Canada’s Emissions Trends

Environment Canada
July 2011

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Annex 1:

Baseline Data and Assumptions

Key Economic Drivers and Assumptions

Economic assumptions are based on the Government of Canada’s short-term economic outlook contained in Finance Canada’s October 2010 Update of Economic and Fiscal Projections. Long-term economic projections were developed using The Informetrica Macro-Economic Model (TIM) and are tuned to productivity growth projections developed in consultation with Finance Canada officials and Statistics Canada’s population growth projections. With respect to major energy supply project assumptions, Environment Canada typically adopts either the National Energy Board or Natural Resources Canada’s view regarding the evolution of Canada’s energy supply sector. For the emissions outlook in this report, forecasts of major energy supply projects are based on consultation with Natural Resources Canada, as their assumptions reflect their most recent views regarding the evolution of Canada’s energy supply sector.

Many factors influence the future trends of Canada’s greenhouse gas emissions. These key factors include the pace of foreign and domestic economic growth as well as its composition, population and household formation, energy prices (e.g., world oil price and price of refined petroleum products, regional natural gas prices, and electricity prices), technological change, and policy decisions. Varying any of these assumptions could have a material impact on the emissions outlook.

In constructing the emissions projections, Environment Canada developed alternative views of changes in key drivers (e.g., world oil price, the pace of economic recovery) that result in a range of plausible emissions growth trajectories. The baseline emissions projections scenario represents the mid-range of these variations, but remains conditional on the future path of the economy, world energy markets and government policy. The assumptions used about key drivers are listed in this section. Alternative cases are explored in the sensitivity analysis in Annex 2 of the paper.

The emissions projections baseline scenario is designed to incorporate the best available information about economic growth as well as energy demand and supply into the future. The projections capture the impacts of future production of goods and services in Canada on greenhouse gas emissions.

Economic projections were developed using The Informetrica Limited Macroeconomic Model (TIM), with the economic assumptions calibrated to Finance Canada’s October 2010 Update of Economic and Fiscal Projections for the period 2010-2014. The longer-term projections are tuned to productivity growth projections developed in consultation with Finance Canada officials and Statistics Canada’s population growth projections.

Similarly, forecasts of major energy supply projects (e.g., oil sands production, large hydro capacity expansions, nuclear refurbishments) from Natural Resources Canada were used; these forecasts are based on consultations with experts and reflect the most recent views regarding the evolution of Canada’s energy supply sector. The projections also incorporate data from the National Greenhouse Gas Emissions Inventory, the National Energy Board, and the U.S. Energy Information Administration for the latest information on key parameters.

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Economic Growth

Canadian real gross domestic product (GDP) in 2008 was an estimated $1,100 billion ($1997). This represents an average annual real GDP growth rate of about 2.7 per cent over the 16 previous years.

The short-term economic outlook underlying the emissions reference case is grounded in the GDP growth forecast contained in Finance Canada's October 2010 Update of Economic and Fiscal Projections. The Department of Finance regularly surveys private sector economic forecasters on their views on the outlook for the Canadian economy. The economic forecasts reported in this fiscal update, and which form the basis of the department’s fiscal forecasts, are based on a survey from September 2010 and includes the views of 15 private sector economic forecasters¹⁶.

The Canadian economy is expected to show strong growth of about 2.6 per cent per year following the end of the recession until 2014. This growth is expected to continue at a slightly slower pace into the future, as annual rate of growth in real GDP decreases to approximately 2.2 per cent in the period 2014 to 2020.

Gross output, which is a proxy for industrial production, is also projected to show significant growth. It is expected to increase by about 13 per cent by 2015 and 27 per cent by 2020, relative to 2008 levels.

The growth in the labour force and changes in labour productivity influence the changes in Canada’s real gross domestic product (GDP). For example, the slowing growth in the labour force contributes to a reduced GDP growth rate after 2014. The deceleration of the GDP growth rate is, however, not as pronounced as that of the labour force, as labour productivity is expected to increase owing to higher capital formation. Labour productivity is expected to increase on average by one per cent per year between 2008 and 2020.

