The Need for Multidisciplinary Management:
Alternative and Market-Based Approaches to
Environmental Protection in the Energy Industry

Magdalena A. K. Muir

Article for the Emerging Air Issues for the 21^st Century:
The Need for Multidisciplinary Management conference
in Calgary, 24 September 1997.

Abstract

There is a growing perception that "command and control" regulation has begun to reach its limits as an environmental protection strategy. The increasing complexity of today’s environmental problems has outpaced traditional regulation. In a number of sectors, industry has taken the initiative and begun to shift toward creative and flexible strategies focused on performance and self regulation. This paper will review environmental regulation of the energy industry, and provide specific examples of alternative legal and regulatory approaches.

The Canadian energy industry and its regulators are actively engaged in seeking alternatives to the traditional command control approach to environmental protection. Greater cooperation is occurring between various levels of government, and different regulatory boards and processes. Due to increasing activity and budgetary cutbacks, the energy industry and its regulators are exploring a self enforcement models where the onus is on industry to understand and implement regulations, and the regulator retains the right to audit and enforce. Industry associations are also engaging in discussions with governments and regulators about the appropriate standards for specific projects, which are then incorporated under legislation. Industry has also been an active participant in the federal Voluntary Challenge and Registry program to stabilize greenhouse gas emissions at 1990 level by the year 2000. Lastly, many industry participants are developing internal environmental management regimes, and beginning to use these regimes to satisfy legislative requirements.

Introduction

The Canadian energy industry is extensively regulated with a number of key federal and provincial energy decision-makers and processes. The primary federal decision-makers and processes are the National Energy Board, Environment Canada, Indian Oil and Gas Canada and environmental assessment under the Canadian Environmental Assessment Act. The primary Alberta decision-makers are Alberta Environmental Protection, the Alberta Energy and Utilities Board and the Alberta Department of Energy. Other significant processes include inter-jurisdictional agreements between the federal and provincial governments, and voluntary initiatives by the energy industry to meet Canada’s obligations under international agreements. These decision-makers and processes combine to create a complex web of environmental regulation that applies to the exploration, drilling, production, transportation and marketing and export of conventional oil and gas. Decision-makers and the energy industry are exploring alternatives to traditional methods of environmental regulation. These alternatives are examined, in conjunction with summaries of the existing regulatory regime, after a brief review of constitutional jurisdiction, and the government, corporate, and public interest in environmental regulation.

Constitutional Jurisdiction for the Environment

The Constitution Act, 1867 assigns powers and responsibility over various subject matters to either the federal or provincial governments. Both levels of government also have proprietary powers to manage their own property, a significant power in the province as the province is often the largest landowner, and owns most of the oil and gas and mineral rights. Energy projects are subject to either provincial regulation, or federal and provincial regulation. Generally, the provinces have responsibility for regulation of an energy project within the province unless there is an inter-provincial scope to the project; inter-provincial pollution results from the project, or fisheries, navigation or Indian lands are affected. Many energy projects are subject to federal and provincial regulation because of the scope of the projects or their inter-provincial nature.

The federal government regulates the Canadian energy industry through the National Energy Board, which operates under the National Energy Board Act. The Canadian Environmental Assessment Act and the Canadian Environmental Protection Act affect the energy business and are implemented by the Canadian Environmental Assessment Agency and Environment Canada, respectively. Alberta regulates through the Alberta Environmental Protection under the authority of the Alberta Environmental Protection and Enhancement Act and through the Alberta Energy and Utilities Board.

Government, Corporate and Public Interest in Environmental Regulation

Environmental regulation is complex because it responds to and meets the needs of a diverse range of interests who have different and sometimes conflicting perspectives. Government includes federal and provincial governments, specialized energy boards, and ad hoc review panels appointed to review the environmental aspects of energy projects. Changes are occurring due to increased demands for public participation, economic cutbacks at all levels of government, and due to a general movement in Canada to reduce the amount of regulation.

A number of key developments are occurring. Environmental considerations are being incorporated into energy decision-making in new ways. At the same time, governments and their institutions are collaborating to avoid duplication and conflict. This collaboration is occurring between federal and provincial governments, and between different departments at both levels of government. Lastly, governments and institutions are transferring more responsibility for environmental compliance to corporations authorized to initiate or implement energy projects.

