Energy and economy in transition: the challenges and opportunities on the way to a low carbon future

Osler’s Sander Duncanson on the energy transition and its impact on Canada’s lawyers & businesses

The energy transition from fossil fuels and other carbon-emitting power sources to a greener economy is inevitable. Environmentally-friendly projects, policies, and legislation has increasingly steered Canada’s energy, infrastructure, and fiscal resources towards initiatives that can mitigate the effects of man-made climate change. However, despite the feverish urgency driving this transition, it cannot happen overnight. During this interregnum between near-exclusive reliance upon fossil fuels and the future dominance renewable sources, there are many pitfalls to be navigated and an equal number of opportunities for those willing to exploit them. We asked natural resources law expert Sander Duncanson of Osler, Hoskin & Harcourt LLP to analyze Canada’s pivot towards a green economy and what it means for businesses and lawyers alike during this critical time.

Much has been made of the inevitability of Canada’s energy transition away from fossil fuels and towards alternative energy sources; how do you assess the country’s progress on this transition thus far? Where have we found the greatest success and what are our most glaring vulnerabilities?

Canada’s energy transition towards a lower carbon (or even “net zero” carbon) economy has accelerated in the last decade, as in the case with many other countries worldwide, due to both industry and government-led initiatives. We have seen significant growth over the last decade in electricity generation from renewable sources such as hydro, tidal, wind, solar, biomass, and geothermal. Canada has also taken a lead in the development of large-scale carbon capture, utilization, and storage (“CCUS”) technology which has garnered interest recently for its application in producing hydrogen from natural gas with low carbon intensity. CCUS may allow Canada to achieve its net zero carbon goals without eliminating fossil fuel production, which remains a significant part of Canada’s economy.

Canada’s strengths in the ongoing energy transition include its abundant natural resources (in all forms), its extensive experience with natural resource development, and its existing regulatory and structural infrastructure that can support new forms of energy (such as oil pipelines that can be converted to CO2 pipelines). Current challenges lie in updating Canada’s regulatory and tax regimes to accommodate alternative sources of energy and incentivise companies to pursue energy transition opportunities.

Are provincial and federal government initiatives helping or impeding the energy transition?

There are a number of provincial and federal initiatives aimed at encouraging investments in energy transition in Canada, all of which should accelerate the pace of transition. Recent examples include:

  • The federal government’s calls for proposals to build new domestic production capacity for clean fuels under the Clean Fuels Fund;
  • The federal Incentives for Zero-Emission Vehicles Program and Electric Vehicle and Alternative Fuel Infrastructure Deployment Initiative;
  • The development of carbon pricing regimes across Canada, and the additional ongoing development of markets for offsets and credits, most notably in Alberta, Quebec, Nova Scotia, and federally;
  • Hydrogen policy frameworks announced by the federal government and British Columbia, as well as Alberta’s natural gas strategy and Quebec’s 2030 Plan for a Green Economy, both of which include plans to become leaders in hydrogen production; and,
  • Incentives in the 2021 federal budget that included such initiatives and funding as:
    • Funding of the recently-created Net Zero Accelerator, aimed at expediting decarbonization projects with large emitters and scaling-up clean technology across the country;
    • A reduction of the general corporate and small business income tax rates for businesses that manufacture zero-emission technologies;
    • Tax incentives for capital invested in CCUS projects and renewable energy generation;
    • Funding to create a Critical Battery Minerals Centre of Excellence to coordinate federal policy and programs on critical minerals, such as lithium, helium, cobalt, and potash; and,
    • A new “green bond” to facilitate investment in “green” infrastructure, clean technology innovations, and other efforts to address climate change.

Are there any areas of law (e.g., environmental or Indigenous affairs) that are now more consequential in this space than they have been in the past?

Environmental and Indigenous laws are often cited as key barriers to developing new resource projects in Canada, and the same challenges that other types of resource projects have encountered may be experienced by energy transition projects as well. While regulatory reforms may seek to streamline environmental approvals for certain types of energy transition projects, they are unlikely to address Indigenous risks. Project proponents will need to assess the risks for their particular project and develop strategies to address those risks, including entering into agreements and partnerships with Indigenous groups to gain their support.

What are the greatest challenges that businesses face as they try to pivot from use of exploitation traditional energy sources towards renewable and next-generation sources? What advice do you have for any clients in this area seeking to be proactive and risk-averse?