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Population Dynamics and Demographics

The population size and its characteristics (e.g., age, sex, education, household formation, among others), and their evolution through time, have important impacts on energy demand. Canada’s overall population is projected to grow on average at an annual rate of one percent between 2008 and 2015, slowing to 0.9 per cent between 2015 and 2020. Major demographic factors that can have measurable impacts on energy consumption are summarized below in the three following variables:

• Household formation. This is the main determinant of energy use in the residential sector. Households are expected to increase on average by 1.4 per cent per year between 2008 and 2015, by 1.1 per cent between 2015 and 2020.
• Labour force. This isexpected to have a decelerating growth rate, reflecting the aging population. Its annual average growth rate is expected to be 0.9 per cent for the period ending in 2020.
• Population of driving age. This is an important factor in determining gasoline and diesel consumption. It is expected to increase on average by 1.2 per cent per year between 2008 and 2015, by 0.9 per cent between 2015 and 2020.

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World Crude Oil Price

A major factor in projected greenhouse gas emissions is the assumption made about future world oil prices. With respect to crude oil prices Canada is a price taker, as its shares of world oil production and consumption are not large enough (4% and 2% respectively) to significantly influence international oil prices. West Texas Intermediate (WTI) crude oil is used as an oil price benchmark. North American crude oil prices are determined by international market forces and are most directly related to the WTI crude oil price at Cushing, which is the underlying physical commodity market for light crude oil contracts for the New York Mercantile Exchange (NYMEX). WTI crude has an American Petroleum Institute gravity¹⁷ (API) of 40 degrees and a sulphur content of less than 0.5 per cent.

The emissions outlook’s reference case is anchored by the world oil price assumptions developed by Natural Resources Canada. According to Natural Resource Canada, the world crude oil price for WTI is projected to rebound following the global recession, decreasing slightly from about US$100/bbl in 2008 to about $US96/bbl in 2020. A higher price scenario, in which 2020 prices are $US186/bbl, is used for sensitivity analysis. Under the higher price case, greenhouse gas emissions are expected to be higher.

Figure A1.1 Crude Oil Price: WTI and Canadian Bitumen

Text Description for Figure A1.1

As shown in Figure A1.1, historically the price of heavy oil/bitumen has followed the light crude oil price (WTI), but at a discount of between 50 and 60 per cent. However, in 2008 and 2009 the differentials between the prices of light and heavy crude oils narrowed significantly owing to a global shortage of heavier crude oil supply. The bitumen/light-medium differential averaged 22 per cent over the 2008 to 2009 period, compared with 44 per cent over the five-year average from 2003 to 2007.

Alberta’s Energy Resources Conservation Board expects the bitumen/light-medium differential to average 26 per cent over the forecast period, compared with the five-year average of 36 per cent and the 2009 average of 17 per cent.¹⁸ Using this price difference, the bitumen price is decreasing slightly from about US$86/bbl in 2008 to about $US71/bbl in 2020.

As shown in Figure A1.2, the wellhead price for natural gas in Alberta (the benchmark for Canadian prices) declines in 2009 to about four Canadian dollars per gigajoule (GJ), and then begins to recover to reach 7.2 Canadian dollars per GJ by 2020. This reflects Natural Resource Canada’s assumptions regarding pipeline expansions (e.g., Mackenzie and the Alaska pipelines).

Figure A1.2 Wellhead Natural Gas Price in Alberta

Text Description for Figure A1.2

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Energy Production

Historically, growth has occurred in all areas of oil and gas production, with over half the growth coming from natural gas production. However, our projections show that both natural gas and conventional oil production will decrease over time as a result of declining supply, but that the increase in production from oil sands operations will more than make up for this decline. As such, under assumed prices and absent further government policy actions, it is expected that from 2008 to 2020 oil sands in situ production will almost triple and oil sands mining production will more then double, while light oil production will drop 30 percent over the same period (see Table A1.2, below).

Table A1.3 illustrates oil sands disposition. There are two main products from oil sands production: synthetic crude oil (or upgraded bitumen) and non-upgraded bitumen, which is sold as heavy oil. Synthetic crude oil production (Table A1.3) from Alberta is projected to increase from about 660,000 barrels per day in 2008 to about 1.8 million barrels per day by 2020. Synthetic crude oil from Saskatchewan is projected to increase modestly from 70,000 barrels per day in 2008 to 85,000 per day in 2020. Non-upgraded bitumen will increase from 571,000 barrels per day in 2008 to 1.1 million barrels per day by 2020. This non-upgraded bitumen is either sold as heavy oil to Canadian refineries or transported to U.S. refineries for upgrading to refined petroleum products.

