countries and their tight trading relationship, money diverted to Canada to purchase energy is much more likely to be recycled back into the U.S. economy through direct purchases of goods and services than if that same capital is sent to Saudi Arabia and other OPEC states.

And despite fears by climate change activists that increased oil sand production has profoundly negative consequences to global warming, Alberta's massive reserve base contributes relatively little to the problem at a global scale, Levi says.

Though increasing oil sands production, which many expect will triple by 2030, will grow Canada's greenhouse gas emissions to a huge extent if business-as-usual practices continue, the added carbon dioxide emissions are marginal in the U.S. and global contexts. Studies show CO2 output from oil sands production is equivalent to 0.5 percent of U.S. aggregate emissions from energy use and less than 0.1 percent of total global emissions.

On the other hand, U.S. energy security enthusiasts eager to boost supplies from a friendly and reliable neighbor can also rest assured that a price on carbon is unlikely to add huge costs to the oil coming from the tar sands, Levi says.

The CFR study guesses that a carbon price of $20 per ton of CO2 equivalent—roughly what prices have averaged in the European Union's Emission Trading Scheme—would add only $2.21 per barrel of additional production costs to the oil sands. A price of $50 per ton of CO2 equivalent would add an extra $5.53 per barrel.

"The oil sands are neither critical to U.S. energy security nor catastrophic for climate change," Council on Foreign Relations President Richard Haass says in the report foreword.


To allay both energy security and climate change concerns, Levi recommends linking the cap-and-trade systems the two nations are both likely to develop but taking care that oil sands producers are freely allocated a sufficient amount of allowances at the start of the system. Imposing immediate costs on oils sands producers will only benefit lower-cost producers like OPEC and would have little impact on curbing greenhouse gas pollution.

Lawmakers should also steer clear of any low-carbon fuel standards that discriminate between conventional and unconventional fossil fuel sources, as they "would exacerbate energy security problems without delivering compensating climate benefits," Levi says.

The United States also should not invest heavily in carbon capture and sequestration technology aimed specifically at the oil sands, as the Canadian and Alberta governments already invest substantial amounts, and should focus instead on carbon capture and sequestration for power generation.

The International Energy Agency estimates the amount of recoverable reserves trapped in the oil sands at about 170 billion barrels, putting Canada second only to Saudi Arabia in oil reserves. IEA believes the sands could very well hold almost 1.7 trillion barrels of oil in total.

Reprinted from Greenwire with permission from Environment & Energy Publishing, LLC., 202-628-6500