Decision-makers at all levels are encouraging increased corporate participation. All aspects of a corporation’s business are impacted by environmental regulation. However, corporate issues are not limited to a company’s obligation to comply with regulations. Corporations may have environmental management systems, engage in voluntary compliance initiatives to reduce gas emissions, and adopt environmental risk approaches as an alternative means of complying with reclamation and abandonment standards. Environmental standards and regulations have also affected corporate accounting practices, and acquisition and divestiture practices for oil and gas interests. Under recent accounting practices, parties record project abandonment and reclamation costs as liabilities, and may set aside funds to meet those costs. Corporations are also entering into indemnification arrangements to avoid "orphan well" liability after producing oil and gas properties are sold.

A multitude of interests falls within public issues including other commercial interests. Oil and gas activity occurs on public and private lands. Activity occurs on public lands where both the surface land and the subsurface mineral rights are owned by Alberta government, but where land-based rights have been conveyed to third parties. Activity also occurs on lands where private individuals own the surface, and the provincial government owns the subsurface. In that instance, government may grant interests in different oil and gas zones, and mineral rights to different parties who must collaborate with each other and with the surface land owner. Lastly, activity occurs on wholly private lands where the same or different private interests own the surface rights and subsurface rights. Corporations are required to consult and cooperate with all these parties. Corporations also have to consult extensively with individuals, communities, First Nations and public interest groups due to the environmental impacts of energy projects and increasing public participation.

Federal regulation

Environment Canada

Environment Canada is the key federal department with respect to the environment. The department is responsible for administering the Canadian Environmental Protection Act, the principal federal environmental legislation. The Act establishes a comprehensive regime to control toxic substances at each stage of their life cycle from development and manufacture through transport, distribution, use and storage, to ultimate disposal. A substance is declared toxic if it is found to threaten the environment, human life or health. The Act also includes provisions to deal with nutrients, federal lands and activities, enforcement, international, air pollution and ocean dumping. The Supreme Court of Canada recently upheld the federal government’s constitutional authority to regulated toxic substances under the Canadian Environmental Protection Act under the criminal law power in the R. v. Quebec Hydro decision (September 18, 1997).

The Canadian Environmental Protection Act is currently being reviewed. A bill to replace the Act was proposed in the last Parliamentary sitting and will be reintroduced this fall. Among other matters, the bill increases public participation, incorporates a pollution prevention approach, promotes intergovernmental cooperation between federal, provincial and territorial governments and First Nations, shifts further responsibility to the user or producer of toxic substances, and facilitates the use of economic instruments.

Canadian Environmental Assessment Act

The Canadian Environmental Assessment Act came into force in January 1995, after five years of consultation and two years of scrutiny by Parliament. The Act requires an environmental assessment when there is a project, when that project is not excluded from environmental assessment, and when a federal authority is exercising a power or performing a duty under the Act. Four types of assessment are available: screening, comprehensive study, mediation and panel review. All these types of assessments result in recommendations to responsible authorities; these recommendations can be adopted in whole, in part, or rejected.

Four regulations have been enacted under which are essential to the operation of the Act. They are the Inclusion List Regulations which lists physical activities which are "projects"; the Exclusion List Regulations which set out circumstances when projects are excluded from the Act; the Law List Regulations which set out the federal acts and regulations which require assessment; and the Comprehensive Study List Regulations which lists projects which require comprehensive study. All these regulations were developed by the Canadian Environmental Assessment Agency, with the assistance of a Regulatory Advisory Committee which is a multi-stakeholder composed of provincial and territorial governments, other federal departments, First Nations, industry organizations, and environmental groups.

Further measures are being proposed which suggest the Canadian Environmental Assessment Act may be evolving in new directions. These measures include federal coordination regulations to streamline the process when more than one department is involved, and regulations that vary and exclude requirements under the Act for projects outside Canada. Future regulations include process efficiency and cost recovery initiatives. The cost recovery initiatives are quite contentious as the Act currently does not require the project proponent to pay any fees, and provides for intervenor funding. Proposals have been made to shift to the proponent some or all of the costs associated with an environmental assessment. The Canadian Environmental Assessment Agency, in conjunction with stakeholders, is developing cost recovery mechanisms and is seeking authority from the Treasury Board to draft regulations for 1997 or 1998.

The Agency has also been involved in the development of bilateral and multilateral arrangements with the provinces and territories to provide a cooperative regime for conducting assessments of projects that require both federal and provincial approvals. Harmonization agreements have been signed with Alberta, Manitoba and British Columbia and discussions are underway with Ontario. A joint review have already taken place between a panel formed under the Canadian Environmental Assessment Act, and the Alberta Energy and Utilities Board under the agreement with Alberta. Other joint reviews are occurring with the Act and the National Energy Board pursuant to a negotiated memorandum of agreement. These joint reviews are discussed in the context of the individual boards.