Natural gas production (Table A1.4) is expected to decline modestly over the forecast period, from 6.2 trillion cubic feet (TCF) in 2008 to about 5.4 TCF in 2010. Projections will increase to some 6.1 TCF in 2020, as new production and non-conventional sources such as shale gas and coal-bed methane come to market¹⁹.

The emissions outlook reflects plans by provincial and territorial utilities with respect to key electricity capacity expansions.

Taking into account these provincial utility expansion plans, plus additional units forecast to be built by Environment Canada’s Energy, Emissions and Economy Model for Canada (E3MC) to meet growth in electricity demand, aggregate electricity generation is also expected to increase substantially, by about 17 per cent from 2008 to 2020, with fuel mix changes as generation increases. Table A1.5 describes, based on assumed policy support, that the proportion of generation coming from wind power and other renewable sources is expected to increase from 2005 to 2020, starting at only about 0.6 per cent in 2005 and reaching six per cent of total generation by 2020. Importantly, though, the proportion of natural gas-fired generation is projected to more than double from its 2005 levels.

Government actions, such as the introduction of the Electricity Performance Standard, will cause fuel switching in the overall generating portfolio. As noted above, it is expected that natural gas-fired generation will more than double from its 2008 levels by 2020, because of its appeal as a relatively cleaner source of power generation and a means to cover peak loads. Coal and petroleum coke generation fall from 17 per cent of the generation in the Canadian portfolio to eight per cent in 2020.

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Emissions Factors

Table A1.6 provides a rough estimate of carbon dioxide emitted per unit of energy consumed by fossil fuel type. These numbers are only estimates, as specific emission factors can vary slightly by year, sector, and province.

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Federal, Provincial and Territorial Measures

Domestically, since 2006, a range of instruments have been deployed to combat climate change. Significant investments have been made in renewable energy, incentives have been put in place to accelerate the development and deployment of green technologies and practices, regulations are being enacted to reduce emissions from key sources, and joint initiatives and investments have been undertaken with the provinces and territories to assist them in addressing their unique challenges and to facilitate coordinated approaches.

Table A1.7 below identifies the major federal, provincial and territorial measures that are included in the Emissions Outlook’s Reference Canada. It includes federal measures that have been implemented or announced in detail as of November 2010. Where program funding is set to end, the projections assume that the impacts of these programs, other than those embodied in consumer behaviour, cease when the approved funding terminates.

The analysis also includes existing provincial and territorial measures: Environment Canada monitors provincial/territorial initiatives, and strives to take them into account in its analysis and modeling (for the purposes of this report, provincial measures announced and fully implemented as of March 31, 2010 have been included wherever possible).

While the emissions outlook’s baseline scenario includes those existing measures that have been implemented or announced in specific detail, it does not take into account the impact of broader strategies or future measures within existing plans where significant details are still under development.

The federal government’s climate change plan involves the development of measures to address emissions on a sector by sector basis, and some measures under development as part of this plan have not yet been included in the baseline scenario: for example, the government has committed to regulate the emissions of heavy duty vehicles starting in 2014, but the details of the regulations are being finalized, so it is not yet included.

Similarly, broad provincial policy initiatives such as the B.C. Energy Plan, Manitoba’s Beyond Kyoto plan, and provincial announcements associated with regional emissions trading regimes (e.g., Western Climate Initiative) are not taken into account in the baseline scenario.

Some of the key existing federal measures that have been taken into account in the baseline scenario include:

1. Performance Standard for Coal-Fired Electricity Generation – In June 2010, the Government announced its intention to regulate for coal-fired electricity generation. The proposed regulations will impose a performance standard on new coal-fired electricity generation units and those units that have reached the end of economic life. The new regulations, which are scheduled to take effect in 2015, will encourage electric utilities to transition towards lower- or non-emitting types of generation. The proposed regulations send a critical signal to industry in advance of expected significant capital stock turnover. By affecting capital investment decisions now, the regulations will help avoid a legacy of higher-emitting facilities being built. The gradual phase-out of old and dirty coal units is expected to significantly reduce emissions from the electricity generation sector and improve air quality for all Canadians.
2. Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations – In October 2010, the Government published its final Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations, which establish progressively stringent standards, harmonized with the U.S., for GHG emissions from new cars and light trucks for the 2011 to 2016 model years. The Government has also signaled its intent to continue working with the U.S. on the development of progressively more stringent standards for new cars and light trucks of the 2017 and later model years.
3. Renewable Fuels Regulations – In 2006, as part of the Renewable Fuels Strategy, the Government of Canada announced its intention to regulate an annual average renewable fuel content of five per cent in gasoline by 2010, and in a second phase, a two percent requirement for renewable content in diesel fuel and heating oil by 2011. The first phase of the Strategy concerning gasoline came into force December 15, 2010. When fully implemented, the Strategy’s two regulatory requirements combined with provincial regulations will ensure a total volume of renewable fuel that will reduce annual greenhouse gas emissions by up to four Mt —about the equivalent of taking one million vehicles off the road.
4. Energy efficiency regulations, codes and standards for buildings and homes – The Government continues to update and strengthen energy efficiency standards for products under the Energy Efficiency Act and is working with provinces to update the National Energy Code for Buildings. These actions, combined with targeted incentive programs, have proven to be effective at reducing energy use and GHG emissions in this sector.

