A DISCUSSION PAPER ON AIR QUALITY April, 199] Imperial Oil Foreword anada's federal Green Plan points out that in making decisions about our economy, we must consider the environment; at the same time, we must pursue environmental goals in ways that promote economic prosperity. The responsibility for finding this balance rests with all Canadians. As a leading industrial company in Canada and major producer of fo~sil fuels, petroleum products and petrochemicals ; Imperial Oil Limited has a vital stake in the development of environmental public policy and is committed to taking an active role. ' As part of this commit~ent, the company published two discussion papers in March 1990 and April 1991 on the threat of global warming. The discussion paper that follows complements these papers and addresses the broader issues of air quality. These issues can be categorized into five areas: ground-level ozone, acid rain, air toxins, global warming and stratospheric ozone depletion. This paper deals primarily with the first three issues and addresses actions that can have a significant impact on Canadian ambient air quality. , A broad array of initiatives have been proposed to extend the already significant progress Canada has made, in improving ambient air qqality. This discussion paper examines the concerns that remain and describes some of the key initiatives proposed, including a perspective on their potential effectiveness . Imperial believes this review of air quality issues reinforces the need for the federal government to undertake a more comprehensive sector-by-sector review of planned and potential initiatives to address air quality and other key environmental issues in Canada, with a view to establishing priorities and appropriate pacing. With these priorities firmly in place, Canada can confidently allocate limited resources to the most pressing issues and continue to effect changes that will make a real .difference in environmental quality. We welcome your comments and further suggestions. J.D. McFarland A.R. Haynes VICE-PRESIDENT, CHAIRMAN AND ENVIRONME'.'-IT CIIIEF EXECUTIVE OFFICER 3 - - - ------~--------------------., Contents I I I I - I ' I:- EXECUTIVE SUMMARy . II . I TRODUCTION 8 III. AIR QUALITY ISSUES AND ACTIONS - Ground-L evel Ozone 9 9 Acid Rain 12 Air Toxins 13 Other Issues and Intera cti ons IV. FUTURE TRANSPORT ATION FUELS V. THE HARD DECISION 6 s 15 16 J7 VI. KEY OBSERVATIONS AND CONCLUSIONS 21 VII. RECOMMEND ATIO NS AND COMMITMENTS 24 VIII. REFERENCES IX. FOOTNOTES TO FIGUR ES 26 26 I I I I ummary 111d1 1'11!-IH IIHI pnpn ery projects at its main distribution 11111'111a nals in Vancouver and Toron Lo. ft is also ,., jq, is IJl'ing termi- liy linrlf'rial working with its industrial customers to Oi l l.111111,·d ("lm1w- encourage the use of solvents with less ten1 i:1 1") I i, nH1tr1ht1t1· lo dency to form ozone. These initiatives will p11hli,· 1111d 1·rHlanrling be continued within the company's capaof k,·y 1·1'1vir1rnrrl('nla l bilities, in order of problem severity. l'hnlit-11~ 1'Kf'a1•i1tv ( :a11 .11la:t lld HOllfld pt1hlic Substantial progress has been made in p1ilin 1t1mld11'K!-I 1lt,•K1'.Th is pupn d1·als pri- addressing the issue of acid rain . Domestic 111nri l~ \\ith tit,· air q11a li1 isH1ws of ground- artions involving both federal and provincial l1•,1•l n;,;0111\ ,H'id ra in ;111dai r loxins. governments, combined with S0 2 emissions \mlii t·111uir q11ali1 in Ca na d a has im- reduction measures contained in the new prm l'd 1·t111 Kidl' rn hi y i II l h,· laHt 20 y,·ars. .S. Clean Air Act, will result in further S ub s tn111in! pro µ;n 'KH li aH b1·1· n made in progress later this decade. Imperial believes r l'dll l'illp, 1'0 111'1' 111ra l ionK o f par tin J!atr,s, that further reductions in S0 2 emissions are nitrn gt:11 dioxid1 •, H11lph11rd ioxid e (S02), best achieved from major point sources in r arb on mo11ox idt• (CO) and lc•ad in our air. sensitive regions. For its part, Imperial has Thi s pro g n •ss, while 1•nco11raging, should identified its major sources of S0 2 emissions not be se1' n as minimizin g th,• i;criowme% of and is assess ing red u ction opportunities 1n th e issnl's thnt slill need to he res ol ved . concert with these natio nal initiatives. Ground -level ozorw is identifi ed as the air Signifi cant progress h as also been made contaminant most in need of att enti on in in red ucin g air t oxin s in Canada . Lead has some urban areas. Progress will require both been eliminate d fr om asoline and concen9 regional initiativ es in Canada and prot ocols trations of CO and suspen ded particulates ~n with the Unit ed Stat es, since mu ch of th e the air have been approximately halved from ozone in. th e Maritim cs and , to some exten t, 1974 levels. T h ere are also indications that in the Windsor to Quebec City corridor , redu ction s in benzene concentrations have originat ~s south of th e bord er. Thi s is in also b een achi eved in some areas. Considcontrast to the problem in the lower mainerabl e un cert ain ty st ill exists about the land of British Columbia , where local heal th thr eat from a number of suspected air sources are mainly responsibl e. Fossil fuel toxin s and th e ap propr iate concentration p11·11:11f'd combustion, vapour losses at gasolin e ter- le vel limit s th at shoul d be established. In minals and service stations and petro chemical solvent use contribute to the form.ation thi s regard , benzen e and other aromatics in gasolin e ar e und er review . The federal gov- of groun~-le~el ozone. Imperial is commi ~ ernm cnt has also ind icated its intention to ted to domg its part to reduce ground-l ev~ limit th e s ulphur content of diesel fuel to ozone levels in Canada. The company intro - , 0.05 pcrc<:nt , to address concerns over diesel · , ,, ,, · · h 1 ·· 1 duced reduced emiss1·ons g 1· aso mes m van- en gin e p arti cu la tes, al thoug mpena couver and the lower mainland of Briti sh bdi cvcs furth Pr wor k is required to subColumbia in the summer of 1990 and ha". 'fh t' 'tie"' ese ac 1v1 ' ,, stantiat c th<·se ('Oncerns. begun implementing gasoline vapour reeov- / <:ould ha ve very signifi('ant implications for I the future compos1t10n of transportation fuels and associated costs to the consumer. Therefore, Imperial urges the federal government to involve knowledgeable stakeholders in reviewing possible initiatives, to ensure that only well-substantiated issues are being addressed, the goals are achieved in the most cost-effective manner and the pace is appropriate, given other environ mental priorities. Alternative fuels development appears to offer opportunities for further air quality improvements. However, the environmenta l benefits in switching fuels need to be carefully and comprehensively assessed, taking into account "life-cycle" emissions of various contami nant s during production, tran sportation, processing, distri bution and combustion of th e fuel. Imp erial believes that reformulated versions of gasoline and diesel fuel will play the major role in meeting Canada's tran sportation energy needs in th e foreseeable future. Alternative fuels will have a smaller but increasingl y significant role to p_layin responding to particular opportunities in th e marketplace. Where thes e opportunities exist, Imperial will expand its current offering of alternative fuels such as propane and compressed natural gas. The proper maintenance and inspection of vehicles to ensure efficient operation would appear to offer immediate improve- I real environmental benefits and related costs, so that an appropriate balance can be struck between the nation's environmental and economic priorities. For example, Imperial has estimated the costs that consumers would face, if Canada were to adopt fuel composition standards included in the new U.S. Clean Air Act, which were designed to address air quality problems specific to the Unit ed States: These standards would likely requir e an investment of about $2.4 billion in the Canadian petroleum refining and mark eting sector s and add another 3 cents per litr e to the cost of gasolin e and over 2 cent s per litre to diesel fuel. Imperial believes that it is no longer effective to deal with each environmental issue in isolation, due to the large number involved, the interrelationships and the very larg e costs. Imperial recommends a comprehensive sector -by-sector review of the impact of potential environmental initiatives, with a view to establi shin g priorities and appropriate pacing. Imp erial has developed a set of guidelines that can assist thi s proces s and ha s applie~ them to a number of proposed air quality initiatives. On the basis of this review, Imperial believes a numher of th ese initiatives need to be reassessed, including plans to r educe the sulphur con- tent of diesel fuel. ) Imperial is committ ed to help solve air quality problems in Canada and will con- ments in air quality. Poorly maintained vehicles can lack power, waste energy and produce excessive exhaust emissions. Imperial tinu e to do what it can, as soon as it can, in areas where the need is th e greatest and believes that vehicle inspection and maintenance programs should be given serious con- where its actions will have th e most benefit. The company has adopted a corpo rat e goal sideration, particularly for the Lower Fraser aimed at the virtual elimination of harmful Valley and Windsor to Quebec City corridor. Government, industry and individual emissions from its operation s at a pace that does not weaken the ability of the com pan y Canadians are fared with a bewildering array to compete. Much work remain s to b e done of real and perceived environmental prob- to confirm which emissions are harmful }ems and potential solutions. The costs of and at what level, and to design reduction addressing are very large steps. Imperial will share its assessment of and will be ultimately borne by each of us. the challenge this goal presents, the action It is essential, therefore, to understand the plans that evolve, and th e progress that is these problems 2 ~~~~-=-~~~~~~~~~-y=-~~~~~ 7 - achieved. Since Imperial believes that I vapour recovery projects, in areas of Canada 1 ground-level ozone requires priority atten- where the need is greatest. The company tion, the company will take steps, as out· will also continue to work with governments lined above, to reduce emissions that lead to and others to develop and share its assessozone formation, including offerings of ment of planned and potential air quality legislative initiatives, in terms of need, pri· reduced emissions gasolines, alternative fuels and less reactive solvents, as well as ority, pace and approach . . Introduction ' his discussion paper is one in a series being prepared by Imperial Oil Limited ("lmpe· rial") to contribute .to public understanding of key environmental challenges facing Canada and sound public policy to address these. As a leading industrial company in Canada and a major pro· ducer of fossil fuels, petroleum products and petrochemicals, Imperial has an impor· tant stake and keen intere§t in fully participating in the search for realistic and cost· effective solutions to these challenges. This paper addresses a broad range of air FIGURE1 FIVEAIRQUALITY ISSUES • GROUND-LEVEL OZONE 8 such as the potential for climate change resulting from increasing concentrations of greenhouse · gases in the atmosphere. This could have serious longer term implications for agriculture, forests, the Arctic and for low-lying coastal areas, due to changing ·sea levels. Air quality issues are often divided into the five categories shown in Figure 1. Thefirst three, namely ground-level ozone, aci~ rain and air toxins, are discussed in some detail in this, paper. Imperial's perspective on the important issue of global warming is more fully 4escribed in two companion papers. 