2012 Fall Report of the Commissioner of the Environment and Sustainable Development

The Commissioner’s Perspective

Is environmental protection keeping pace with economic development?

Natural resources and international trade have always been at the heart of the Canadian economy and will very likely remain so into the future. Like other export-intensive countries, Canada faces critical challenges ahead. The global economy is undergoing fundamental changes as a result of the global economic downturn and the emergence of new consumer economies such as Brazil, Russia, India, and China.

As a trading nation, Canada looks beyond its borders to generate jobs, economic growth, and prosperity. Today, roughly 30 percent of Canada’s gross domestic product (GDP) is fuelled by exports, and natural resources account for half of that. The federal government estimates that the natural resource sector provided jobs for over 750,000 Canadians in 2010 and is poised to grow even more. It also estimates that more than 600 major resource projects, representing $650 billion in new investments, are under way or planned across the country for the next 10 years.

The expected boom in natural resource development brings not only economic opportunities, but also environmental challenges. For at least the past two decades, international markets, trade rules, and the private sector have recognized that economic growth, international trade, and environmental protection are interlinked. For example, Canada has been at the forefront—both in global trade agreements like those of the World Trade Organization, and regional and bilateral agreements—in acknowledging the critical role that environmental stewardship plays in the global economy. This year marks the 20th anniversary of the North American Free Trade Agreement, an agreement that codified explicit environmental commitments within trade rules and a parallel environmental cooperation agenda. Since then, Canada has completed a number of other trade agreements, including those with Costa Rica, Colombia, and Chile, which recognize that international trade and high levels of environmental protection go hand in hand.

As I noted in my 2012 Spring Report to Parliament, there is a growing list of Canadian companies that are integrating environmental performance into how they do business both here and abroad. For example, after years of facing consumer boycotts, Canada’s forestry sector is now a world leader in sustainably produced timber and forest products. In a number of global industries, Canadian companies continue to demonstrate environmental leadership.

A key challenge in expanding Canada’s development and export of natural resources—from oil and gas to minerals and metals—will involve meeting or exceeding the environmental standards and consumer expectations of foreign markets. Trade cases continue to underscore that the environmental characteristics of a product, as well as how it is processed and transported, can affect market access and consumer choice. Therefore, it is vital from an economic perspective that Canada’s environmental protections keep pace with economic development.

This report examines the following federal environmental programs and activities, which help ensure that natural resource development is both responsible and sustainable:

  • protecting our ocean resources by establishing marine protected areas;
  • managing environmental risks associated with offshore oil and gas development; and
  • setting financial guarantees and liability limits for mining, shipping and offshore platforms, and nuclear power.

We have also included a study of federal support to the fossil fuel sector. This study highlights the critical link between environmental and economic issues raised in past reports. In the annual environmental petitions report, we follow up on questions posed in three petitions received in recent years. We present what Environment Canada and Health Canada are doing with regard to substances used in hydraulic fracturing for shale gas.

Looking forward, in 2013 we will be reporting on several aspects of the federal government’s sustainable development strategy. In particular, we will be assessing the fairness of the information contained in the next progress report on the Federal Sustainable Development Strategy 2010–2013, as well as providing feedback to the Minister of the Environment on the government’s next draft of the Federal Sustainable Development Strategy. In addition, we will be reporting on the implementation of the federal and departmental strategies.

Protecting and conserving Canada’s oceans

The world’s oceans facilitate about 90 percent of global trade and provide a wealth of benefits as well as material goods, most notably commercial and subsistence fisheries. Fish are the main source of protein for 1.5 billion people. Ocean scientists at the International Programme on the State of the Oceans reported in 2011 that, faster than predicted, human activities are compromising the oceans’ ability to support us and stated that deferring action now will increase costs in the future. Canada’s oceans are hardly immune to global threats. Canada’s State of the Oceans Report, 2012, by Fisheries and Oceans Canada, noted that our country’s oceans are increasingly threatened by pollution, overfishing, coastal development, and climate change.

Marine protected areas (MPAs) can be a cost-effective way of protecting the oceans, while ensuring that activities like commercial fishing, offshore drilling, and marine shipping respect and work in tandem with conservation goals. MPAs are not necessarily sanctuaries where all human activities are banned. In many, human activities take place but are closely managed for long-term sustainability. Research has shown that MPAs can have economic benefits, including higher fish catches in adjacent areas.

On this front, there is some good news at the international level. An October 2012 international assessment of progress being made under the United Nations Convention on Biological Diversity found rapid growth in the number of marine protected areas worldwide, making up more than 8.3 million square kilometres, or about 2.3 percent of the world’s oceans. However, that is still short of the target accepted in 2010 under the Convention on Biological Diversity, which called for 10 percent of global oceans to be protected by MPA networks and other effective area-based conservation measures by 2020.