National Energy Board

The National Energy Board is the key federal energy regulator and functions under the authority of the National Energy Board Act. Under that Act, the Board approves energy activities on federal and offshore lands, inter-provincial oil and gas pipelines, international electrical transmission lines and oil, gas and electricity exports and imports from or into Canada. The Board considers and incorporates environmental considerations into its approval of energy projects.

The National Energy Board collaborates with other parties and processes. The National Energy Board has collaborated with the Alberta Energy and Utilities Board on a number of matters including the development of a shared oil and gas reserve database. The decisions and policies of each board also affect the other board as they will on occasion defer to or adopt the findings of the other board.

The National Energy Board has also carried out environmental assessment on energy projects jointly with panels formed under the Canadian Environmental Assessment Act. These joint review panels are a step forward as environmental assessment is directly incorporated into the decision-making process. The panel examines the environmental aspects of a project and issues recommendations. The same panel then considers these recommendations when they decide on broader grounds whether to approve an energy project, and the terms and conditions of that approval.

The first joint assessment between National Energy Board and a panel under the Act occurred in an application to construct and operate the Express Pipeline, an oil pipeline transporting oil from Alberta to the Canadian border. This joint review panel was created under a memorandum of understanding between the Canadian Environmental Assessment Agency and the Department of Natural Resources Canada. The joint review panel recommended that the pipeline should proceed on the grounds that it was not likely to cause significant adverse environmental effects in light of the proposed mitigation measures and the incorporation of the panel’s recommendations. The panel then approved the pipeline and incorporated its recommendations, as well as other environmental conditions, as certificate conditions for the pipeline. Another joint review involving the Board, a panel under the Act and the Canada–Nova Scotia Offshore Petroleum Board is now under way with respect to the Sable Island gas projects. These projects involve gas development offshore of Nova Scotia, and the associated underwater and onshore pipelines to export this gas to markets in Canada and the United States.

Indian Oil and Gas Canada.

Indian Oil and Gas Canada, a division of the Department of Indian Affairs and Northern Development, is responsible for administering oil and gas rights on reserve lands in southern Canada, and paying royalties to the First Nations. The First Nations beneficially own oil and gas rights on reserves in Alberta, Manitoba and Saskatchewan. Indian Oil and Gas Canada, with the consent of the First Nation, issues the oil and gas leases and surface rights agreements for energy projects on these lands. The division requires a proponent to conduct a project environmental assessment under the Canadian Environmental Assessment Act for any project on reserve lands, and includes environmental terms and conditions in the surface access agreement. The Alberta Energy and Utilities Board process also applies on reserve lands in Alberta as a result of the Indian Oil and Gas Regulations.

The First Nations Oil and Gas Management Initiative (the Pilot Project) is underway between five First Nations, the Department of Indian Affairs and Northern Development, and the Indian Resource Council of Canada to enable these First Nations to move top full management and control of their oil and gas. The Pilot Project has a three phase approach of co-management, enhanced co-management and full management, and is currently in the enhanced co-management phase.

Alberta Regulation

Alberta owns mineral rights for approximately 80 percent of the lands within the province, and regulates the development of all publicly and privately owned energy resources in the province. Alberta has developed a comprehensive set of environmental regulations for the energy industry, and is attempting to streamline its regulatory processes to minimize duplication and delay. Key Alberta environmental decision makers and processes are summarized below.

Alberta Environmental Protection

Alberta Environmental Protection is the key provincial department for environmental regulation. The department implements the Alberta Environmental Protection and Enhancement Act, environmental legislation which streamlined and consolidated existing environmental legislation on its proclamation in 1993. The Act establishes an environmental assessment and approval process to ensure environmental protection and economic factors are considered early in a project. The Act requires environmental impact assessment reports for certain energy projects. The Act identifies mandatory activities like pulp mills, oil refineries and large dams that always require environmental assessment. Approvals are required from Alberta Environmental Protection to ensure projects that could adversely impact the environment are reviewed. Lastly, the Act establishes the Alberta Environmental Appeal Board to hear appeals on approvals.

Effective September 1996, Alberta Environmental Protection introduced a series of eight codes of practice which replace approvals under the Act with a more industry-driven approach. Three of these codes are specific to the energy industry and developed in part because of discussions with industry associations. These codes are the Code of Practice for Oil Production Sites, the Code of Practice for Discharge of Hydrostatic Testing of Petroleum Liquid and Natural gas Pipelines, and the Code of Practice for Compressor and Pumping Stations and Sweet Gas Processing Plants. The first code requires a company to notify the department when it undertakes a certain activity, with no further action being required. The remaining two codes require a company to notify the department that it intend to undertake an activity, with the company proceeding only when advised by the department. The department retains the ability to conduct audits in all three situations to ensure the company complied with the requirements in the code.