1•2 The fifth issue, stratospheric ozone depletion, is only discussed briefly, quality issues facing Canada. Canadians are since Imperial's role is not significant. For each of the three air quality issues concerned that ground-level ozone and smog continue to be problems in some urban disc4ssed in detail in 'this paper, a broad areas during the summer. .Certain air con- perspective is presented. This includes a taminants are considered toxic and are description of the basic scientific aspects, known to have adverse health consequences impacts of concern, emissions sources, at high exposure levels. Others, such as sul- including the contribution of the petroleum sectors, progress to date phur dioxide (S0 2 ), contribute to acid rain. and petrochemical . . The depletion of the protective ozone layer and remaining problems. Initiatives already in the upper atmosphere, due to emissions under way or planned, both by governments of synthetic chemicals such as chlorofluo- and Imperial, are discussed. I • ACIDRAIN • rocarbons (CFCs), results in risks associated with excessive exposure to ultraviolet • AIRTOXINS radiation. In addition to the health and envi- in air quality improv ements is highlight· ed, although a detailed discussion is · be· • GLOBAL WARMING ronmental issues resulting from these prob• yond the scope of this paper. Work by Impe· • STRATOSPHERIC lems, Canadians are also becoming increasOZONE"DEPLETION ingly concerned about more subtle issues rial and others is under way that will more · The role of future transportation comprehem;ively fuels assess the contribution · I J of reformulated gasoline and diesel fuel, as well as alternative fuels, to improving air quality. The implications of a range of possible "clean air" public policy initiatives for the petroleum refining and marketing sectors are discussed. These involve significant costs for industry a;nd consumers and will require some hard decisions to be made. Imperial has given considerable thought to the principles that should guide these decisions. These principles sho uld help to ensure that the resulting actions are: directed at well-substantiated environmental quality goals; realistic and cost-effective; and appropriately prioritized in the ('Olllcxt of other environmental and eC'.onomiC" needs of our society. Some suggested prioritization guidelines are proposed l>y lmperial and are applied to a number of potential air quality legislative initiatives currently under review by governm<:ints, to illustrate how these hard choices migHt be made. The paper concludes with commitments by Imperial and recommended actions by I governments and the private sector that can contribute to further improvement in air quality, while taking account of other environmental and economic priorities for Canada. I I J Air Quality Issues and Actions GROUND-LEVEL OZONE Ozone formed at ground level - as distinct from ozone in the stra1osphere - is the most widely recognized example of a class of air contaminants called photochemical oxidants. It is formed during photochemical reactions between nitrogen oxides (NOx) and volatile organic compounds (VOCs), in the presence of heat and sunlight. The concerns over ground-level ozone centre on its adverse effects on human health and vegetation. Health concerns include both short term degradation of lung function and a strong suspicion that ozone may play a role in the longer term development of chronic lung diseases. Ozone is believed to adversely affect crop yields of beans, tomatoes, wheat, soybeans, corn and potatoes. 3 Although the extent of. the impact is uncertain, there has.been speculation that ozone also contributes to the reduced vitality of many forests in North America. The overall trend for one-hour peak con- centrations of ground-level ozone, on average in Canada, has been relatively flat, with little or no improvement o;er the 1979 to 1989 period, as shown in Figure 2. 4,5 Concentrations remain at or near the "maximum acceptable" ambient air quality objective set by the federal government, and are well above the "maximum desirable" objective. In terms of specific problem areas, FIGURE 2 CANADIAN ONE-HOUR PEAK .AVERAGE OZONE CONCENTRATIONS 1979-1989- 90 -:o D.. D.. z 0 80 ::J _J CD a: 70 ACTUAL UJ a.. Cf) f-- a: ~ 60 a.. 50 "MAXIMUMDESIRABLE" 50 ppb 40 1979 9 eon tribute to ozone formation, arie-. v.uleh. I Al I AX as shown in Figure t.J l-.o, -.ome of the SAINT.OHN most reactive compounds. -.uch a-. i-.oprent>, OUFBEC originate from biogenic as \\ell a-. man-made sources. In fact, the total natural emi,,ion, O"'TAWA of VOCs in Canada. main]) from forp.,t,, are •oRONTO estimated to be up to ..,1xtimes tho,e from man-made sources.3 Thi-. indicate-. that the WINDSOR innuen('e of natural source" in forrninir ozone cannot be ignored. particularh in rural areas. ·.ox 0 5 10 15 20 25 30 DAYSPERYEAREXCEEDING "MAXIMUMACCEPTABLE" OBJECTIVE (82 ppb) FIGURE 3 ONE-HOUR OZONE EXCEEDANCES BY CITY(AVERAGE OF THREEHIGHEST YEARS1983-1989) FIGURE 4 RELATIVE REACTIVITIES OFvoesIN CONTRIBUTING TO OZONEFORMATION (BYWEIGHT) METHANE BENZENE 23 PROPANE 39 METHANOL 43 MTBE 47 n-BUTANE 65 TOLUENE 96 ETHANOL 105 -I m-XYLENE I II 328 FORMALDEHYDE481 1-PENTENE 662 ISOPRENE (BIOGEN IC) 2,191 the '\\ ind::-or to Quebec City corridor, Lower Fraser \allev in British Columbia and the area around Saint John, New Brunswick, most frequently exceed the "maximum acceptable" objective as shown in Figure 3. 5 Ground-level ozone in the Lower Fraser Valley is mostly local in origin, \\ hereas ozone and NOx and VOCs emissions originating in the eastern seaboard of the United States and carried by prevailing winds, are mainly responsible for the problem around Saint John. Within the Windsor to Qu ebec City corridor , the ozone is sourced primarily from the United States at the Windsor end, and becomes more domestically sourced towards the eastern end of the corridor. 3 The chemistry of ozon e formation at ground-level is complex. Nitrogen .dioxid e, one of the NOx species that is a product of fossil fuel combustion, react s with oxygen in the air, forming ozone and nitric oxide. As the temperature and the inten sity of sunlight increase, so does the concentration of the ozone. However, the ozone concentration is reduced when the reverse reaction occurs between ozone and nitric oxid e ' giving back oxygen and nitrogen dioxide. VOCs interfere with this reverse reaction and thereby contribute to elevated ozone concentrations. 6 The ability of different types of VOCs to ----10 The effectivene!-'Sof steps to reduce and VOCs emissions to control ground-Ie,el ozone also depe~::'. \t'\1 cars toda y produce 76 percent lt'::'::- o..... and 96 percent less hydrocarbon emi::-::-ion~than 20 years ago.8 However. this imprownwnt per automobile has been offoet ln an increase in vehicle mih•s trawlled. Ground-level ozone is being addn•,:,,-ed by both th e federal and prm mcial gowrnments, who have been actiYely irn olwd "ith initiatives to reduce NOx and VOCs emissions. Canada' international commitments are an important consideration in designing these initiatives. In 1988, Canada signed the Sofia protocol, which called for a cap on national NOx emissions at their 1987 leveJ by 1994. In March 1991,_ the federal government signed an Air Quality Accord with the United States to control transboundary air ~~- -~~~~~~~~~~~~~~~~~ level ozone is a serious issue and one whe;e the company can make a significant contribution beyond regulatory requirements . Accordingly, in the summer of 1990, Imperial introduc~d reduced emission premium FIGURE 5 CANADIAN NOx EMISSIONS BY SECTOR - 1985 and mid-grade summer gasolines in Vancouver and the lower mainland of British Columbia. These gasolines were formulated with v~latilities considerably below pollution. The first annex to this accord the new provincial requirements. This inideals specifically with acid rain, but will also tiati"~,ewill be continued within the comhave beneficial impacts in red-ucing ground- , pany's capabilities, in order of problem_ level ozone formation. It incorporates each severity. country's obligations to reduce S0 2 and The company is also implementing gasoN Ox emissions to specified levels under an agreed timetable. line vapour recovery projects at a pace that is in advance of specific regulations. These The most comprehensive national attack projects are being completed at Imperial's on ground-level ozone was initiated ·in Octo- main distribution terminals in Vanc<1mver ber 1988 when the Canadian Council of and Toronto, and plans are being developed Ministers of the Environment (CCME) an- to expand this to other major terminals in nounced the development of a detailed plan the Windsor to Quebec City corridor. to manage NOx and VOCs emissions in In the chemicals sector, adoption of less 3 Canada. The plan was completed in 1990 reactive solvents can complement overall and contains 58 specific reduction initia- VOCs e,missiohs reduction measures. Impetives for implementation over the next rial is working with customers to promote decade, under the clirection of both federal the use of solvents that have a lower tenand provin~ial governments. dency to form ozone. For example, isoparafIn May 1989, the federal ministers finic solvents that the company produces of Transport and Environment also . an- have lower reactivity than naturally sourced nounced "A Plan 1:0 Identify -and Assess terpene$ distilled from pine trees. Imperial Emission Reduction Opportunities from is also investigating the potential for more Transportation, Industrial Engines and extensive solvent recycling. Motor Fuels. "9 This plan sets out an overIn the oil and gas production sector, Imall framework for establishing tighter . perial and other companies ate assessin~ opengine emission standards and fuel com po- tions for the cost-effective :eduction of NOx emissions from gas compressor engines. sition controls. Many initiatives arising from these plan 's These engines alone accounted for 7 perare now under way, with important impli- cen't of Canada's NOx emissions in 1985.7 In summary, Imperial is actively respondcations for the petroleum and petrocheming to the well-substantiated problem of ical industries. For example, provincial govground-level ozone, in some cases in advance ernments have recently set lower summer of spe.cific legislation. In these cases the gasoline volatility requirements to reduce the level of ozone and urban smog. The company's goal is to do what it can, as soon petroleum refining and marketing se~tors as it can, in areas where the need is greatest and where its actions will have the most have responded and have met these requireimmediate benefit. ments. Imperial re~ognizes that ground~ . PETROLEUM PRODUCTION ANDREFINING 11% ' FIGURE 6 CANADIAN voes EMISSIONS BY SECTOR - 1985 PETROLEUM PRODUCTION ANDREFINING 3% FUELMARKETING 6% PETROCHEMICALS & PLASTICS 7% 11 ACID RAIN i',how11i11Vig11n· 7, anr111alaverage concen- lwv1·l11n1 rnlue<:d in half and are Acid rain is the most familiar form of t l1t· 1rat 111111,1 : fi·dc·rnl government's "desirmore general issue of acid deposition, wbil'h now wit!ti111111 alilc·" rnr1g,·.'1.,r,F11rthPr progress will b.e encompasses all forms of acidity originating from rain, snow and fog, as well as from 111adc· with 01Jgoir1µ; and rww initiatives being acidic particles deposited during dry pl'l'i ods. Acid deposition has been shown lo cause damage to aquatic systems, crops, forests and structures. Damage to the environment depends not only on the amount of acid deposition, but also the ability of the land to neutralize the acidity. The.reforc, some regions can be more sensitive to acid rain than others. pla111H'd,aH dcsnihc·d twlow. Atmospheric acidity results from the interaction of certain gases and particles with moisture and trace reactants in the air. These gases and resulting acids can be transported over great distances from their source by preva iling winds. The principal gases involved are S0 2 and NOx, which are converted to sulphuric and nitr ic acids. While nitric acid can contribute significantly to the measured acidity of rain, the impact of the deposi tion of nitrogen compounds in the vuln erable areas of eastern Canada is not believed to be as serious as that of sulphuric FIGURE 7 ' ac~d.6,10T herefore, S0 2 has received the CANADIAN ANNUAL mo st att ention. AVERAGE S02 Considerabl e prog ress has already been AMBIENT AIR CONCENTRATIONS mad e over th e past two d~cades in reducing 1974-1989 ambi ent air con centra tions of S0 2 . As 12 "MAXIMUMDESIRABLE " 11 ppb :co. 10 A..id min almlc·rnent measures are excell<'nt 1·xar11pl1:s of ,.ffoctive solutions emerging from joint int,:rnationaI; federal and provinc·ial act ions. [n 1985, the federal gov(\rn meu t, i II cooperation with the seven eastern provinces, launched an acid rain control program by implementing measures to cut S0 2 cmissiom, in half by 1994, based on 1980 levels. For some Lime, the federal government had also been urging the United States to pass acid rain legislation, since , over half the acid deposition in eastern Canada is believed to originate from the United States. Revisions to the U.S. Clean Air Act in 1990 now contain provisions for major reductions of S0 2 emissions in the power generation sector over the next decade. Canada's federal government has also committed to work with the provinces to permanently cap national S0 2 emissions at no more than 3.2 million tonnes annually, by the year 2000.11These commitments by Canada and the United States to redµce S0 2 . . em19s10ns are ~ncorporated in the March 1991 Air Quality Accord. \ Progress in reducing Canadian S0 2 emissions has been significant as shown in Figure 8, with a reduction of 45 percent over the 1970 to 1985 period. 