One of the greatest challenges that businesses face as they try to pivot from traditional energy to renewable sources is managing the financial and legal risks that come with changing their investment and growth strategies. Even when the question is not whether a company should transition their business, but when and how, the decision is an extremely difficult one. Clients in this area who are seeking to be both proactive and risk-averse should begin seeking legal and financial advice early in the process, and do their due diligence to take advantage of the federal, provincial, and municipal incentive and funding programs available to help minimize their risks.

How has the legal aspect of the energy transition evolved during the last few years? What new challenges does it present to legal professionals, and what new opportunities have emerged? Have you observed increased specialization in energy law, or is there a need for lawyers with broader knowledge and expertise?

The legal side of the energy transition in Canada has evolved in many ways in recent years. New statutes and regulations have been introduced and existing ones have been significantly amended. Courts have released several watershed decisions, including the Supreme Court of Canada’s decision on the constitutionality of carbon pricing under the federal Greenhouse Gas Pollution Pricing Act. Furthermore, businesses have been advancing new and innovative projects ahead of the supporting regulatory frameworks being fully developed. These rapid changes make it challenging for lawyers to stay current, but for the lawyers who put in the time and effort to do so, the fresh landscape places all lawyers on an even playing field – from relatively junior lawyers to the most senior practitioners.

Another challenge specific to Canada’s energy transition is the need for lawyers to gain understanding of the relevant emerging technologies and science. A lawyer who wants to assist clients interested in expanding into hydrogen or geothermal developments, for example, needs to have a basic understanding of the underlying technology and processes.

Finally, while energy law is a niche practice area, it is increasingly overlapping with areas like environmental, intellectual property, tax, and Indigenous law, requiring integrated legal teams with multi-disciplinary expertise.

Recent years have seen increased scrutiny and criticism of cross-border energy projects (Keystone XL, Line 5, Nordstream 2, etc.) – how do you anticipate this area will evolve as the energy transition accelerates? Is there a risk of a shortfall as demand increases and capacity maxes out before replacement generation or transport infrastructure can be completed?

That is certainly a risk, and one of the reasons why Canada should not be too quick to transition completely away from fossil fuels. Canada’s experience with cross-border energy projects in recent years has shown that different jurisdictions often have diverging priorities and interests in energy, and if the regulatory system allows any one jurisdiction to veto a project it is difficult to get anything done. Canada’s constitution provides a model where the federal government can approve projects across multiple provinces even if certain provinces oppose the project, so long as the project is in the best interests of the country. If used strategically to advance our country’s energy goals, this may provide Canada with competitive advantages over other jurisdictions.

What predictions do you have for the energy transition in Canada in the years to come? How do you anticipate Canadian law evolving as this transition accelerates? Which legal spaces are most likely to see watershed change?

As the energy transition picks up speed, Canadian law will have to evolve with it, and in many cases, it will have to evolve to allow for a smoother and more rapid energy transition to take place. Canadian energy, regulatory, climate change and emissions trading, and environmental laws are all legal spaces likely to see watershed changes over the coming years.

Do you have any other insights on helping clients navigate the energy transition legal landscape post/during COVID?

As we emerge from the COVID-19 pandemic, governments have been particularly active in introducing programs and incentives for companies interested in advancing their energy transitions. This is a good time for companies to explore those opportunities and take advantage of the ones that fit their business objectives. That said, this is a competitive market and companies should move quickly so they don’t find themselves left behind.

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Sander Duncanson specializes in environmental, regulatory and Aboriginal law issues for natural resource developers. He has experience with matters before the Canada Energy Regulator (formerly the National Energy Board), the Alberta Energy Regulator (and its predecessor the Energy Resources Conservation Board), the Ontario Energy Board, the British Columbia Environmental Assessment Office, the Alberta Utilities Commission, the Northwest Territories Office of the Regulator of Oil and Gas Operations and federal–provincial Environmental Assessment Joint Review Panels. Sander also has experience with regulatory, environmental and Aboriginal matters before all levels of courts in Alberta.

The subject matter of Sander’s recent regulatory work includes oil and natural gas pipelines, oil sands (both mining and in situ), LNG export, offshore drilling, hydro-electric generation, mining (including coal, metal, potash, gravel and diamonds), natural gas processing, electricity transmission and contaminated lands. He also regularly advises clients on their obligations to Aboriginal groups and negotiates impact benefit agreements with Aboriginal groups on behalf of resource developers.