Energy Magazine Category: USA

The British debate over leaving the European Union (EU) has absorbed a lot of energy in the past few years and has generated more heat than light on what will happen next. Nonetheless, the United Kingdom’s (UK) energy sector has been planning for its post-EU future and the outlines of future energy markets after Brexit is beginning to emerge from the London fog.

According to Energy UK¹, the national energy ministry, the UK will import 6 per cent of its electricity and 47 per cent of its natural gas in 2019. Just 12 per cent of UK natural gas was sourced from the European Union in 2016, which is a net importer of natural gas now, and would become more import dependent² if the UK exits. Currently from within the EU, the UK faces no taxes of tariffs on these imports; after Brexit and the expiration of existing contracts, imported energy prices could rise either because the EU imposes a new tax or because EU suppliers see an opportunity to leverage the situation profitably. Another concern for British consumers is the risk of extreme weather and an associated energy demand spike that overwhelms the capacity of import infrastructure and leads to shortages as well as price increases.

Leaving the EU could complicate domestic energy supplies because four of the “Big Six” energy companies that supply the UK market are owned by EU firms: EDF Energy is a state-owned French company; Npower and E.ON have German parent companies; Scottish Power is a subsidiary of Spain’s Iberdola. British Gas (a division of Centrica) and Scottish Hydro SSE are UK headquartered, as are many of the alternative energy firms operating in the UK. If Brexit leads to tax and investment changes for EU owned firms in the UK, the stability of the downstream energy market could be disrupted.

Ireland and Northern Ireland also face energy supply risks associated with Brexit. Irish energy imports largely pass through the UK, with Ireland and Northern Ireland (part of the UK) importing to meet roughly 39 per cent of natural gas and eight per cent of electricity³ demand. Since Ireland will remain an EU member state, Brussels is unlikely to interfere with UK energy supplies from continental Europe since doing so could have implications for Ireland. However, in an acrimonious no-deal Brexit, collateral impacts on Irish consumers are possible.

To forestall these worst-case scenarios, the UK government has been exploring its options. First, Qatar, currently the largest foreign LNG supplier to the UK and owner of the South Hook import terminal in Kent, is leading an effort to secure a trade agreement between the UK and the Gulf Cooperation Council⁴ that would provide for LNG supply continuity without price volatility in the event of Brexit. Second, in 2012 the UK negotiated an energy trade agreement with Norway⁵ that would guarantee continued imports of oil and gas in the event that Britain leave the EU without a deal.

Importing LNG from North America could supplement these sources. In 2019 the UK has increased LNG imports from the United States⁶ and is now one of the ten largest markets for US LNG exports.

Canada’s Canaport LNG facility in New Brunswick is an import and regassification facility that could be repurposed to give Canadian LNG access to the UK market after Brexit. In 2016, Spain’s Repsol (which co-owns and operates the Canaport terminal with Irving) canceled a multibillion dollar plan⁷ to refit the facility for liquefaction and export. Repsol and Irving have spent more than a decade⁸ in litigation trying to block development of LNG import terminals on the US side of Passamaquoddy Bay in Maine.

Yet when compared to the United States and other energy producing countries, Canada has been slow to capitalize on the export opportunity for LNG after Brexit. Last summer, as Brexit negotiations were underway, Canadian officials warned that provisions of the Canada-EU Comprehensive Economic and Trade Agreement (CETA) would not be “rolled over”⁹ to cover trade with Britain after Brexit. Instead Prime Minister Justin Trudeau indicated¹⁰ that UK-Canada trade negotiations could begin “the day after Brexit occurred.”

This position may be worth revisiting now. Britain appears closer to Brexit in 2019, with or without a deal with the EU. Rival suppliers have moved ahead through deals that will help meet UK energy needs should Brexit occur. Canada can still get in the game now that the federal election has passed. Prime Minister Trudeau is in a weaker position now as head of a minority government and boosting energy exports to the UK would bolster the Canadian economy – while helping Britain, a country that helped build up Canada and is more than a mere ally and trading partner after all.

Christopher Sands is senior research professor and director of the Center for Canadian Studies at Johns Hopkins University’s Paul H. Nitze School of Advanced International Studies (SAIS) in Washington, D.C.

Washington has been buzzing about the “Green New Deal”¹ ever since it was first proposed by newly-elected U.S. Representative Alexandria Ocasio-Cortez (D-NY)² in January 2019. A leaked draft of legislation for the Green New Deal included striking new policy measures: a call for the renovation or reconstruction of all buildings in the United States to maximize energy efficiency, and the elimination of fossil fuel powered transportation including cars, trucks, and aircraft. Nonetheless, by April 2019 the proposal had been endorsed³ by U.S. Senators Cory Booker (D-NJ), Kirsten Gillibrand (D-NY), Kamala Harris (D-CA), and Elizabeth Warren (D-MA) all declared candidates for the Democratic Party’s presidential nomination for 2020.