7,12 Over this same period, S02 emissions from non-ferrous smelting in Canada have been reduced by percent and those from the production of fossil fue_ls,by 40 percent. 54 e 1980 1985 . 1989 Further reductior;i.s in Canadian S0 2 emissions from the 1985 level of 3. 7 million tonnes per year are expected, as programs ar e put in place to achieve the national ob1· · . ective of 3 ·2 m1·11· ion tonnes per year. Given that th·1s commitment · has been made, Imperial believes these reductions are best achit>ved by reducing S0 2 Pmissions from major point sourres in sensitive regions. (11 this regard, transportation OIHlH fods and n·fin- eries are generall) small contributors to S0 emissions. Ewn though the production of natural gas and crude oil accounted for 12 percent of national ~0 2 emissions in 1985,7 these emission - are concentrated in western Canada, where acid rain is a less pressing issue. due to lower acid deposition levels and generall) lower acid deposition sensi tivit ies of the terrain. 13· 11 onetheless, Imperial has identified the sources of S0 2 emissions in the oil and gas production Powr R PLANrs 2 6 NONF[RROUSM[ 1Al S a: ~5 rnSSIL FUELPRODUC1 ION ~4 2 0 I2 0 YEAR2000 OBJECTIVE 3 3.2 Mt/Y _J :::::!2 ~ 0 1970 1980 1985 of benzene are incomplete, but in some loca- ing reduction opportunities these national initiatives. tions there is evidence that reductions have been achieved over the past decade.16,17Ben- Air toxins are airborne substances that pose threats to human health and to the environment. A numbei of suspected air toxins are associated with the petroleum and petrochemical industries. There has been substantial progress in reducing ambient air concentrations of some important air toxin"s over the 1974 to 1989 period, as shown in Figure 9. 4 ,5 Annual mean concentrations of lead have been reduced by over 90 percent since 1974. The removal of lead from gasoline that was completed in 1990 has made a significant contribution to this reduction. Average 8-hour peak concentrations of carbon monoxide (CO) - a product of the incomplete combustion of fossil fuels - have been reduced by 57 percent over the same period. Annual mean concentrations of total suspended particulate (TSP) have also decreased significantly. The picture for finei: particulates is not so clear, since the monitoring data has only beencollected recently and Canadian air quality objectives are not yet in plaee. •••, preliminaryanalyses do not sugJt)Y .. *f' Jlla!jorareas of concem. 15 II U) refining sectors of its business and is as ess- AIR TOXINS D ct: and petroleum in concert with II zene is a high-octane component of gasoline and a major petrochemical feedstock. There are still uncertainties about the magnitude of th e decrease, and the appropriate standards for ambient air concentrations of benzene to protect human health.· Similar uncertainty exists about other aromatic compounds, such as polycyclic aromatic hydro carbons (PAHs), which are found in exhaust gais and particulates emitted from internal com bu stion engines, particularly diesel engines. Engine and automobile manufactur ers have recently made significant progress in reduc in g emis sions from diesel fuel combustion and are 100 2000 FIGURE 8 CANADIAN S02 EMISSIONS TRENDS FIGURE 9 CANADIAN AMBIENT AIRTOXIN CONCENTRATIONS ASA PERCENTAGE OF1974LEVELS 1974 11 90 1981 D 80 en _J 1989111 70 LU > LU 60 _J ~ r- 50 ,~ u... 40 0 ~ 0 30 20 10 o· LEAD (ANNUALMEAN) CARBON MONOXIOE (CO) TOTALSUSPENDED PARTICULATES (TSP) (AVERAGE 8-hr PEAK) (ANNUALMEAN) - j 1 developing em 1ss10n con trol de, ices lo reduce diesel particulates. Air toxin concerns are being act i n·I) addressed by both government and industry. In June 1988, the Canadian Emironmental Protection Act (CEPA) was put in place to , protect the enYiron~ent and safeguard Canadians from toxic substances. Th~ Act established a Priorit) Substances List containing 44 Gompounds identified as potentially hazardous and in need of assessment. By 1994, the asses 9ment of this first list of 44 substances should be complete and any necessary regulatory action will be defined. Benzene, PAHs, methyl tertiary-butyl ether (MTBE). toluene and xylenes are included. MTBE is a high-octane gasoline blending component. Toluene and xylenes are natural high-octane components of gasoline and are also solvents. In addit~on to substances currently on the Priority Substances List, the federal gov- FIGURE 10 ~ ..;talll"\'S 0 (" 1110:-,I1·0111 ,•111 Ii; 1111•Y<·:tr 2000. 1n term:,; of proµ,1.111,sto • IL' SIOI"' n•cci, mt'nt\ 11·cl111•1• l'ltllS· «>f.stl'Jll'<'lt·d ai1 tu,i11 .. f,wls a11· • · · inµ; incn·a!-illlj.!, at I 1•111·1<>11. Tl 11· gov1T11Ma) f <)l-1') plan, ainwd .ti n·d11l'i11g cmissio 11s fro111 I ransportal io11, i11duslrial r ngitH'S and ITIOtOt" f1wl:,;,'I «ic-f'irwd Sl'V<'t"al areas for inv<·stigat io11 Th«·s,· i11l'lt1d<'1·011Iola! centrations of lw11i<'1 .w, tol1w111 •, xyl1·11<', aromatics and MMT 111gasohrw. For di1·s«·I fu el, the areas of in vest igat ion i rll'l11dt· f 1wl characteristics such as sulphur and arornat- ics content, cetane 1111mher and d isl illation temperatures. While air toxins are receiving consickrable attention, specific propo sals have grn- e~ally not yet been drafted. Steps to reduce diesel exhaust toxicit y are at th e forefront and the federal government ha s formally indicated its intent to regulate the concentration of sulphur in diesel fuel to a maximum of 0.05 weight percent, starting in ernment has raised concerns over aldehydes October 1993. The logic supporting (a product of fuel combustion), diesel particulate matter and the fuel additive methyl- initiative requires review, since diesel fuel I toxicity concerns are principally this related to the organic components of the parti culates, cyclopentadienyl manganese tricarbonyl CANADIAN AMBIENT (MMT). T here is also a continuing interest _as opposed to the sulphate component Alf\CONTAMINANT in ensuring that CO levels .remain within derived from the sulphur in the fuel. LEVELS ASA acceptab le lim its . The federal government Consultations are now under way between PERCENTAGE OF intends to expand th e Prior.ity Substances industry and the federal government to "MAXIMUM 1994 an d ever, y th ree year s thereafter List in fully understand the rationale and implicaACCEPTABLE " 100 prio rity sub wit h a goal to assess th e OBJECTIVE tions of this initiative and to defin e appropr iate action steps. 120 w 1979 11 1984 1989 111 > Imperial and affiliated companies are i== D u con tinuing to very actively assess the impact ~ 100 CD 0 of fuel composition w _.J CD on vehicle emissions incl u ding a wide range of potential refor- 80 <( I- m ulations of gasoline and diesel fuels. Impe- CL w u u 60 rial is committed to working with the federal <( :iE and provincial governments, =i :iE 40 industry asso- ciations and others to eliminate x substanti- <( ;2 LL ated health threats associated with the pro- 20 duct.ion and use of its produc~s. 0 0 0 0 OZONE (AVG1-hr PEAK) ---14 ln summary, significant progr ess has been made over the past two decades in Ill'', 11111• 1111 11111111·1111111 'flllll11y i11( ,,lllild,1, 01 lltcl!l',llt'd l,y 11,II\ IHIIIIIH'III ( ,.lfi.1111 1110111 ',U1 Nil) VIII, C,IHJIHJIJ 11VI I '1/IHJI 'I. I. ,./~>tt/11, /\LIil 11/\IIJ X Ii/,. /\Ill l(J/.lrJ', 1; 111·1 ·11 1ll'k111,wl.. dvl'd l, y ,, 11g . 'l'l,i 11 11,1 111 1,;111 i101111w11I1:d111td11111 llw11 M:1y l 1JIJ() ll'fllll I I') I wl1i1·l1 l,111•1 " 11•,lfllft'l •• i , , 0 I 'Jll 7 ,,,.,;,,,, "'""' ' ' ;,,,1,, 0 ,,,.,,,,.,,,.~ OIi. ,,/,., ft in 1111,l>i,•11/ "" ,11111/ily." ',lli/\10',l'III IW. (J/IJNI IJI I'I I I l!JrJ Can:1clia11av1·1.ig1·11111·111w1·11t1i1l1011 "4of lolal w,1w111h·d11mti, 1dal1· ('l'Sl') , 111111,gi II d1,,x id,· (\l(), ), S( l a11d ( ,( ), l1avi- all fall, 11 111 1lw po111I wlwr1· th, y 1111·w1·II lwlow 1111 's "111:1xi11111111 a1•1·1·pt f1·clnal gov,·1111111·111 low t lw :ilil,·" ol>j,·1·1i v1·H.I II f'a1·t, 1lwy an· 111 11111,·li l11w1·r"111axJ11111111 dP'iJrnl,1,·" 11hJ1·1· :n· 11w:-..I lown1·r, ii i:-. n•1·11g11iz1·dI lial 1111 IIJl1•ly, fflf' l "l ,llf•j,, / Ill ' U11 f,114 I. '/. Srnill' of 11111 i111p111v1 ·11w11l i; ,111· 11111111rra f,() 1I I. ,,, 011/\IW/\HMINI, lw 1·1·11I lr:111lw 11,,.,,cl i11Fig1111·IO 1 'l I 1·1111 1,11. I, I. /. II II 11ff111llllf l ll'J,1!1•,I ilH 1r1fo'ig,11111 It i , l'"' '" d,I, 1li;rl 11 ·I" ' 'll111w11 1·ili1• i11i1i111iv1 11,add11·11"1,111ll>lfl llf 1·111111·f'.11l1 i11 IH1wl1, rnl 1111p,11 ·fh 11111,tl11, 1~i.111 •14;111 . ollll'r 1·11•w", , llu 1111p;11 ·li..1,111J,,. d, l1111w11l:d "'" 1·x11111pl1·, HII fl ~ 11111·d1w1· ( >x f'IIIIH KilJIJ'I, i1t Mllllfl· l'JJl'ltf1t'll1tlll'I· , 1'/111'l lllllll!ll an· a f1·w an·aH wilh liwal air q11ali1y is;K111:<;lll'IJIIHly IJllllg/llr· g1111111d Ii-vi'! fJZIJJJr illlll Iha! rt'f,r·1:Kl'lll d1•viatiom; from lill•f,11•Ila , 1,..,...111,w,1111:, a1·id rai11. 011 t Ill' ,,1111·1111111d 1io11alav1·rag1· I n·ndi-i. /\.., iH 1·vid1·111i11 Fig lal1:r Kl:f'lio11,,f' 11,ii.. p1qw1, 1;1·!111111 r·11g1111 I l1·v1dozo111·st ands 0111ai,; Ih,: 11n•I 0, grn11111 1·1Jtrd111Hlio11 p111a1111·l11 1; 1,, wd1w1· 1,ydro a11tl,w11t ai1 1p1ali1y isH111:rnm,1 in r11:1:d carl1<1111:111iK 1;1,iow ; 1·1111 i1w11·ai..1· N( >x1·rr11 of all1·11tio11. 1110MI I ff,.,.. Hio1tK.Cornw11111·11Ily, lo 1r1ah· 1111· Iiw: d1:1·iOo1iot1s, a µ;111,d 1111d1 f'Hl1111d111g of' 1h1·"J1• OTII E H ISSUES ANH INTEHACTIO NS v'ario111;irt11·rn·la1i1,11:,;l11pK 11; irr1po1111111. Au111.h1·r 111q11J1 la11I ,·1,11 i..1d1·1a11011 1<; 111t,·rrns of ot her irn p or la nl air qu a li1y 1 1li-i1,w11 Canada'i,; al,i li1y 11, lw ,wf'i1 I 1111r 1ss 111·s, g lo ba l warrn rng 1s m ore full y d is- al'I ion'!. Fur Ho1111· iHf\111:1,, Kiwi, 1·11::;scdin two d isf' ussio n pa p ers 1.ha 1 have lcw· l ozIJt1iprrwnt during op e ration and rnaintPnan('c , rcdul'ing halon ,:mi ss ion s w;i,o «·iat<'dwith fin· 1·xtinguish1:r tes ting and train ing and dewloping plan !'!to ri~c yd<' CFC s al st•veral automotive s1'.rvi1:1 · Hit1·s. I rnp1·rial is also wor~ing with its s11ppli1!rs to find 1:ffoctive rt~placements for CFCs and halon s. Although the five air quality iss ue s di s• cussed in •the paper have been tn'.a!f!d sqia- 15 ---------- Future Transportation Fuels ontinuing concerns over the transportation contribution sions are related to the characteristics combustion. sector of In the case of NOx, for exam- ple, the air - not the fuel - is the source of to emis- sions of NOx, CO 2 , particulates, VOCs and CO and some other air toxins, have spurred inter- nitrogen and emission levels are related to combustion temperature, even with fuels such as hydrogen or CNG. The optimization est in the development of alternative fuels. of engine operation on any fu~l. in~ol~es many trade-offs. Simultaneous rrumrruzat10n These include reformulated gasoline, refor- of various emissions and maximization mulated diesel fuel, propane and other liquified petroleum gases (LPG), compressed power and fuel economy - which minirrµzes CO 2 emissions - is not possible, regardless natural gas (CNG), electricity, methanol, of the fuel, as shown in Figure 12. 