Here in Canada, 20 years after signing the Convention on Biological Diversity, only about 1 percent of our oceans and Great Lakes is protected. Our audit showed that at the current rate of progress, it will take Canada many decades to establish a fully functioning MPA network and achieve the target to conserve 10 percent of marine areas. While the process of establishing MPAs takes time, and there are many reasons for this slow progress, the fact remains that conservation actions are not keeping up with the increasing pressures faced by our oceans.

Offshore oil and gas activities

Protecting Canada’s oceans requires more than setting aside protected areas. It requires vigilance by various resource extraction industries. The Macondo (Deepwater Horizon) incident in 2010 captured global attention, with the well blowout resulting in an estimated 4.9 million barrels of oil being spilled into the Gulf of Mexico. That incident demonstrated starkly the absolute importance of being ready to respond to a spill of that magnitude and the need for strong regulatory oversight to help prevent environmental disasters. The Macondo spill reminded us how quickly environmental damage can occur, and how expensive that damage can be—the estimated cost of that single incident is over $40 billion US dollars.

In this report, we examined whether the two offshore petroleum boards operating in Atlantic Canada appropriately managed the environmental risks and impacts from offshore oil and gas activities. This report is the first time my office has conducted a performance audit of those boards. We found numerous good management practices, particularly with regard to assessing and managing current environmental impacts. We also found several opportunities for improvement.

While offshore oil and gas operators are responsible for responding to incidents, including major spills, in the case that an operator does not or cannot respond appropriately to a spill, the relevant board can take over management of the response, with support from federal departments and agencies. The obvious question from the audit is this: Are the boards and their federal partners adequately prepared to respond to a major oil spill? In my view, the boards and their federal partners are not adequately prepared and, although the probability of a major spill in the Atlantic offshore area is relatively low, they need to do more to prepare for one. This is particularly the case given the potential for increased risks due to deepwater drilling and expanding exploration and development activities.

We identified several shortcomings, including insufficient spill response tools across the federal government, inadequately tested capacity, poorly coordinated response plans, and out-of-date or missing agreements between the boards and supporting departments. In addition, the Canada–Newfoundland and Labrador Offshore Petroleum Board has yet to complete its review of operators’ spill response capabilities and, therefore, does not have adequate assurance that operators are ready to respond effectively to a spill. Although the risks from an oil spill do not pertain to Nova Scotia, where only gas is currently produced, exploration for oil is expected to begin there in the near future.

The economic and financial impact of environmental risks

The legacy of resource development, such as tailings ponds left over from decommissioned mines, and unforeseen events, like oil spills or nuclear incidents, can not only damage the environment, but can pose significant financial risks to Canadian taxpayers. The federal government requires financial assurances for several key industries to operate in Canada. These assurances help manage risks to the environment and to the public purse by ensuring that funding is available from operators to decommission and restore sites after major resource projects have ended and to clean up incidents such as spills. Our chapter on the Financial Assurances for Environmental Risks examined the systems in place to obtain financial assurances.

We found that the federal departments we examined had procedures in place to obtain environmental financial assurances. We noted, however, that the departments lacked complete inventories of the assurances they held and did not know whether these assurances were sufficient to address the risks they were meant to cover. More concerning, given the expected increase in activity in the natural resource sector, we found that Aboriginal Affairs and Northern Development Canada, the department responsible for resource development in the North, was not conducting the required inspections that are essential for ensuring that the terms and conditions of project approvals are being met.

We also found that liability limits have not kept pace with the potential consequences of an incident. For example, the $75 million absolute liability limit for nuclear facilities has not changed since it was introduced in the 1970s, while the absolute liability limits for incidents involving offshore oil and gas development (which range up to $40 million) have not been updated in nearly 25 years. We found that Canada’s limits are significantly lower than those of other countries. To put it in context, the United States’ National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling found the US$75 million absolute liability limit for offshore incidents in the United States was “totally inadequate,” and placed the economic risk on the backs of taxpayers. As noted above, the Macondo (Deepwater Horizon) incident has resulted in estimated costs of over $40 billion US dollars.

These findings, when considered with our concerns regarding preparedness to effectively respond to a major oil spill, show clearly that Canadians are exposed to environmental risks and the financial implications that go with them.

We also noted that the recent Jobs, Growth and Long-term Prosperity Act included key changes to the Fisheries Act and the government’s Policy for the Management of Fish Habitat (Fish Habitat Policy). Before these changes, the Minister of Fisheries and Oceans could authorize projects that resulted in the harmful alteration, disruption, or destruction of fish habitat while requiring financial guarantees for habitat compensation, under the long-standing “no net loss” principle that was at the heart of the former Fish Habitat Policy. Recent amendments to the Fisheries Act were passed by Parliament in the summer of 2012. In light of the transformative nature of the changes made, I am concerned that the government does not know which aspects, if any, of the former “no net loss” principle remain in effect, and whether compensation plans are required for new projects. A practical consequence of this confusion is that the government does not know what will happen to the approximately $120 million in financial assurances it now holds under the conditions of the former legislation.