The Green New Deal is unlikely to become U.S. policy before 2020, but the response to it is indicative of its U.S. political appeal, despite a price tag commensurate with its ambition, estimated in one study as $93 trillion.⁴ The Green New Deal phenomenon to date offers three important lessons for energy and environment watchers.

Frustrated Moderation Begets Radicalism

Following the United Nations Conference on Environment and Development (UNCED)⁵ in Rio de Janeiro  in 1992 environmental experts and government leaders from around the world established the United Nations Framework Convention on Climate Change (UNFCC).⁶ As scientific research on the problem and forecasts of its implications grew dire, environmental activists were persuaded to unite in support of climate action, and more importantly to accept market-based mechanisms to address the problem. These market based mechanisms, principally carbon emissions trading systems and carbon taxation, were a compromise that was intended to convince the private sector and governments to take action at a more acceptable economic and political opportunity cost.

Signs of frustration with this compromise have been growing in recent years. Some activists have taken direct action to block oil and gas pipeline construction that have alienated some businesses and created political headaches for governments, particularly in Canada and the United States. The LEAP manifesto⁷ adopted by the NDP in 2016, with its demand that fossil fuels remain in the ground and unused forever, was a precursor to the Green New Deal.

One may not like the tsar, but when Kerensky stumbles you get the Bolsheviks. So it is with the new radicalism that is grabbing headlines and inspiring many younger voters in Canada and the United States. Even though the inherent difficulty of implementing such a radical package of reforms in the U.S. political system is likely to prevent the Green New Deal from becoming law any time soon, the implications of the failure of pragmatic moderation to slake the thirst for change within the environmental community are noteworthy for the energy sector.

Three scenarios now appear likely. The Green New Deal could be rejected by the public and fail politically forcing a return to moderation, perhaps following Donald Trump’s departure from the White House should he be replaced by a Democrat more open to addressing climate change. The Green New Deal might be adopted in whole or in part and then fail economically, prompting firms and governments to repeal it or revise it in a more pragmatic fashion. Or, the environmental movement might splinter into factions fighting among themselves with a tiny minority adopting resistance tactics to express their anger over the frustration of their efforts.

“As the largest energy trading partner of the United States, Canada has a reason to be concerned about this.”

U.S. Unilateralism and Self-Absorption a Bipartisan Problem

As the Green New Deal is debated in the United States, Canadians will be unhappy to see that the American appetite for unilateral U.S. actions that appear indifferent to the impact on other countries is a bipartisan problem. The George W. Bush administration imposed market access barriers to the United States in the form of bulked up border security measures. The Barack Obama administration responded domestic political concerns about the Keystone XL pipeline rather than Canadian interests. The design of the Green New Deal promises more of the same. As James Bacchus and Inu Manak have noted,⁸ the Green New Deal is based on an autarkic U.S. economy and makes no allowance for energy trade. As the largest energy trading partner of the United States, Canada has a reason to be concerned about this. Even renewable electricity from hydropower generation is not factored into the Green New Deal. To reach the climate goals of the Green New Deal, energy trade might have to end to avoid “leakage” or arbitrage as green energy prices skyrocket.

 

Elimination of fossil fuel-powered transportation will impose significant costs on Canada as the auto industry adapts, the aerospace sector is put out of business, and the 74 per cent of North American trade that moves by land⁹ searches for new ways to reach consumers.

Canada Must Defend Its Interests

Such nightmare scenarios are unlikely, but the seriousness with which they are being taken in the United States is a signal that a new threat of collateral damage to Canada from U.S. unilateral policy making has emerged. Canadian energy firms and perhaps some more moderate Canadian environmental groups should engage in the U.S. debate about the Green New Deal with the same zeal as the Canadian business community and Canada’s federal and provincial governments did in the debate about NAFTA that led to the CUSMA (aka USMCA). The best way to prevent radicalism from prevailing is a recommitment on all sides to making responsible, moderate efforts to address climate change work.  

Christopher Sands is senior research professor and director of the Center for Canadian Studies at Johns Hopkins University’s Nitze School of Advanced International Studies (SAIS).

“Cross-ownership.”

That was the matter-of-fact reply to a question that I asked Peter Morici,¹ now a Professor of International Business at the R.H. Smith School of Business at the University of Maryland but then director of the Canadian-American Center at the University of Maine. My question was why, if Canada and the United States could negotiate an Auto Pact to manage automotive trade, the two countries could not do the same for steel, given that so much Canadian steel imported to the United States was for the auto sector.