18 ethanol and hydrogen. The impact of these To date, significant reductions of Ox, CO and VOCs have been achieved acrpss a alternatives on emissions is complex, leading of to many conflicting claims. Minimizing emissions from vehicles is range of fuels through improved engines and TYPICAL VARIATION not simply a case of replacing one fuel with OFPOWER AND another in the same engine. Emissions of TAILPIPE EMISSIONS voes are primarily linked to fuel composiWITHAIR/FUEL tion and the manner in which the fuel is RATIOFORSPARK I handled prior to combustion. Other emisIGNITION ENGINE lier in this paper, over the last 20 years, tail- FIGURE 12 I I exhaust treatment devices. As indicated earpipe emission levels from new passenger cars have been reduced by 96 percent for CO and hydrocarbons and by 76 percent for Further improvements 1 Ox_.8 are expected as efforts continue to optimize engine design and fuel formulation. Major studie$, such as POWER /.,,,#---........ the current Auto /Oil Air Qualit) Improw- I / ment NOAFTERTREATMENT , Research Program teristics and the optimum a: LU s: fuel formulation ' §: . en combinations of and t.>ngi1wtt-ehnolog) required to minimize emissions. The results will help lsof the future. I , ~omparisons of tl~e emironnwntnl ~ LU / ./ I his of all transportat ton ful'ls must lw // / RICH LEAN AIR I FUEL RATIO' (RELATIVE TOSTOICHIOMETRIC RATIO) bent'- I l'Olll· prehem,ive ansl probfoms GASOLINE 1% Benzene/25% Aromatics StageI.VapourRecovery StageII VapourRecovery LowerSummerVolatility MMTBan * Includes 13%aftertax returnoncapital 1,130 100 150 10 ...... ~-----------~----------------------~ 8 2.5 0.1 0.2 0.2 in dealing wilh the e11virom,w111is the dt>gree to which il i.san u,tegr«IPm - a delicate wholR i11wlticlt a c/1a11g,,lo OllP /Jart affects all the others. This 11w.lrPs it ollution H.'t•reto be the first i.ssuP lt1d1·letl. wltat would happen to inititttiu,•s to d,•al uit/1 air pol/111io11,wltich is its,>lf a f>rimory :io11rct> of pollutants i11 :,;:;er? Notwithst~11di11l( these dij]icultif 'S. it is cleor tltot priorities mu st be s,, 1• •• :t-Jow ever, thi s goal has not yet been ful h I realized in Can ada . an d mu ch \\ ork n'main .s to establi sh appr opri ate priorit ies. I Within th e air qualit y deb ate itself. there is a clear need for pri oriti zati on among the wide rang e of initiati ves und er con ide ration. Imp erial has develop ed som e suggested guidelines to describ e th e respective rol es of government and indu str y in thi s pro cess, to I address the creation of an eff ective !inka ge between problems and solution s and to establish a basis to help prioritiz e initi atives, as follows: • The primary job of government should be to define those air quality objective s that are necessaryto adequately prote ct human health and the environment. This should be don e through exten~ive consultation with knowledgeable stakeholders, applying sound science to define pr oblems and guide solution s. • Th e primar y job of t he private sector should be to appl y its creative talents to find the most cost-effe~tive solutions to meet the objectives set by government. ,,,• Specific Canadian pr obl ems should b e addressed by tailor-mad e Canadian solutions, design ed for th e lo cation and severity of the problem. • Preference should b e given to initiat ives which provide benefit s to mor e t han one environmental probl em. • · Canada should prioritiz e it s r esponses based on the nature of th e thr eat and the contribution Canada can mak e, , in th e fol lowing order: l. Substantiated thr eat to human healt h, which can be !rignificantl y redu ced by Canadian action . 2. Substantiated threat to th e environm ent, which can be significantl y redu ced by Canadian action. 3· substantiated threat to human I health or the environment that cannot be sign ifi- t'antly reduced bv · anadian ~wtion. l · Potential health . . th . . , . , ,md ennronmt'ntal 't · . f ieab ,\~:Yet un--ub ' ::dntiated. rt'quiring urther scientific asses--ment. , Imperial . . bdi e, e~, t lmt the application ,)f these gu1dmu r· ,· l , • eo p mup e::-would ensure tlut the best er . . effort--, of c°'ernment and indu:::tn t' d. · are focu,ed . , on m mg the most eo:::t-effeetIYe solution,' ' t 0 th e most urgent problem:::. . m the most timely manner. the,··d . . . . Given . . \ l e range of e11Yironmental uutiat ives, beinrr , ·d ere d acros:; the varib con81 o~is sectors of the Canadian economy. Imperial beliews that only issues falling with.in th e first and second categories. as described above. should be recei,ing prioritv at th.i::: tim e. To illustrate, Imperial has d~wloped th e following views on a selection of propose d government initiatiws that addres::: air qu alitv and are of importance to the petrol eum indu stn : " Reduction in gasolin e rolatilit y fo r th e Lou :er Fraser l'all ey. Wind so r-Qu e bec Corridor, Neff Bru11s1t"ickan d S o ra Sco tia to 62 kPa (9.0 psi ) R l' P f o r Jun e . July and August.·· In th e regions identified . ground -level ozone concentrati ons exceed the federal governm ent ·'maximu m acceptable .. objective on occasions. As described in earlier sections of thi s pap er. Canadian action can haw a significant impa ct on ozone reduction in the Lower Fraser \all ey and_to ;;:omeextent. in the Windsor to Quebec City corridor. Accordingly. Imp erial believes that the reduction of summer gasoline rnlatility in / these region is an effective initiati ,·e. Ho,fever, in :\'ew Brun swick and :\ om ~cotia. the ovenvhelming influ ence of emis::;ions from the nit ed Stat es would make the effe t of more stringent local gasoline volatility con trol insignificant. In vie,\ of th.i5. Imperial does not beli eve that fur ther Canadian action is warranted for these areas. 19 ---------------------- --"Vapour balancing and recovery at gasoline stotage and transfer depots an d vapour balancing for gasoline delivery to service stations." t~ce program s ensur e that th e benefits of Other initiati ves to impro ve engine design a nd fu el formulat ion ar e in fact realized. Thes e program s can lead to lower emissions of several exhau st compon ent s and encour- Imp erial befo;:ves this "stage I" vapour recovery initiative will also make a worthwhile contribution to reducing ground-level ozone in regions where Canadian action can have a significant effect, namely the Lower Fraser Valley and Windsor to Quebec City corridor. Therefore, Imperial believes this initiative should be widely supported. "Vapour balancing for vehicle refueling at s~rvice stations." age regular engin e maint enanc e. Also, good maint enanc e optimiz es engin e efficiency and perferman ce, leading to redu ctio ns in greenhouse gas emission s. Imp er ial b elieves that implementation of som e form of in spectio n and maintenance program in th e Lower Fraser Valley and Wind sor to Qu ebec City corridor, where ground-l evel ozon e pro blems are the most sever e, is an effect ive initiative and should receiv e seriou s att ention. I This is the "stage 11" vapour recovery initiative. Imperial believes that the benefits of this initiative are very small in relation to the cost of the program. Costs in the Lower Fraser Valley and the Windsor to Quebec City corridor alone could amount to $150 million to capture refueling losses that contribute only about 2 percent of Canadian VOCs emissions. As an alternative, vehicle controls, such as enla~ged on-board canisters, can capture these refueling emissions, as well as more significant evaporative and running losses from the vehicle. Should use of these types of on-board controls become widespread, "stage 11" controls would beceme redundant. Imperial believes that investments required for "stage II" vapour recovery could be better spent on other initiatives, where there is a larger and lasting environmental benefit. "Light duty vehicle inspection and maintenance programs." , These P.rograms are excelhmt fXamples of initiatives that can have many coincident benefits. Poorly maintained vehicles lack power, ate inefficient and produce excessive exhaust emissions. Inspection and main- "Retluced benzene and total aromati cs content in gasoline." The federal government has indi cated its intent to investigate possible futur e reductions in concentration s of benzen e and total aromatics in gasoline, to addre ss both air toxins and ground-level ozone concern s.9 Stud ies are underway lo assess the .toxicity of benzene at low concentrations and to defin e th e appropriate concentration limit in air requir ed to protect human health. The impa ct of total aromatics cont ent on tailpip e emi ssions and the implic;ations for ground-level ozone formation are also being actively assessed studies such as the Auto /Oil Air Qualit y Imp rovement Research Program in th e Unit ed States. However, these important studies are not yet complete. Therefore, Imperial believes that ) initiatives to reduce the benzen e and total aromatics content of gasoline should be categorized as "requiring further scientifi c assessmen t " , at t he present time. If th e result s of these studies are to be used to develop furth er controls on the composition of gasoline, Imperial urges the government to consult closely with knowledgeable stakeholders. ¥1 "Reduce diesel sulphur content to 0.05 weight percent." - - ---------------- -- - _J Particulates in the exhaust from dif•sel engines make a mall contribution to I lw concentration of total suspended particulates in the air. The sulphur in diesel fuel contributes to these particulates in tlw form of sulphates. together with the other particulate components namel), soot and organic compounds - from unburned fuel and lubricant. Concerns have been raised over the health implications of breathing. this material. However, Imperial believes " that the health threat to Canadian from these particulates has not been substantiated. Furthermore, the concern expressed are usually directed at the organic component of the particulates rather than the sulphur-derived sulphate component . The company acknowledges the desire to harmoniz~ with· a correspond ing regulation being adopted in the United States. However, Imperial be lieves t hat a solution can be found which addresses bot h th e health con cern s and the Canadian impl ications of the Cnited Sta tes' legislation, in a way that minimizes the costs to Canadians . Such a solution may preclud e the need for major investm e~ts to red uce the sulphur content o.f diesel fuel. Imp erial is actively discussmg these issues with th e 1e c d era1 government and with other members of the petroleum industry. "Further reductions of S02 emissions in Western Cunada." · Within the March 1991 Air Quality Accord between Canada and the United States, Canada has agreed to a cap of 2.3 million tonnes of S0 2 emissions from the ea tern provinces effective 1994. This guideline i lo be superseded by a permanent national ceiling of 3.2 million tonnes by the year 2000, as discussed in an earlier section of tl:is paper. In establishing specific programs, Imperial believes that regional acid depositioi{ rates and terrain sensitivity should be considered, with priority being given to those regions with high deposition rates and high terrain sensitivities. For · example, southern Alberta and Saskatchewan are character ized by relatively low deposition rates and low terrain sensitivities, so should not be considered as priority regions for S0 2 reduc tion initiatives . \ l(ey Observations ·and Conclusions mperial believes that th e for egoing di scu ssion , whi ch pr esents a re view of the key air qualit y issues in Canada and a per spective on futur e action s by Imperial and governments , can contribute to publi c understanding of the challenges and sound public policy to deal with them. The key abservations and conclusions may besummarized as follows: • Ambi ent air quality in Canada has improved considerably in the last 20 years as measured by Environm ent Canada. The concentration s of total suspended particulates, nitrog e~ 'tl.ioxide, S0 2 and CO now lie ~ell within th e "maximum acceptable" ·objec- I tives as defin~d by th e federa l government. • Littl e or no progress has been made _in redu cing ground-l evel ozone, a key contn~ utor to smo g, an d thi s remains a problem m some ur b an ar eas· T hese areas include the 21 I I \ lower Fraser Valley in British Columbia, the S0 2 emi ssions are best ach ieved at maJor Wind sor to Quebec City corridor , and part s of New Brunswick and Nova Scotia. On point