For detailed information about existing federal measures see the May 2010 Environment Canada report, “A Climate Change Plan for the Purposes of the Kyoto Protocol Implementation Act.”

Table A1.7 describes provincial and federal government policies and measures that are included in the emissions projections. Provincial measures include: Ontario Coal Phase Out, Ontario Feed-In-Tariff Energy Efficiency Standards, B.C. Carbon Tax, Alberta’s Industrial Regulations, Quebec’s Carbon Levy, Nova Scotia’s Cap on Electricity Sector GHG Emissions, Building Code Regulations, Various energy efficiency standards and rebates across provinces. Federal Measures include: Passenger Automobile and Light-Duty Truck Emissions Regulations, Electricity Performance Standards, Strengthened Energy Efficiency Standards, Renewable Fuels Content Regulation (5% ethanol), ecoENERGY for Renewable Power, ecoENERGY Retrofit Initiative, ecoENERGY for Buildings and Houses, ecoENERGY for Industry, ecoFreight Program, ecoTechnology for Vehicles Program, ecoENERGY for Fleets, ecoMobility, Public Transit Tax Credit, ecoENERGY for Renewable Heat, ecoAUTO Rebate Program, ecoENERGY for Personal, Vehicles Initiative, National Vehicle Scrappage Program, Marine Shore Power Program, Renewable Fuels Development, ecoENERGY for Biofuels Initiative, ecoAGRICULTURE Biofuels Capital Initiative, Technology Development and Deployment, ecoENERGY Technology Initiative.

Table A1.7 Measures covered by the projections

Table A1.8 shows individual Provincial targets for reducing greenhouse gas emissions. British Columbia: 33% below 2007; Alberta 50 Mt below BAU; Saskatchewan 20% below 2006; Manitoba 15% below 2005; Ontario 15% below 1990; Quebec 20% below 1990; New Brunswick 10% below 1990; Nova Scotia 10% below 1990; Newfoundland 10% below 1990; Prince Edward Island 10% below 1990.

Table A1.8 Announced 2020 GHG Reduction Targets of Provincial governments (only announced and implemented measures under these targets are included in projections)

¹⁶ In October 2010, the Department of Finance released an Update of Economic and Fiscal Projections. Based on the September “Consensus Forecast”, the pace of economic growth for 2010 was more robust than the projected pace underlining the budget (2.6% vs. 3.0%). Despite the higher growth for 2010, the average pace of growth for the 2010-2014 period is comparable to the growth under Budget 2010.

¹⁷ API gravity is a measure of how heavy or light a petroleum liquid is compared to water.

¹⁸ http://www.ercb.ca/docs/products/STs/st98_current.pdf

¹⁹ For the purposes of this document, shale gas development has been included under natural gas production. As more data and information on likely shale gas production trends become available, consideration will be given to modelling shale gas production projections separately.

²⁰ While the emissions intensity of burning wood is 81.26, biofuels such as wood can be considered carbon-neutral since carbon dioxide was absorbed from the atmosphere as the trees were growing.

²¹ Environment Canada is continually researching new provincial/territorial initiatives. Very recent provincial/territorial measures may not be incorporated in this report. New initiatives will continue to be included in our analysis as information becomes available.

²³ Under the auspices of the Conference of New England Governors and Eastern Canadian Premiers (NEG-ECP) partnership, the four Atlantic provinces committed to a regional goal of achieving 10% below 1990 levels by 2020. Prince Edward Island and Newfoundland have not established their own official provincial emissions reduction targets, so the common NEG-ECP target is applied to them for the purposes of this analysis.

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