In his answer, Morici identified an important but often ignored aspect of U.S.-Canadian trade: a lot of bilateral trade occurs between branches of the same company, or between firms that have the same owners. That has been the case for the auto industry from the beginning, with General Motors, Ford, and Chrysler shipping vehicles and parts between their plants in the United States and Canada from the first decade of the 20^th century, switching to full-time military production between 1942 and 1945, and then seeking to integrate production across the border to offer more models at a lower cost to consumers in both countries.

In effect, the Auto Pact was a concession to this integrated reality of cross-ownership but the governments, who wanted to get out of the way of industry and promote the competitiveness of Canada and the United States in the increasingly global auto industry.

Steel was a different case, as Morici indicated; U.S. and Canadian steel producers were competitors, owned by different people. When they clashed, they wanted trade remedy action, not trade deals.

Now in the first decades of the 21^st century, steel trade remains contentious, with the United States imposing tariffs on Canadian steel (and aluminum) on national security grounds. But Morici’s insight still holds: there is relatively little cross-ownership of steel production in the two countries, and U.S. and Canadian firms remain rivals. Resource sector trade follows a similar pattern. Cross-ownership of lumber companies, such as Weyerhauser’s take-over of Canada’s MacMillan Bloedel, has reduced the amount of trade tension between the two countries, though it hasn’t silenced small U.S. lumber producers without ownership ties to Canada from seeking trade protection.

This may explain why U.S.-Canadian trade relations over energy have been less contentious. Major U.S. oil and gas companies have operated in Canada for decades, and helped develop offshore oil in Newfoundland, Sable Island gas in Nova Scotia, and the oil sands in Alberta. In recent years several Canadian energy companies have invested in the United States, particularly in natural gas and in energy infrastructure.

The case of Canadian hydroelectricity has been more contentious, particularly over powerline infrastructure and renewable portfolio standards. But this lends support to Morici’s cross-ownership thesis: most provincial utilities are Canadian owned. However, there is evidence of growing cross-ownership in the electricity sector, too, as Canadian hydro firms invest in regional power companies in the United States.

The draft United States Mexico Canada Agreement (USMCA)² negotiated to replace NAFTA as the rulebook for North American trade contains important energy provisions that promote common energy performance standards, regulatory cooperation by governments related to the energy sector, and reinforces the rights of energy sector companies to operate in all three countries. Unlike NAFTA, which had a single energy chapter that conveniently combined all energy related provisions in one place, the USMCA has energy-relevant language in various places throughout the lengthy text. After combing through the draft, my preliminary judgment is that USMCA represents a step forward for Canadian energy, particularly oil and natural gas.

Cross-ownership ties between the United States and Canada in the energy sector are a positive indicator of better energy trade relations in the future. This feature of the U.S.-Canadian energy relationship could be expanded to include Mexico if U.S. and Canadian firms find attractive investment opportunities in Mexico and if incoming Mexican President Andrés Manuel López Obrador, a critic of his predecessor’s energy reforms, does not attempt to reverse them. Since 2014, Mexico has actively pursued³ Canadian energy investments in the Mexican market.

Although the USMCA would eliminate Investor State Dispute Settlement for Canadian firms in Mexico that was previously available through NAFTA’s Chapter 11, Canadian investors in Mexico (and vice versa) will have access to a similar mechanism in the Comprehensive and Progressive Trans Pacific Partnership, and USMCA’s Chapter 14⁴ preserves investor-state dispute settlement for redress on national treatment, most-favored nation treatment, and direct expropriation.

The USMCA adds protections⁵ for investments in to government contracts in the areas of oil and gas, power generation, and ownership or management of infrastructure. Another positive aspect of the USMCA is Chapter 15⁶ which liberalizes trade in services, including energy-related services to which Canada has considerable expertise.

Since NAFTA, economic growth in Mexico has increased demand for energy and turned the country into a very attractive energy market. As a result, it was important for the USMCA to get energy trade rules right. Two chapters are important in addressing concerns about closer energy linkages: Chapter 8⁷ affirms “the Mexican State’s Direct, Inalienable, and Imprescriptible Ownership of Hydrocarbons”  and Chapter 27⁸ is a strong anticorruption clause based on the standards developed by the Organization for Economic Cooperation and Development (to which all three USMCA countries belong).

NAFTA showed that once trade and investment barriers are removed, cross-ownership can reduce trade conflicts and power growth across North America. Although NAFTA has been justly criticized and after nearly 25 years was in need of an update, energy trade and investment under NAFTA has been a success story that USMCA looks to advance further once it is approved and implemented by all three countries. In the coming months and years, look at the data on  cross-border investment and cross-ownership activity for evidence that North American energy markets are being strengthened or weakened under USMCA.

Christopher Sands is Senior Research Professor and Director of the Center for Canadian Studies at the Nitze School of Advanced International Studies (SAIS) and a nonresident Senior Associate at the Center for Strategic and International Studies (CSIS), both in Washington, D.C.