sour ces in sensitive regio ns. Trans- man y days during the year, ozone concentrations can exceed the "maximum acceptabl e" objective in these areas. • Automobiles are a major source of NOx and VOCs emissions, which contribute to the formation of ground-lever ozone. Even though new cars today produce 76 percent less NOx and 96 percent less hydrocarbon emiss4.ons than 20 years ago, these significant gains ha~e been offset by an increase in vehicle miles travelled. • Progress in reducing ground-level ozone concentrations in problem areas iri Canada will require a combination of regional initiatives and tran~border protocols with the United States, since much of the ozone in the Windsor to Quebec City corridor and in the Maritimes originates south of the border. Imperial believes it can make an important contribution to reducing ozone levels and therefore has taken action in advance of specific legislation. Imperial introduced reduced emission gasolines in · Vancouver . and the lower mainland of British Columbia in the _summer of 1990. The company has also begun implementation of gasoline vapour recovery projects at its main distribution terminals in Vancouver and Toronto. These initiatives will be continued within the company's capabilities, in order of prob- portatio n fu els and refiner ies are genera lly small contribut ors. Alth ough S0 2 emissions from th e oil and gas produc tion sector are great er, affected ar eas in western Cana da are generall y less sensitive to acid deposition and acid deposition levels are low.er. Imperial has identifi ed it s major sources of S0 2 emissions and is ass essin g emissions reduction opportunitie s in con cert with these national initiatives. • Substantial progr ess ha s been made in ~educing air toxins in Canada. Com par ed to , 1974 these results includ e elimin ation of ' lead from gasoline, a 57 per cent redu ctio n in the ambient air concentrations of CO - on an average 8-hour peak basis - and a 45 percent reduction in suspended parti culat es - on an annual average basis. There is eviden ce that benzene reductions have also been achieved in some areas during the last 10 years. • Considerable uncertainty still exists about the health threat from a number of suspected air toxins and the appropriate standards that should be in plac e. Benzene and other aromatics in gasolin e are b eing assessed and the federal governm ent ha s indicated its intent to reduce the sulphur content of diesel fuel to address concern s over diesel engine particulates. Th ese activities potentially have very important implications for the future composition of tran sportation fuels and associated cost s to the • Acid rain abatement measures undertaken consumer. Therefore, possible initiati ves so far are excellent examples of effective should be discussed extensively with knowlsolutions emerging from joint international, edgeable stakeholders to ensur e that only federal and provincial action. These have well-substantiated issues are being addr esscut annual average ambient air concentra- ed, the goals are achieved in the most costtions of S0 2 in Canada by half over the 1974 effective manner and the pace is appropri ate, to 1989 period. Initiatives under way in given qther environmental priorities. Canada and the United States, and embod- • Air quality issues are often int errelated ied in the 1991 Air Quality Accord between and these relationships need to be carefull y the two countri~s, should produce further considered when designing inifiatives. Steps substantial progress later this decade. to reduce NOx, for example, can have ben• Imperial believes further reductions in eficial effects on ground-level ozone and acid , . I I \\ ('\t'r, t radt'offs arc' associated with P . . , . . )•iir ,·x,uuple, st·t trng t'ngm<' ('OmPl IJI Is. · fnrnuwtcrs to n·dtH'P hydrocarbon b11stro 11 ' ·. ·1c,11,., r·l!l incn•ast' I\Ox. Pntissions. 1•111r~s • ' r,1111. 1 • lmpi·rial lll•li('\l'S that reforrnulatt'd wrand dit•sel fuel, with · . (Jf. gasol11w ..;l(lllt" • n•dnred emissions characteristics, will play the major rok in meeting Canada's transportation t·m·rg} nerds in the foreseeable futon·. Altenrnti\'e fuels will have a smaller but inrreasingly significant role to play in tllt'l'ting particular opportunities in the nrnrketplace. • Costs to respond to these air quality issues will be ,ery large and it will be essential, therefore, to understand the real environmental benefits so that an appropriate balance can be struck between the nation's envi ronmental and economic priorities. For example, Imperial has estimated the costs I "' diPs,•I fuc·I to 0.0S 1wr1·1·nt ha m,t tw,:n substant iat(·d and t hf· f1>rkral gr1vf·rnrrwnt 's plan should lw n,as f•ssr·d. " slag,· JI" vapour rr•r·overy ,·crntn,ls hr I v{'hil'h\ rcftwling have v,:ry lirnil<'.d bc·rwfits for dw high r·osts involw:d . Alternatives sul'h as on-board vehicle C'ontrols should be assessed, sincr: these can also reduce more signifir'.ant evapo~ative and running losses from vehicles. --r~mplem_entalion of ~ome form of vehicle / rnspect10n and maintenance programs pa<-) should ,e,eive se,ious oonsiderntion, t1cularly for the lower Fraser Valley and Windsor to Quebec City corridor. that consumers would face if Canada were to Iadopt fuel composition standards included in I the new C.S. Clean Air Act, which was designed to deal with unique air quality problems in various ,regions of the United States. Adoption of these standards in Canada would lik ely require an investment of about $2.4 billion (1990$)in th e Canadian petroleum refining and marketing sectors, adding another 3 cents per litr f to gasoline costs and over 2 cents per litre to diesel fuel. ' I • Imperial believes that some hard decisions will have to be made. As a first step, the company believes it is essential that progress be made in establishing priorities 1 among the wide range of possible environmental initiativ;s embodied in Canada's Green Plan. In this paper , Imperial has proposed a set of guidelines that can help this process, ~nd has tested a number of key air quality initiatives being proposed by governments that impact the petroleum refining and marketing sectors. On this basis, Imperial believes a number of these need to be reassessed and others emphasized: - the need to reduce the sulphur content of 23 - - - Recommendations ' and Commitments . ased on this review of Canadian solution s for Canadian prob- air quality lems , tailor ed for th e severi ty and loca- issues in Canada, Imperial of- fers the following for consideration by governments and the private sector. Imperial believes these recommendations will help to ensure that the efforts of all stakeholders are focused on finding the most costeffective and timely solutions to the most urgent problems, in a way that the nation can afford. Imperial recommends: • Initiation of a comprehensive sector-bysector review of the impact of planned and potential initiatives to address a:ir quality and other key environmental issues, with a view to establishing priorities .and appropriate pacing: Imperial believes j.t is no longer effective to deal with each issue in isolation, 'because of the large number of issues involved, as summarized so comprehensively in Canada's Gree1;1Plan. Many issues are complex and interrelated. Potential solutions are costly and may well be beyond the nation's ability to manag_eeffectively, unless they are prioritized and paced. · However, the Green Plan does not appear to establish a mechanism to establish the necessary priorities: • Develop~ent -of a set of guiding principles to facilitate prioritization. Imperial belieyes the guidelines outlined in this paper on page 19 will help this process and lead to: actions that respond first to weU.-subtrtantiated issues where Canadian initiat.i-.escan do the most good; tion of th 'e probl em ; - - preferential tr eatm en t for in itiatives which provide ben efits in mor e than one area , or whi ch mak e economi c sense in their own right. • Application of these guiding prin ciples to possible air qul'!lity legislative initiati ves outli~ed in the Green Plan and in oth er nati onal programs such as the management plan for NOx and VOCs. As described in this paper, Imperial believes that several of th e plaD? ed initiatives need careful review befor e targ ets are set and commitments are mad e. For its part, Imperial is committ ed to help solve air quality problems in Canada. The company has adopted a corporat e goal aimed at the virtual elimination of harmful emissions from its operations at a pac e tha t does not weaken the ability of the com pan y to compete. Imperial believes this compl ements similar goals being adopted by som e jurisdictions and companies in Canad a . !lowever, much work remains to be don e to confirm which emissions are harmful and at what level, and to design reduction step s. More specifically: Imperial commits to: • Share its assessment of the challenge to Imperial of the goal of virtual elimination of harmful emissions, the action pla.l\S that evolve an~ the progress that is achiev ed. • Continue to do ". 6. ·7. 8. 9. "A Di scu 10n Pap er on Potential Global Warming": Imp erial Oil Limited, March 1990 "A Discussion Paper on Global Warming Response Option s ..: Imperial Oil Limit ed, April 1991 "Manag ement Plan for "\"it rog en Oxides and Volati le Organi c Compounds"; Federal ProYincial Long Range Transport of Air Pollutants Steering Committee. October 1990 Draft "?'i"ationalCr ban ·Air Quality Trends 1978 to 198T; Emironm ent Canada report EPS 7 CP 3. ~lay 1990 Personal communications from T. Furmanczyk, Emironment Canada. "\"oY. 9, 1990 and Feb. -. 1991 '·Canadian .PerspectiYes on _.\.irPollution". SOE Report "\"o.90-1: Emironment Canada. eptember 1990 "Canadian Emissions lnYenton of Common Air Contaminants (1985) ..: Em·irorunent Canada report EP 5 AP 3. ~larch 1990 ··Motor Fuels in a Clean Fuels Em -ironment"; A.D. Little. June 1990 "A Plan to Identify and --\.ssessEmis sion Reduction Opportunities from Transportation, Industrial Engines and 11oto.rFuels ..: Tran port Canada Emironment Canada: ~1a:·1989 10. "Further ~1anagement of Emissions of Xitrogen Oxides and Yolatile Organic Compound. in Canada: Summan Report'': Federal ProYincial Long Range Transport of Air Pollutants Steering Committee. March 1989 (updated July 1989) 11. Canada"s Green Plan: Gowrnment of Canada. December 1990 26 1990 Canadian Long-rangP Tran,,port of Air Pollutant~ and cid Deposition Asse":oment Report ..: Federal Pro,incial Research and .Monitor- 14. ing Coordinating Committee. 1990 -T he Pr esent and Potential Effects of ..\.cidic and Acidifying Pollutant~ in .-\.lberta · s Emironment. Critical point 1 fi nal Report ·· ..\cid Depo;;ition Research Program . ~eptember 1988 15. Cnp ubli sh ed report : T . Dann . Emironm ent Canada . ..\.larch 1990 16 ... Benzene in .the .:\mbient --\.ir of Cana dian C rhan _.\reas - ources and Exposur es··: E nYironment Canada Report T -8. Ju ly 198-:17. Pers ona l communica tion from T. Dann . Emir onrnent Canada . "\"oY. 2. 1990 18. ··_\.ir Pollu tion : T hreat and Response:·· DaYid ..-\. Lynn. Addi son -"\\esley Publishing. Don \Ii lls. Ontario . 1976 19. -_.\_Fram ework for Discussion on the Emir onment: th e Gr een P lan ..: Emi ronm ent Cana d a. 1990. Footnotes to Figures fif!ure 12 Adapted from '"Air Pollu tiou: Threat and Resporn,e ..: DaYid .\.. Lu m . .Addisou- \\ ·esle, Publi;:hina. Don \Iill~.. · n t ano. · 19-•6 . · CARBON DIOXIDE EMISSIONS AND FEDERAL ENERGY POLICY April, 1991 Imperiai Oil IMPERIAL OIL LIMITED CARBON DIOXIDE EMISSIONS AND FEDERAL ENERGY POLICY FOREWORD This have document been published one of a series researched comprehensive Discussion is work Paper in April on of background and written in on Global Warming Global Warming 1991. - 1 - papers support of that a more entitled Response Options", II A ORI/M cGraw-Hill Carbon Dioxide Emissions and Federal Energy Policy: A Discussion of the Economic Consequence~ of Alternative Taxes ... ·'. ·.:.. •.