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Av: Partner Lars-Henrik Q. Røren (19.10.2007)

Back in February 2005, the Kyoto Protocol officially entered into force, marking an important and highly needed step forward in the struggle against global climate change. Now each and every involved country has to show whether they are simply "talking the talk" or "walking the walk" by acting inline with the binding treaty.

As of October 2007, 173 countries have signed and ratified the Kyoto Protocol to the UN Framework Convention on Climate Change (UNFCCC). Prior to the Kyoto Protocol sign-off, the UNFCCC ("Convention") had the intention to stabilise greenhouse gas emissions at 1990 levels by the year 2000. The Kyoto Protocol goes a step further than the mentioned Convention, by requiring the countries which sign and ratify the Protocol to reduce their greenhouse gas emissions from 1990 levels by an average of 5% over the period 2008-2012.

Keep in mind that signing is optional. Signing serves as an intention to ratify, whereas ratification is the final step for a country to formally accept the Kyoto Protocol.

In addition to the 173 countries which have ratified, 19 countries/states have not expressed any ratification position yet, nor have they signed. The United States of America (U.S.), Australia and Kazakhstan signed during 1998/1999, but none of these have since ratified the Protocol they originally signed. It is unknown whether Kazakhstan will ratify or not, but we place more attention on the fact that the U.S. as well as Australia have both stated that they do not intend to ratify the Kyoto Protocol.What happened?

The U.S. is the world's biggest emitter of greenhouse gases, with one of the highest levels of emissions per capita, and originally agreed to the intended reduction targets and signed the Protocol back in 1998. As part of its commitments to fulfil the Kyoto Protocol, the U.S. accepted CO2 reduction targets of 7% from 1990 levels to be reached within 2012. It was the Clinton administration that signed the Protocol.

With a new presidency follows new policy. Very early in his first presidential period, President Bush and his Government announced that it would not ratify the Kyoto Protocol.  The Bush administration has since worked with a belief that these climate change policies need to be on a voluntary basis. The same administration has announced a policy that will add up to an increase of over 30% in emissions above 1990 levels by 2010.

During a speech at a U.N. climate panel earlier this year, Mr. Bush was slightly more eager to take some forced initiatives to cut emission growth. Still, this eagerness seems fairly half-hearted and non-committing. Currently, there is no reason to believe that further initiatives will be initiated by Mr. Bush before he leaves the White House by the end of next year. In our opinion, 2009 will be the first year with possible commitments from the U.S. related to greenhouse gas emissions. Until then, the U.S. will continue to grow its air pollutions at a rapid rate.

It is of some interest what the Australian government decides to do regarding its unwillingness to ratify the Protocol. However, the Australians are not the major problem. The U.S. has been, and will be the big problem, until the leading U.S. politicians take a completely new direction. A victory for the Democrats in next year's election would make the U.S. a more environment friendly nation.   

 
On the other hand, the Americans have been quite honest. They do not like the Kyoto Protocol. Hence they will not ratify it. The rest of the world can put pressure on the Americans, but in the end it is all up to them. We could provide many examples on international treaties where a few or many countries did not sign up.   

Let us draw your attention to another issue related to the Kyoto intention. How many of the countries which have ratified the Protocol will reach their (cuts in) emission targets by 2012? We doubt that there will be many. This serves as another proof that politicians are good at "talking the talk" while very few are prepared to "walk the walk."

We can take Canada as an example. The Canadians ratified the Protocol in December 2002, forcing Canada to reduce CO2 emissions to 6% below 1990 levels before end of 2012. The Canadian people supported the Protocol and the obligations that followed at the time. Despite the support from a large group of Canadians, there was still an opposition. And the opposition grew rapidly. Backed by the Conservative Party, many large business groups, energy corporations and others started to build a forceful momentum against the Protocol.

By 2004/05 the CO2 emissions had risen to 25-28% above 1990 levels. This was in fact a quite dramatic development and also compares unfavourably to the 16% increase in emissions by the U.S. during the same period.

The previous Canadian government developed a plan to meet its Kyoto targets. Already in 2003 the government claimed to have spent or committed USD 3.7bn on climate change programmes. The emission volumes had nonetheless reached historic high levels. The politics seemed to fail. Unfortunately, the acting Government at that time never got the chance to implement or improve the plan before it lost the election in January 2006.

The new minority Government under leadership of the Conservative Party had previously and during the election campaign expressed opposition to Kyoto. This was a clear set-back for the Canadians and their ambitions (and eagerness) to reach their emission targets according to what the government had signed and later ratified in the Kyoto Protocol. The new Minister of Environment announced in April 2006 that Canada would have no chance of meeting its targets under Kyoto.

To push Canada's intention not to fulfil its obligations further, the government even announced that funding designed to meet the Kyoto goals had been cut.

The federal Government has introduced a kind of legislation to set mandatory emission targets for the industry. Sources have said that this will not take effect until an estimated 2050. There have been some further initiatives lately between the opposition and the Government to improve this legislation. The Canadian Government has this year been sued by an organization called "Friend of the Earth" for failing to meet its Kyoto Protocol obligations.  

Countries that still have the intention to reach their Kyoto targets are likely not the biggest fans of what has happened in Canada the last 2 years and the environmental politics of the Canadian Government. Normally you work against such countries. At least you implement political pressure to force them to fulfil intentions in international treaties that they have accepted by signing and ratifying.