Alberta Energy and Utilities Board

The Alberta Energy and Utilities Board is the regulator for energy projects in the province, with environmental aspects being considered as one aspect of their decision-making process. The Board grants permits, approvals and license to construct and operate regulated facilities. In addition to the general powers outlined in the Energy Resources Conservation Act, the Board has further specific powers and jurisdiction over oil and gas under the Oil and Gas Conservation Act and the Pipeline Act. The Board is required to ensure that energy development is carried out in an orderly and efficient manner which protects the public interest. Section 2.1 of the Energy Resources Conservation Act states the board will consider the environmental, social and economic effects of a proposed development when determining whether a project is in the public interest. The Board may convene a public hearing on that project "if it appear to the Board that its decision on an application may directly or adversely affect the rights of a person". Funding is also available to defray some of the costs of intervenor participation.

The Alberta Energy and Utilities Board collaborates with the National Energy Board on variety of matters, adopting the findings of the National Energy Board where relevant or useful. The Alberta Energy and Utility Board has recently completed in a joint review with a panel formed under the Canadian Environmental Assessment Act. The joint panel environmentally reviewed and approved the Cheviot Coal Project, an Alberta coal mine and a related power line. The Alberta Energy and Utilities Board has also negotiated memorandums of understanding with Alberta Environmental Protection, and works with that department to ensure there is a "one window" approach to environmental regulation of an energy project.

Due to record levels of activity and budgetary cutbacks, the Alberta Energy and Utilities Board is exploring alternative approaches to energy regulation where the onus is on the energy industry to understand and implement regulations, and the Board retains the right to audit and enforce these regulations. Consistent with this approach, the Board has introduced a new enforcement policy which considers the company’s actions as a whole, with timely enforcement action and escalating consequences for repeat or similar non-compliance.

Other Regulation

Inter-Jurisdictional Agreements

Confusing and overlapping constitutional jurisdiction over the environment has historically resulted in tensions between the federal and provincial governments and a significant amount of civil litigation. Its has also resulted in a number of inter-jurisdictional agreements between governments. Agreements are either in place or have been proposed under federal legislation such as the Canadian Environmental Protection Act, the Canadian Environmental Assessment Act, the Fisheries Act and the proposed Endangered Species Protection Act. Under these agreements, provincial legislation may be deemed to be equivalent to federal legislation. The agreements also permit such administrative solutions as joint environmental reviews or the delegation of the administration of a federal law to the provincial government.
There have also been a number of harmonization initiatives by the Canadian Council of Ministers of the Environment to resolve uncertainties over the environment by negotiating different or complementary jurisdiction. A framework agreement has been approved in principle, and parties are proceeding with detailed agreements on specific issues. These initiatives are referred to as the CCME harmonization initiatives. In December 1996, the Council of Ministers had approved in principle a Canada-Wide Accord on Environmental Harmonization. This accord provides a framework, with three detailed agreements on environmental assessment, standards and inspections nearing completion. Another meeting of the Council of Ministers is scheduled for the fall of 1997.

International Initiatives

Canada is signatory to a number of international trade and environmental agreements which impact on and affect the Canadian energy industry. Canada is a signatory to the North American Free Trade Agreement also with the US and Mexico. These three countries also executed the North American Agreement on Environmental Cooperation to complement the environmental provisions under the free trade agreement. This parallel side agreement establishes the Commission for Environmental Cooperation to enhance regional cooperation, prevent environmental and trade disputes, and prompted the effective enforcement of environmental law in each of the signatories. Canada has been exporting record volumes of oil and gas to the United States. As of yet, there have not been any trade challenges to these exports on environmental or on any other grounds. Canada has also entered in to a similar free trade agreement, and parallel environmental side agreement with Chile.

Canada is also a signatory to a numerous international environmental agreements and conventions regarding the global environment. Under Canada’s constitutional division of powers, the federal government has the power to enter these agreements. However they often require the active cooperation of the provinces to implement these agreements. The regulation of greenhouse gas is of particular concern to the Canadian energy industry. As a result, there have been significant industry initiatives to voluntarily reduce greenhouse gas emissions in order to assist Canada in meeting its international obligations, and to avoid federal legislative reductions. Many participants in the Canadian energy industry including the Canadian Gas Association, the Canadian Association of Petroleum Producers, the Canadian Energy Pipeline Association and the Canadian Association of Oil Well Drilling Contractors have signed a memorandum of understanding with Natural Resources Canada regarding climate change. They have endorsed the federal government’s Voluntary Challenge and Registry program which aims to stabilize Canadian greenhouse gas emissions at 1990 levels by the year 2000. To meet this challenge, members of the industry is reducing release of methane and improving energy efficiencies of operations such as processing plant s and compressor stations.