·.:-'. Cumulative Reduction In Carbon DloxJde Emissions and the Associated Cost (Reduction) In GDP (Milliontonnes and billion1981 dollars at factor cost. 1990 to 2005) 1000 • Carbon Tax Extreme .g ·x 0 '5 _,../" .5 500 200 _,../" _,../" _,../" _,../" • Motor Fuel Tax Extrem~ ~ E • GST Extreme 400 300 :I (.) _,../" 600 i ~ _,../" _,../" j ! _,../" 800 700 !5 ~ _,../" 900 _,../" , Carbon Tax Moderate /""' • Gas GUZZier Extreme _,../" ·~~at8 • • GarGUZZler Moderate Motor-f"uel Tax Moderat8 100 _,../" 0 0 100 200 300 400 500 600 700 Cumulative Reduction in GDP Diagonal Line Represents $1000 Per Tonne CO2 Reduction Cost ..:-:····-·-·-:-::::;;:'.:·: ....·:·:::::::::::;:;:::::::::;:;:;:::·:·:::::.: ·.::::::::::.;::·: ·:.::·'. ::::·::-·. =:·: ··":'.<,:-.·· · ·•.···::· ..•. ••.• ·'.:::····••,•,• .·.·.···-·-·-:::·::·· Prepared for Imperial Oil Ltd. by James A. Osten George Vasic David West DAI/McGraw-Hill March 18, 1991 •,•,•,•.·::::-:-:·. 800 900 __.::..-·::: ...... ,,,_, 1 Executive Summar; 5 Introduction 6 Reference 27 Gr.,,;_. S ....': - A.S.S.--c Z7 :;..,. ~ ~7,:r:, ~ ~7,a 29 'E:""3'';/ ~- ;· ~f"Y..T ::.::, -2:J ~- ~~~ T - -~ c-.a_ ~"""C"" -c.a,7 ~ :. :., ::::€ ::..es,_""" case 33 Gas G~s ...-ax 7 Scenario Assumptions 7 8 9 9 Methodo logy Macroeconomic Assumptions Regional and Industrial Notes Energy Assumptions 13 Macroeconom ic and Energy Policies 13 Macroeconomic Policy 16 Energy Policy crs 34 Po: -'11-ss34 Erono- - ~ca::::s .a -ca:::-: 34 Re;;o-.a a:·c .. 35 E""e'..'I ::..es... -:s 37 ~.r.r 39 00 40 40 40 Por ::,::,~ :::.es..,:s F._e ax ASS; Economc ~ ~anc 41 Energy ResLl'S 43 earoono·., ice - ~ Res.."ts 17 Carbon Tax 18 Policy Assumptions 18 Economic Impacts 18 Regional and Industrial Impacts 20 Energy Results 23 carbon Diox ide Results 24 Comparison of Results 45 Co 46 ~ISOl"I lmpactS s1ons ai anc ~ Re; Across Sce.-.a nos 49 Appendix ·- ·- Executive Summary Carbon dioxide is produced in varying amounts by every economic activity in Canada. The Canadian government. in cooperation with other nations, is committed to reducing the potential environmental consequences of greenhouse gases such as CO2. An effective control policy would cause carbon dioxide and other greenhouse gases to diminish with a minimum effect on the day-today operation of the Canadian economy. This study analyzes the economic consequences of curbing CO2 emissions through the proposed introduction of both Carbon and Gas Guzzler Taxes, and increases in the newly introduced Goods and Services arid Motor Fuels Tuxes. A Carbon Tax causes the most direct impact on CO2 since the tax is in proponion to the emissions. Electric utilities would have considerable incentive to build new nuclear or hydro plants , since these sources produce no CO2. The Canadian oil and gas industry , which is heavily_concentrated in Albe~...would.be.harshly-penalized . The paper, chemicals and primary metals industries would face severe cost increases. Production of coal would falter while heavy oil would vinually cease to be a usable resource. Those provinces with extensive nuclear and hydro power would experience an accelerated switch to electricity, especially for electric heat. The Gas Guzzler Tax falls on the production and sale of motor vehicles in the commercial and family-size categories. Since Ontario produces many such vehicles. the greater onus of the tax is borne in that province. In general, manufacturing industries fare poorly. Also, ·::::··:::· ·,; ··:•: CHART 1 Cumulative Reduction In Carbon Dioxide Emissions and the Associated Cost (Reduction) In GDP (Million tonnes and billion dollars ($1981) at factor cost. 1990 to 2005) 1000 ~ x 900 i5 800 _..,,.,, _..,,.,, _..,,.,, _..,,.,, _..,,.,, 0 i .5 a J 700 t 300 l 200 I _..,,.,, _..,,.,, 500 400 _..,,.,, _..,,.,, • GST Extreme 600 ~ _..,,.,, _..,,.,, • Carbon Tax Extreme • Motor Fuel Tax Extrem)!.-• Carbon Tax Moderate _..,,.,, • Gas Guzzler Extier1ie .,,..,,.... _..,,.,, • G~~ate • • GarGuzzter Moderate Motor'"fuel Tax Moderate .,,..,,.... 100 0 0 100 200 300 400 500 600 700 800 900 Cumulative Reduction in GOP DiagonalLine Represents $1000 PerTonneCO2 Reduction Cost February 1991 E ecut1veSummary . 201o Reference CHART2 d Emissions Growt h -1 978 to carbon Oloxl e . (1U case at, ( 7 8~i8 C02LOv,; 9YtiW1 G3T2S ___, ---- CO2 1975 2000 1980 TX25 = Motor FuelTaxModerate rx1oo= Motor Fuel TaxExtreme GUZ30 = Gas Guzzler Moderate GUZ100 = Gas Guzzler Extreme 2005 C0 2 LOW = Carbon Tax Mode rate co2 = Carbon Tax Extreme :··..... ·:/:·· :·::.:;:.···-:-:- 2010 GST10 = GSTMoaerai.e GST25 = GSTExtreMe ..-:-:· trade is adverselyaffected since Canada would import proportionately more vehicles. mary effect is to reduce manufacturing activityandllII· balance existing interna tion al trade patterns. The Goods and ServicesTaxwas introduced on January 1, 1991 at a rate of 7 percent. '!11istax is increase~ to 10 percent in the moderate version and 25 percent m the extreme case. The main thrust of the GST is to raise revenues for the federal government. How those revenues are respent and the workingsof the Canadian economyin the aftermath of large tax increases are set forth by this case as a basis of comparison with the other three tax cases more focused on carbon emissions. The GST does in fact reduce CO2 emissions. In 1990 Canada will em it about 500 million tonnesof , CO 2 while consuming over 12.000 petajou les of energ_1 and producing a GDP of 684 billion dollars. In the Rei· . tonnes erence Case CO 2 emiss ion s rise to 616 million by 2005 whil~ energy consu mption grows to 16.00lpet3· joules and GDP to 1072 billion dollars ($1990). Them~ creasing reliance upon fossil fuels in the Referenee(l! causes CO2 emissions to grow faster than total enefg_\ consumption. while conse rvation and rising energy 1• prices contribute to a substantially lower energy gro~ rate than that for GDP. The Motor Fuels Tuxfalls on consumers. In the extreme tax case, the trade balance is improved, the exchange rate rises and interest rate effects are nil. inflationary increases are moderate, and overall economic effects are small. Consumers do switch from large to small cars. What all the scenarios show is that direct taxes are a blunt instrument. The major impact on CO comes 2 from new nuclear plants replacing coal-fired generation. Secondaryimprovements in CO2 emissions occur from automotive efficiencygains, conservation, and increased use of natural gas. The Gas Guzzler Tuxis a panicula l · erfi· f · ry m 1aent way o reducmg CO2 emissions since its pri2 Imperial Oil , C.:()/ li Taxes on CO2 are taxes on energy consumpu· n.. coa whi has the highest CO 2 emis i n per unit of enerro.. ro natural gas is half that f al. and nuclear and h~d rt'· power have no CO emissi ns. The simplest wa~tL' . . ns- fr m energy i t ubsurnte nJtU duce CO2 em1ss1 ".i\f• ~as, n~clear and hydr power f r al. The Carb0°1rl',' 1 s set m propon ion t carbon ntent. Thu, the C3 1 Tux . ·1 cau e a high pr p n~itv t 1t h fuel:. Gencf.1 the taxes redu ce n umpti n f the ttems t xed. -, th l ey arge cars. m t r fuel . n ntent 1 r e ~~ activity. For each f the t ca pared f ea tu ring mOd sion of th t . F r altern u. ·e wer·· ...pre·· JllC\ n and an e,·tre ('t. J rbon Th.xIS tOI of All nor Jan twt me1 coll be 2 Executive Summary duced at $50 per tonne of carbon emitted in the moderate case and at $200 per tonne in the extreme case. Consequently, a total of eight different tax scenarios are compared with a moderate and extreme version of each of the four taxes. All of the cases can be compared in terms of their economic efficiency in reducing CO2 in a measure of dollars per tonne. The cumulative loss in real GDP between 1990 and 2005 is a measure of the social investment made in CO2 reduction. Also. the tax revenue collected on energy consumption by the given tax would be a measure of the relative burden on society of under- taking CO2 reduction by use of taxes. The cumulative reduction in CO2 emissions is the result. In principal, the best policy to reduce CO2 would be the one most cost effective. Cost effectiveness is shown by comparing cumulative CO2 emissions with cumulative GDP reductions in Chart 1. If a line were drawn at the ratio of $1000 per tonne of CO2 emissions avoided, most of the scenarios would be to the left, indicating a cost of less than $1000 per tonne. The Gas Guzzler Tax is closest to the right, indicating a higher cost. In Chart 2. the results of the eight scenarios are compared for the annual level of CO2 emissions. • February 1991 3 Introduction Carbon dioxide is one of several greenhouse gases that are considered contributors to global warming. Many developed nations are accepting global warming as an inevitable consequence of the buildup of g_reenhouse gases in the atmosphere. There is no doubt that CO 2, methane, CFCs and nitrous oxide are increasing in atmospheric concentration. Thus, governments around the world are seeking new actions that limit the build up of greenhouse gases. preau were built in other provinces. All of these measures helped reduce carbon dioxide levels. Carbon dioxide reduction was initially accomplished by recession. 1980· ener · inflation and fuel switching-.ln..additioo,..-the..gy policies altered industrial consumption patterns. High energy prices encouraged pulp and paper companies to install bark boilers, which have one of the 'highest CO2 emissions rates. Wood burning releases 100 tonnes of CO2 per petajoule, while natural gas releases 49 tonnes. The essence of policy measures is to reduce the emission of carbon dioxide by ta,cing energy consumers. Grand goals such as a 20 percent reduction in carbon dioxide emissions from current levels have been proclaimed. The Canadian Minister of the Environment has set a goal of stabilizing carbon dioxide emissions in 2000 at current levels. Such goals for carbon dioxide emissions imply new energy policies, including new taxes. Hydroelectric sites do not produce carbon dioxide. However, they do flood large areas of vegetation, which reduces the absorption of CO2 by photosynthesis. Bodies of water such as oceans and lakes also. absorb CO2. The point is that biomass and hydro projects also interact with the environment. Scientific evidence offers fewer certainties than would be desirable for informed public policy. Canada has already had experience in reducing carbon dioxide emissions by large amounts. From 1980 to 1983, carbon dioxide emissions in Canada fell from 456 million tonnes to 404 million tonnes as calculated using CO2 coefficients and energy consumption. Other environmental concerns were heightened in the past decade. Nuclear accidents at Three Mile Island and Chernobyl have heightened concerns about nuclear safety. Also, the final resting place for spent nuclear fuel is as yet undecided. The economic circumstances that led to a reduction of carbon dioxide were severe. Energy prices nearly doubled during this period and a very deep recession occurred. No consumer would willingly return to the 20 percent interest rates and double-digit unemployment rates that characterized the economy of this era. The reduction in CO2 from 1980 to 1983 was not brought about by environmental policy. However, examination of this era serves to indicate the potential dangers in a single-minded greenhouse-gas emission reduction plan. Energy policies did have much to do with the reduction of carbon dioxide emissions in the early 1980s. Natural gaswas substituted for petroleum, and massive new hydroelectric generating stations featuring flooding of the LaGrande River Basin reduced fossil fuel consumption in Quebec. Ontario Hydro constructed the Pickering and Bruce nuclear stations while Gentilly and Point Le- Clearly, the experience of the 1980 to 1983 price shock and recession was painful for energy consumers and producers. Economic shock was accompanied by government intervention in market decisions. Such events ultimately disrupt normal economic, commercial and political decision-making. In particular, political decisions carry an inherent responsibility to all parts of society such that a single-minded goal is usually unworkable. Tradeoffs must be made between CO2 reduction, economic growth and other environmental issues. In many forums, the Canadian government has discussed the use of taxation to effect environmental goals. Economic analysis of such options will help the government make prudent decisions. While the details of the proposed Environment Canada policies are still taking shape, newspapers and government agencies have been discussing various taxes. Four February 1991 5 :·;·: :.: Reference case ····:.:-:·:,, ,, .,.:;:;,.,::c=·::::-. =·.:c,,:: ,,-:,:.:: G owth-1978 to 2010 CHART 1 carbon Dioxide Emissions r . 