The Norwegian Government has been crystal clear that it expects all countries that have signed and ratified the Protocol to deliver according to intentions. Canada will not do so.

Why is Canada's breach of the Kyoto Protocol interesting? And why are we mentioning the Norwegian Government in relation to this?

Again, we will highlight that the U.S. is a (read: THE) big problem. On the other side, it is still of high relevance that a big emitter like Canada seems to ignore the Protocol it is a part of. That should really catch the interest of the Norwegian Government.

Because:
1) Canada is one of the greatest consumers of energy per capita.
2) The 33 million Canadians use more energy than all of the 765 million inhabitants of Africa.
3) Canadian greenhouse gas emissions are increasing rapidly.
4) Canada spends more than 10% of its GDP on energy consumption.
....and it ignores the Kyoto Protocol.

The Canadian energy industry and transportation sector contributes to the greatest share of emissions. There is some focus on clean energy and renewable sources, and overall the Canadians are keen to implement new clean sources in its energy spending pattern. This is positive and will help, but on the other side Canada is growing its oil and gas production rapidly. That is the main reason why Canada without policy changes will continue to grow its total emission contribution to the globe for many, many years. This policy contrasts heavily to what it signed up for in the Kyoto Protocol.

Canadian oil and gas production (and exploration) has taken a completely new direction the last years. With a rapidly rising oil price, the enormous oil sand resources in the Province of Alberta have been economical achievable to explore for and produce.

Oil sand is "impregnated sands that yield mixtures of liquid hydrocarbon and require further processing other than mechanical blending before becoming finished petroleum products (from source)."

Oil sands are found in more than 70 countries, but Canada and Venezuela have the two largest deposits. Oil sand production represents more than 50% of Canada's total oil output and is expected to increase its market share. Reserves are massive and bring Canada into a top 3 position globally when measuring potential recoverable reserves.

This is one of the problems in today's global energy situation: On one side we have the need for energy, first of all coal and oil based. On the other hand, oil sands are among the largest deposits to supply these needs. Finally, we have the climate and CO2 related issues.

This is a difficult situation, and firstly, politicians should not ignore these challenges and act as though there does not exist a problem in relation to their pressure for global climate initiatives.

To be frank, it will be very difficult to simultaneously allow oil sand fill (some of) the increasing demand needs going forward and also take care of climate issues (and fulfil Kyoto Protocol).

We are aware that large amount of money which is put into new production methods/technologies that hopefully will reduce emissions originating from oil sands going forward. However, this will take time and there is no guarantee that the oil sand players will be successful.
The fact is that oil sands currently are clearly the worst type of oil for the atmosphere, with direct effects on and parallels to the existing climate issues.

On June 26th 2007, Statoil (now StatoilHydro) announced that it had received a final approval from Canadian authorities regarding its acquisition of North American Oil Sands Corporation (NAOSC). This was a transaction worth NOK 12bn. Statoil reached a milestone. It secured an 1110 km2 license area in the most prospective and resource rich parts of Alberta Province, Athabasca-region.

Statoil (todays StatoilHydro) will from the beginning to the end of the next decade grow its oil sands business from a small 10.000 barrels a day operation in 2010 to a massive 200.000 barrels per day operation during that decade.

StatoilHydro will probably invest more than NOK 100bn in its Canadian oil sand operations during the next 7 years, according to our estimates.

Statoil acquired this business as a part of its eagerness to grow reserves and because it finds it economically attractive to get involved in that part of the oil business. Statoil is absolutely not to blame, even though we in the Kaupthing Energy Team still are not convinced that this is a value enhancing project for the shareholder when all aspects are taken into account. We will come back to an in-depth research regarding this at a later stage.

We see a potential conflict in this StatoilHydro involvement in Canadian oil sands. Namely that the Norwegian Government (Ministry of Oil and Energy) as the majority owner of Statoil (73% at that time) and 62% owner in StatoilHydro now, indirectly, gives its support to Norwegian investments into Canadian oil sands. In another governmental office, the Minister of Environment is indirectly putting pressure on the Canadian government (and others) for not fulfilling their Kyoto obligations.

There are many examples where the owners of companies have taken direct control of commercial decisions. And these issues have been minor compared to the issues and questions the decision on oil sands raises. All owners decide upon what direction of the business their Board of Directors take and how the CEO's execute. If it is your business, your capital and your risks on the line, then you like to decide and set the overall agenda for a business.

One can always claim that if we do not invest in oil sands someone else will. That is true. The exact same thing happens when the Norwegian Government puts restrictions on the Norwegian Petroleum Fund to not invest in weapon-industries and tobacco. Both are legal products, but our politicians did not want us to support such business. We highly agree on that decision, but it also raises some questions:

Tobacco increases the risk of cancer. Oil sands destroy our climate and will worsen our quality of life going forward. Is there any difference?  Is it more important to protect people from smoking than protecting the human kind against air pollution and dramatic climate changes? The only difference as far as we can see is that it will hurt more - moneywise - to protect against a collapsing environment. Then it is easy to just "talk the talk" and not "walk the walk."

Canada must be seen as a problem when it will not live up to its Kyoto obligations. We (Norwegians) are actually indirectly sponsoring the problem. Nothing more, nothing less.

If you do not want your children to eat candy, it is a good start not to give them any.