A number of non-governmental international initiatives have also been occurring. These initiatives include the International Standards Organization initiatives to develop international environmental standards (ISO 9000) and certified environmental management systems (ISO 14000). These initiatives provide benchmarks to measure a company’s products and environmental performance and, thus, facilitate competition in international markets. In some instances, they have or may be used to demonstrate due diligence on behalf of a company if a spill occurs. Companies are also developing internal environmental management systems that are uniform throughout all their operations. Both these initiatives may be used as an alternative means of complying with environmental regulations in Canada and abroad.

Conclusion

As suggested above, the Canadian energy industry and its regulators are actively engaged in seeking alternative approaches to the traditional command control approach to environmental regulation of the energy industry. These approaches include greater cooperation between different levels of government, and between different boards and processes. Self enforcement models are also being where the onus is on industry to understand and implement regulations, and where the regulator retains the right to audit and enforce. Industry associations have also engaging in discussions with governments and regulators about the appropriate standards for specific projects, which are then incorporated under provincial legislation. Industry has also been an active participant in the federal Voluntary Challenge and Registry program to stabilize greenhouse gas emissions at 1990 level by the year 2000. Lastly, many industry participants are developing voluntary environmental management regimes in order to regulate their own business and to satisfy regulatory requirements.

Bibliography

Canadian Environmental Legislation

• Arctic Waters Pollution Prevention Act, c. A-12
• Canada-Newfoundland Atlantic Accord Implementation Act, 1997, c.3
• Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act, 1988, c.28
• Canada Oil and Gas Operations Act, c. O-7
• Canada Shipping Act, c. S-9
• Canada Water Act, c. C-11
• Canadian Environmental Assessment Act, 1992, c.37
• Canadian Environmental Protection Act, c.16
• Fisheries Act, c. F-14
• Hazardous Materials Information Review Act, c.24
• Hazardous Products Act, c. H-3
• Motor Vehicle Fuel Consumption Standards, c. M-9
• National Energy Board Act, c. N-7
• National Round Table on the Environment and the Economy Act, 1993, c.3l
• National Transportation Act (now National Telecommunications Power and Procedures), c. N-20
• Navigable Waters Protection Act, c. N-22
• Northwest Territories Waters Act c. N-27
• Oil and Gas Productions and Conservation Act (now Oil and Gas Operations, Canada), c. O-7
• Pest Control Products Act, c. P-9
• Pesticide Residue Compensation Act, c. P-10
• Territorial Lands Act, c. T-7
• Transportation of Dangerous Goods Act 1992, c.34
• Yukon Waters Act, 1992, c.40

Alberta Environmental Legislation

• Department of the Environment Act, R.S.A. 1980, c.D-19
• Energy Resources Conservation Act, R.S.A. 1980, c.E-11
• Environmental Protection and Enhancement Act, S.A. 1992, c.E-13.3
• Forest and Prairie Protection Act, R.S.A. 1980, c.F-14
• Forests Act, R.S.A. 1980, c.F-16, ss.1, 9, 10, 28, 51
• Metis Settlements Act, S.A. 1990, c.M-14.3, ss.1, 111-129, Sched. 3
• Mines and Minerals Act, R.S.A. 1980, c.M-15
• Oil and Gas Conservation Act, R.S.A. 1980, c.O-5, as amended, Miscellaneous Statutes Amendment Act (Bill 59), s.8
• Oil Sands Conservation Act, R.S.A. 1980, c.O-5.5
• Pipeline Act, R.S.A. 1980, c.P-8
• Planning Act, R.S.A. 1980, c.P-9, ss.1, 2.1, 43, 68-85, 154
• Public Health Act, S.A. 1984, c.P-27.1, ss.1, 70-82
• Public Highways Development Act, R.S.A. 1980, c.P-28, ss.1, 16, 23, 25-33,
• Public Lands Act, R.S.A. 1980, c.P-30
• Safety Codes Act, S.A. 1991, c.S-0.5, ss.2, 27-66
• Surface Rights Act, S.A. 1983, c.S-27.1
• Transportation of Dangerous Goods Control Act, c.T-6.5
• Water Resources Act, R.S.A. 1980, c.W-5
• Wilderness Areas, Ecological Reserves and Natural Areas Act, R.S.A. 1980, c.W-8
• Wildlife Act, S.A. 1987, c.W-9.1, ss.1, 38, 47