7 REFERe Ce ~\ GST10 s C02LO Guz,00 TX100 T GST25 _,..-.- clu CO2 me cus ass 1975 1980 TX25 = Motor Fuel TaxModerate TX100 = Motor Fuel Tax Extreme 2000 1985 GUZ30 = Gas Guzzler Moderate GUZ100 = Gas Guzzler Extreme 2005 2010 Ao C02LOW = Carbon Tax Mode rate CO2 = Carbon Tax Extreme step The long year tax cases are representative of possible policies-a Carbon Tux,increases in the Goods and Services (GST), increasesin the Motor Fuel Tax,and a Gas Guzzler Tax involvinga one-time sales tax on larger cars followed by higher annual registration fees. Of panicular interest is the effect such taxes would have on the macroeconomicand industrial structure of the Canadian economy. Energy-intensiveindustries obviouslywould have the primary impacts in terms of fuel choice,cost of doing business, trade patterns, and investment. Electric utilities would face complexchoices, with massiveconsequencesfor CO2 emissions. This study, commissionedby Imperial Oil Ltd., is a formal analysisof the economicimpacts and reduced CO levels resulting fro~ sel~cted government tax policy. order to proceed with th15 analysis,ORI/McGraw-Hill has developed the appropriate assumptions to fully re. flect of the government tax po11cy . h' the . consequences . . wit 10its CX1St10g economicand energy mod 1. system. e mg in ReferenceCase In the Reference case,current li . . are few disruptive events, and po cy s~ys mtact, there cecds at a normal rate. Worlder:no~ic ~o~th pro. terms. the economygrowsat 3: pnces ~ 10real moderate. and the federal def . ~~ year, inflation is lClt IS 10 retreat by 1998. long Resource prices increase in real tenns suchthatmut1 incn manufacturing and services all substantiallycont ribu:i The to economic well-being . new oom duce Energy demand growth averages 1.7%peryear,a 0.55 the rate of increase of the entire economy. Coc~ woul vation programs , demand management, automobile t pacti ciency, and real price increases temper energydem ar.: rates iden1 11 growth. Natural gas deman d is enhancedbyincrea. : use in electricity genera tion and more stringe ntrequ.: The ments for clean fuel. Nuclear power overcomes1h e~ mud 5111 rent impasse, and both On tario and NewBrund, sive I try rr struct new nuclear stations . cons · thedim n6 mad Energy development focuses on replacing .i-: . . . h uchpro Je(· mg supply of conventiona l crude oil wit s ~ The as Hibe~ia, Terra Nova, Beaufort and 0~ tion. Mackenzie Delta pipeline is constructedm 1 ro{ mane . ample supplies . of natural gasto meetg Ener ensunng ~~ . . . . pendover ish C deman d s. Canadian elect ric ut1hues s geme' d mana . l10n dollars on conserva tion and deman . .t1UI· Seve . ~~~ with a target of 11,000 megawatts of gene ety a lent by 2010. nom1 (: nom1 n wnnes , • . . I n 1990,CO2 emission s reach 500milhO hing 6l0, imbe . · · reac n bo . n d 1ox1deemissions continue to nse, in2(Jlv-,_, at th hon tonnes in 2005 and 664 million tonnesn caicu l!·; surei level of_carbon dioxide emissions haveb~~lO bas ~;. by ProVlllc~~or the period form 1978 to Mines an° CO2 coefftc1ents obtained from Energy av sources and the Ontario Ministry 0 f Enero-1· s;\n~ Scenario Assumptions There are nine scenarios developed for this study, including a Reference Case and four tax cases, each with a moderate and an extre me version. This section discusses the met hodology used in the ana lysis and the key assumpt ions made for eacl:l.scenario ..... Methodology A comprehensive modeling exercise includes several steps . First, the assumptions are carefully prepared. The tax cases are contrasted to a base case which is a long-term trend forecast extended to 2005. The 15 years, 1990 to 2005, measure both the initial and the long-term economic impacts of the aforementioned tax increases. The results of models reflect how society would adapt to new policies. New taxes imply that consumers and producers would face higher costs, while governments would have more revenues. The macroeconomic impacts of tax changes include inflation, growth, exchange rates, investment and trade, and are relatively easy to identify. The microeconomic effects on specific industries are much more difficult to establish without a comprehensive framework such as those provided by related industry models. Since most of the taxes are aimed at energy consumption, a large scale model of Canadian energy markets is also used in this study. The energy model is used to calculate energy consumption. Total CO2 emissions are derived from energy demand using CO2 coefficients developed for models by Energy Mines and Resources, and the Ontario and British Columbia Ministries of Energy. Several aspects of how CO2 tax policies will impact society are addressed in this study at the level of Macroeconomics, Regional, Industry and Energy. The Macroeconomic model has an associated industrial model with an imbeddedinput-output framework to establish impacts al the level of industrial detail. The Energy model meaSUleS effects on oil and gas supply as well as energy de - mand and trade. The Regional model h w the di tnbution of effects across provmces. parttcularly the differences between the producing and consummg re2.1 ns L1f Canada. Imperial Oil Ltd. is undertaking a comprehen ive analysis of alternative tax policies on the Canadian ec n m. and CO2 emissions. The assumptions used in th1 analysis reflect twq ~ltematives for each policy-a moderate compromising-policy, and an extremely harsh. repre 1ve policy. The key assumptions that are required to analyze the government tax policies are as follows: ..... Each of the taxes has a different incidence ba ed upon the level of the tax, its intended incidence. and its intended consequence. For example, a carbon tax would be set in dollars per tonne of carbon emission on fossil fuels, the GST increased acr the board on all goods and services. the m t r fuel tax raised in cents per litre for gasoline and road diesel, and a gas guzzler tax established on the least fue l-efficient passeng er cars and light trucks (new and existing) in Canada. The total tax revenue is calculated using the Canadian Energy Mode l. ..... How the tax revenue is spent is of major importance to the economic results. Essentially, government accrues the extra revenues from the new ta; until budget balance is achieved. The tax revenues are then spent on transfers and new programs. The same government spending pattern is applied to all of the scenarios. In addition to the spending patterns imposed in these scenarios, various f rm of trading or cross crediting could be allowed. ..... The carbon cont ent of each fuel is specified. Combustion efficiency can alter the amount f CO-i emitted. Carbon taxes are based upon the C01 emission coefficients. CO2 emissions are calculated by fuel, sector, and province. ~ Interna tional competitiveness is a critical aspect f taxation policy. In a mild tax case we assume that other countries are adopting Slfllilar policies so that international competition is less significantly af- February 1991 7 - Scenario Assumptions the full debilitation fected. In the extreme cases, bout by taxation of international trade ?rought a eration is ultun~tewould occur. International coop f 1 CO2 emission ly the deciding factor for_a sul~~:;titiveness is reduction plan. Intemauona . odel through the reflected in the Macroe~no~ic ~f ects on trade. exchange rate and relative pnce e Macroeconomic Assumptions · respo~~s assumed bfor This section identifies the pohcy · Smee · poricy can have a SU b• the carbon tax scenanos. stantial impact on the economy, it is critical that t~~ ~havior assumed by the fiscal and monetary autho~ues 15 identified: It is also important that these assumpti~ns are consistent, so that comparisons between.scenanos are appropriate. In each scenario, a tax policy was introduced t~at ultimately attempted to lower CO2 emissions. This had the direct effect of raising federal government revenue and inflation while weakening the economy. In light of the direct changes to the economy, the following responses were assumed in all cases: Monetary Polley Short-term interest rates were increased by the amount of the increase in inflation, thus real short-term interest rates were unchanged. No additional adjustments were made to long-term rates, which move by approximately 25-35 basis points for each 100basis points (or 1 percent) move in short-term rates. This response was consistent with the Bank of Canada's unwillingness to accommodate any increase in inflation, and therefore wasassumed to respond to increases in inflation with an equal dose of higher interest rates. Flscal POUcy All net revenue flows from the increased taxation were used to lower the deficit until it achieved balance Th· simply reflects the reality of the current deficit ~hich lS has stagnated near $30 billion in each of the ~t five years; and a debt-to-GDP ratio that is at its highest 1 since World ~ II, and is still growing. In our base eve 1 case, the National Accounts deficit balancedin p~tely ~ y~ later than the Depanment of1998 Fi-(apnance IS proJectmg). but the higher tax revenue :elerated that by up to 2 years. Once the deficit was anccd, it wasmumed that the federal would rapend all addi1ionat revenues; thus th ~nt provementin the ddieit in the year it was e unmaintainedto die forecast horizon.In the aovcrnm- ~:85 this improvement was roughly $7-$8bill' cases, cases it was $12-$14 billion . The irnp1on ;~~ extreme b rove ~~ r in the exteme cases ecause the rno Iller was 1ar ge . d rne n from the sharper tax increases cause the deficit 1u~ ner than in the moderate cases. Thus I0 ~, ance SOO h d d l , re1a the base case that s owe a gra ua reduction . 1~, tor·1c1·t over time, the improvement .required to baan llltn, de 1 the budget was greater the sooner It took place. ~ Federal government respending was divided between additional spending ~n current goods an~ se~ces, tra ~ fers to persons, and mcome tax _cuts. This divisio n~ intended to spread t~e respendmg over the Principal revenue and expenditure components so that aSimil ar balanceiJetwe ·en programs could be maintained. Since the amounts for each component were allocatedto maintain a given improvement in the deficit, thespecif i mix chosen has little bearing on the overall simulatiani effects. $1.0 fisa Def cha, pact duce and er ti Toil lead est( The prev simu Usirl Other Key Factors ..... The Canadian dollar was allowed to float;noaddi, tional adjustments were made to it. The effect or the higher interest rates and improved tradebal · i ance (from the weaker economy) typicallycaused mild appreciation at the beginning of the period ; subsequently, the higher inflation and reduced competitiveness caused it to weaken. cate; mod prox the I to si pro" ..... The wage response to inflation changes wasnot _e accelerated; thus the effects of the policieswer unanticipated in labor negotiations prior to theu impact on reported inflation. ..... The federal government was not assumed to initi· ate any new stabilization policies in the faceof the weaker economy that emerged prior to the re· spending . of revenue gains. This reflects theO er· ous level of the deficit and debt that does notPhe mit action on any meaningful scale. However,: . 0 full effect of the automatic stabilizers (suchas employment insurance) were operational , as:.