This report also contains a study on federal support to the fossil fuel sector. At the G-20 meetings in 2009, Canada committed to rationalizing and phasing out inefficient fossil fuel subsidies in part to decrease emissions of greenhouse gases. I note that the federal government has taken action in line with this commitment. Direct support has decreased to between $60 million and $160 million annually, and at the same time, the proportion that supports cleaner technologies continues to increase. In addition, the government is phasing out some tax incentives that favoured the fossil fuel sector. The reduction of support to the fossil fuel sector clearly shows Canada going in the right direction.

At the same time, a number of other tax incentives that may provide a significant amount of support for fossil fuel extraction remain in place. We note, as we did in a similar study conducted in 2000, that the costs to taxpayers of tax incentives are difficult to estimate accurately. Finance Canada’s estimates suggest that tax incentives to the oil, gas, mining, and clean energy sectors, of which fossil fuels represent the majority of GDP, may have amounted to more than $3 billion over the past five years.

Environmental petitions

Finally, I am pleased to present the annual environmental petitions report. This year, Canadian residents submitted 23 environmental petitions reflecting many of the significant environmental issues facing Canada today, such as toxic substances, climate change, biodiversity and fish habitat, and environmental assessment. We are pleased to report that departments and agencies responded on time to all petitions this year.

Since 2010, three environmental petitions have been submitted raising questions about the federal government’s role in regulating hydraulic fracturing for shale gas and about disclosure of the substances being used in the process—many of which have been assessed as toxic when used in other applications. Production of natural gas from unconventional sources—such as shale gas—is expected to increase by more than 50 percent within the next 10 years, and to almost double in the next 20 years. While the regulation of the oil and gas sector largely falls under provincial jurisdiction, regulating toxic substances is a federal matter. Regulating toxic substances includes identifying and assessing the risks to human health and the environment posed by these substances. It also involves controlling the risks where substances are deemed to be toxic, and maintaining an inventory of pollutant releases.

We followed up with Environment Canada and Health Canada to get an update on what has been done since the Ministers responded to these petitions. Federal officials told us that they consider hydraulic fracturing to be an emerging issue that they are now starting to investigate. They are currently gathering information on the substances used for hydraulic fracturing in Canada. According to the government, until it has a better understanding of hydraulic fracturing, it cannot determine whether risk assessments and control measures are warranted. Currently, oil and gas exploration and drilling activities are exempt from reporting pollutant releases to Environment Canada. A review of these reporting requirements will be completed in March 2014.

The pace of progress

Reflecting on my current and past reports, I have seen several areas of progress by the federal government. In this report, we note the use of scientific expertise in selecting marine protected areas and note that the government is reviewing liability and compensation systems to ensure they reflect current realities. In 2011, we noted the government’s plan for implementing an integrated environmental monitoring system in the oil sands region. We look forward to the implementation of that plan. The federal government has also made progress in other key areas, including expanding the use of environmental indicators to inform citizens about the state of Canada’s environment.

We have also seen causes for concern in the management of programs directly related to natural resources. Last year, we pointed to weaknesses in the capacity of the federal government to identify the cumulative effects of large-scale oil sands projects and to enforce compliance with the Canadian Environmental Protection Act, 1999. We also noted problems involving how the National Energy Board followed up when it found deficiencies in systems designed to ensure safety, pipeline integrity, and environmental protection. In 2010, we reported deficiencies in the federal government’s readiness to respond to spills from ships. I note, however, that Budget 2012 saw some welcome steps to increase funding for pipeline inspections and to improve preparedness for oil spills from tankers and other vessels in Canadian waters.

This year’s report has identified other shortcomings. For example, the current level of inspections of major resource projects in the North is very low relative to the level of activity. The government does not know the actual cost of its support to the fossil fuel sector. Meanwhile, offshore resource development continues to expand even as the government makes slow progress establishing marine protected areas. As well, the petroleum boards on the east coast and their federal partners are not adequately prepared to respond to a major oil spill should they need to step in.

Considering the central role of natural resources in today’s Canadian economy, it is critical that environmental protections keep pace with economic development. In this report, we found a number of encouraging practices, but also numerous shortcomings. When combined with our previous reports and viewed in the context of the risks and challenges posed by increasing development, these shortcomings leave me concerned that environmental protection is failing to keep pace with economic development. Recognizing Canada’s record of leadership in linking international trade with environmental protection, I am hopeful that these gaps will be addressed and that natural resource development and environmental stewardship will move forward in tandem.

 

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