~ 10 the maintenance of the same volume of spen on 800ds and services and transfers to the provinces. - Other Notes c~ .Pounding. .2 ~~ Care must be taken when inte d pcun nomma1 val gro h ues because of the effects of co~ rrent dol: ·. For example, by 2005the economy ~ cuAr~· era1 :: !'1°re _than three times its present ~l.Zes 30bil' lion lev icilt equ1~lent as a share of GD~ to dit\cof e lOday is $9() billion in 2005,as is a e Co Nu N Scenario Assumptions Sl.05 trillion (compared with $350 billion at the end of fiscal 19 9-90). neous fashion, while ensuring the add-up to the previously solved national levels. Deficit ~hanges .. ~ explosive dynamic can cause large changes m the deficit from seemingly small initial impacts. This is because extra revenue, for example, reduces the deficit directly, which in turn lowers the debt and subsequently interest payments. These in turn lower the deficit, which again lowers interest payments. etc. To illustrate. a Sl direct change in the deficit in 1990 will lead to a $4 change by 2005, with the $3 effect on interest payments dominating the original change. It is important to recognize that output in the industrial and regional models is defined at factor cost, while total output (real GDP) in the macroeconomic model is defined at market prices. Real output at market prices/ less indirect taxes/plus government subsidies is. by definition, equal to real output at factor cost. As a result , in the extreme case, real output at market prices declines by a cumulative amount of $100 billion, while real output at factor cost declines by a cumulative $566 billion. The difference between these two declines is the cumulative amount of increased indirect taxes that are collected as a result of carbon taxes. Regional and Industrial Notes The eight macroeconomic simulations described in the previous section were used to construct corresponding simulations using DRI's Industrial and Regional models. Using an input-output structure and the final demand categories of the macroeconomic model, the industry model produces forecasts of industrial output for approximately 40 industries. The regional model then uses the output of the industrial and Macroeconomic models to simulate economic activity within seven regions -(six provinces and the Atlantic region) in a dynamic, simulta- Energy Assumptions Each of the four tax scenarios has a moderate and an extreme scenario for a total of eight scenarios. The energy assumptions for the moderate cases are the same except for slight modifications of the carbon tax and gas guzzler cases. The extreme case has accelerated conservation, more natural gas vehicles, and more nuclear and less coal consumption. There are slight modifications of the extreme case assumptions made for the carbon tax and gas guzzler (see Table 1). TABLE 1 Energy Assumptions Used In the Moderate and Extreme Alternatives of Each Tax Scenario Moderate CO2 Extreme CO2 Coal Plants none after 2003 none after 1998, existing coal plants replaced with other fuels such as nuclear Nuclear Plants Alberta adds gas, other provinces add nuclear or hydro as required . Carbon Tax case has · additional 900 megawatts all add Nuclear plants 200 megawatts per year added to 11,000 megawatts total in Reference Case 400 megawatts per year added to Reference Case 2% of new car sales 10% of new car sales Carbon Tax case has additional 7200 megawatts Conservation and Demand Management Natural Gas Vehicles ..... ..:,.-: ;•:•, ;·.::.,:,.,·,·. ;:, :-· .. ..·: :;: February 1991 9 .•·,· .•.:,:··: ... :::··. C t 1985 1980 1975 TX25 = Motor FuelTax Moderate TX100 Motor FuelTax Extreme 20 1990 GUZ30 = Gas Guzzler Moderate GUZ100 = Gas Guzzler Extreme 1995 2000 2005 2010 C02LOW = Carbon Tax Mode rate CO2 = Carbon Tax Extreme C CHART 2 7:r------------~ __, Carbon Tax Revenues Are Highest CO2 GST25 8 .. ; TX100 -1uuuu-~-t;;---t;;-~= 1975 1980 1985 ,r:c~~ "'. = TX25 • Motor FuelTaxM Motor FuelTax 199() 1995~---t:::-----1-~~~---200o GUZ30. GasG GUZ100• Gas~ZZlerMOderate .·./,., ..... ·....... ~ler Extreme C02LOW 2005 ...~n Tax MOderate CO2 • t",.': .. ......,uon Tax Extr. ~-. . 1O Imperial Oil -·~ 2010 oderate GST10 ==GST~xtref118 GST25 ==GST ~ Scenario Assumptions C RT 3 HFO Prices Are Highest for Carbon Tax • ... ,,,,,,., ,. ,, 1~., 1975 1980 TX25 = otor Fuel ax Moderate TX 00 = iotor Fuel Tax Extreme 1985 1990 GUZ30 = Gas Guzzler Moderate GUZ100 = Gas Guzzler Extreme , , , ,,, __,_ ~ / • 1995 .. -~ ~-·--' -......-~---2005 2000 C02LOW = Carbon Tax Moderate CO2 = Carbon Tax Extreme 2010 GST10 = GST Moderate GST25 = GST Extreme CHART 4 NucJear Capacity Is Highest for Carbon Tax ,, CO2 .,,::; ~--· ~-· ... :: CII ,. J i' 2 - , ....,,,.-··· .. . .,,,../ GST25 C02LOW GST10 REFEREN E / 10000--+- 1975 TX25 TX100 z a 1980 Motor Fuel Tax Modera11e Mor,, Fuel Tax Extreme 1985 1990 GUZ30 z Gas GUZZier Moderate GUZ100 ,.. Gas Guzzler Extreme 1995 2000 2005 C02LOW = Carbon Tax Moderate CO2 = Carbon Tax Extreme 2010 GST10 = GST Moderate GST25 = GST Extreme February 1991 11 Macroeconomic and Energy Policies Fiscal policy, especially taxes and respending, are the initial causes of the results of this study. The price changes induced by the taxes have further effects on interfuel substitution. And the consequences of the taxes-CO2 emission reductions-must be measured against other environmental policies. Macroeconomic Policy The principal macroeconomic issues involve respending. The federal government can recycle the tax revenue by deficit reduction, cutting other taxes, increasing transfers to individuals through such things as the GST credit and program spending. Spending is divided between deficit reduction, transfers, and programs. Deficit ReduC1ion All of the tax revenue is used to reduce the deficit until the budget is brought into balance, which would be in the late 1990s. Federal budgetary balance is achieved by 1998 in the base case and by 1996 in some of the energy tax cases. The tax rates have a smooth implementation, such as introducing the GST at a rate of from 1 percent to 2 percent per year, thus causing a continual increase in government revenues. Transfers Program Spending There are numerous prospective programs that could improve environmental quality such as assistance to mternational efforts to.ban CF.CS.and .dea1+-1-p of-the Great Lakes. Government program spending is targeted on specific activities which have in turn effects on economic activity such as energy demand. Federa l programs could also address interfuel substitution and promote conservation, demand management, electricity use in mass transit, and nuclear generation, thus significantly reducing fossil fuel consumption in Canada. Recycling. Many communities have begun voluntary recycling programs. Also, many newspapers and magazines want to use recycled paper for ecological reasons and public recognition. The petrochemical industry recycles plastics and will be able to increase recycling dramatically in the future. Federal program monies could be spent on promoting recycling programs. Great Lakes Cleanup . The Great Lakes clean up consists of water treatment plants for effluent at the point of entry, such as towns and mills with discharges into rivers and streams that flow into the Great Lakes. Mass Transportation. There are subways. light rail transit. commuter trains, and VIA rail and bus lines that provide enormous transportation services at relatively low emissions of pollutants per passenger . Government transfers include the proposed GST credit, which causes a transfer payment to low income individuals whose existing level of income and spending patterns make the GST regressive. Since all of the proposed taxes are regressive. additional transfers or credits are consistent with current government views on respending. Rail ElectrlficatJon . Electri city generated by nuclear or hydroelectric sources could be used to power railroads. There are other ways of offsetting tax revenues. The personal income tax could be reduced or adjustments made to other taxes such as unemployment insurance (U.I.) and the Canadian Pension Plan or Quebec Pension Plan. Nuclear Plants. Atom ic Energy of Canada Ltd. (AECL ) is the major provider of nuclear technology in Canada. Several nuclear stations have been panially funded by AECL. either th rough research and development or provision of technology . Nuclear generation of Conservation and Demand Management. Electnc utilities have made enormous commitments to conserving electricity. Ontario Hydro is committed to spending several billions of dollars to reduce the demand for electricity at specific sites and for specific processes. February 1991 13 ----~ ~ ~~._, -,., II~ 'lijjjjl:I I" ·..... •, ·....,: .•, . . :· ::;:,;·.. .:-;··?:..:····::.::·:. ·... ···:·····~ :r : ..:·-:·::~ .. CHART, Tax Nuclear Investment Is Highest for Carbon 1000--1- 1975 1980 TX25 = Motor Fuel Tax Moderate TX100 = Motor Fuel Tax Extreme GUZ30 = Gas Guzzler MOd erate GUZ100 = Gas Guzzler Extreme C02LOW = Carbo Taxeme Moderate co = Carbon TaxnExtr 2 .·.·.·-·.....•.-.•••·;-.:-.·.····· -·.·.-;-.-.·.·-·.·.-: ••·.·.·>.••:-.-.·.·,;__ _;_._.,.;,;._•.-•••..-.:. ..... .·•• •-:.; •••• ;. ;:, •••.·.-:-.:: .•:;;; ,.,;: .: :: .: / . ..:-:::.:·{::: :\ :-:;:::::::: '::;::;:,:,:-·:·::: ·:::::·::·;:;:;:;,:-:-:-:-:-:-::-:-:-:-:.: :,:-: :-:-:-:-:-.-.·.· :___ .-.-•••: ••••••:::::: electricity would require a major contribution by the federal government to induce provinces such as Saskatchewan, Manitoba and British Columbia to add nuclear capacity. Investment The base case investment provides for the energy, infrastructure and producing capacity of an economy growing by nearly 3 percent per year. The base case capital stock , is nearly fully employed, with both domestic demand and exports of Canadian goods growing. The pattern of growth is ~ery much a refle_ctionof Canadian traditional ~trengths m resources and includes several megaproJects. A major reduction in allowed CO 2 emissions w Id · h . f OU unpact t_ e mvesthment pSrLo ile in t"'.o ways. First, the megaproJects sue as 0 O and Hibernia could b celed. Development of large scale oil pro · ~ can. Jects IS not . necessarily linked to Canadian demand 1" . pr od ucts, so these proJects could proceedorif petroleum . · h" h world oil pnces are 1g enough. A concerted eff world oil consumption would probabl h~~ to reduce ic prospects for development of eith/ c •bothe economr or th of these projects. A program to reduce oil and coal consu . mp!•on would lead to the closing of refineries a d nificant reduction in the capital s~~oal mines-a sig. of Canada C ' On- GST10 = GSH GST25 = GSTE • •• • ••••• • •-. •.• ••• ·.•.•.•,•.·.·-·.·-·.·.··:··.·.-.-.-~---.·.· .·.·.· • :-·.· . ' verting railroads to elec tricity would cause a redu the demand for diese l locomotives. Ch ange of e, activity from coal and oil to electricity would cau siderable investment by the utility sector. Nucle plants costing on the o rd er of Darling ton wouldt ed, while the existing coal plants would presuma main in the rate base but not be used. In a reals ~he loss of wealth caused by capital that is retired its useful life ends repres ents a large loss of weal1 Canada. Second, the need for clea n energy resources such ur~l ~as~ nuclear and hyd ro power will result ina ~hift m investments from the base case. While th investments may be subs idized by governm ent pre the overall cost to the economy will be dependen the relative cost of the se new sources of energy. pil To a large et . ~Lent, these e nergy resourc es are C3 · ensive, with enormous in itial investments. Jowop mg costs and f · 1 Th p of .' arr Y long pay back periods . e new mvestm · · eco will . ents impl ies that the Canadian receive a st . .. . rne a cons·d rong in itia l stimulus from 1nve51 1 erab le inc . tt'rnat ment of d b reas e m borrowing and u 1 e t. There are two iJlY ment, incluctin aspects of the energyreso~rce surr economic inf g the loss of part of Canadian _cvestr required · rastructure and the large scale in co m new . rhee ·.· ,. CHART 1 • hest Nuclear Investment Is Htg ·.· ..... . •, tor carbon Tax ---- .. I\,,,_.., I \ II , , , I I ••~ " - '' . ... I / _,,, ,,,,,,/ , ...... .. .--, I _. -· .. -.i".- 1975 1980 1985 1990 1995 Investment The base case investmentprovidesfor the energy,infrastructure and producingcapacityof an economygrowing ?Ynearly3 percent per year. The base case capitalstock 1snearlyfullyemployed.withboth domesticdemand and e~rts of Canadiangoodsgrowing.The pattern of growthIS ~erymucha reflectionof Canadiantraditional strengthsm resourcesand includesseveralm jects. egaproA majorreductionin allowedco emission . pact the investmentprofilein two2wa . s wouldungaprojectssuch as OSLO and Hibe ~s. First, the mece1ed. Developmentof large seal mra~W~ca . n. necessarilylinkedto Canadiand e o11proJectsIS not pr?ciucts,so these projectscouldemand fo~petroleum pnces are high enough A co proceed if worldoil ed effort to reduce worldoil consumption~ould ncebn . pro ably h·u ic p~ospectsfor developmentof . h c I the economproJects. eu er or both of these A programto reduce oil and co l !~adto the closingof refineri a consumptionwould nificantreductionin the ca .es and coal mines- . Pita!stockof C a s1g. anada. Con. 14 Imperial Oil 2005 2010 GST10= GS TMC