03 Jun The polluter pays principle in Alberta: Meeting economic challenges with regulatory certainty
The polluter pays principle in Alberta:
Meeting economic challenges with regulatory certainty
To say these are “challenging times” is a gross understatement. Borders closed, energy prices in the basement, propping up the economy with public funds, and supporting individuals and firms to weather the pandemic driven economic storm. Our governments have responded to the storm: A $1,000,000,000 grant program for abandoned and inactive well sites, a Government of Alberta $1.5B equity investment and $6B loan guarantee in the KXL pipeline, and suspension of a host of monitoring programs (notwithstanding the originating public interest determination of these conditions by the regulator). Some steps are aimed at addressing environmental risks while others potentially increase environmental risks.
Through it all, it remains unclear how our society will uphold and promote the polluter pays principle, not only today and tomorrow but well into the future. As individuals and firms alike face dire economic challenges arising from the pandemic as well as low energy prices, the value of a clean and healthy environment is at risk of being marginalized.
Marginalizing environmental costs is far from a new approach. As a species we have relied heavily on the carrying and dilution capacities of the natural world. Globally this has clear repercussions on air, water, land, habitat and on other species (for example see the global assessment by the Intergovernmental Science-Policy Platform on Biodiversity and Ecosystem Services).
On the other hand, we have made tremendous strides in reducing human impacts on the environment by investments in pollution abatement technologies, increases in efficiency, and continually learning about the complexity and linkages between the environment, human health and economic development.
While the near-term focus is rightly on health and the economy, there is a need to ensure that environmental quality is maintained. The tough question is whether due to, or perhaps in spite of, economic downturns we should continue to expect polluters to pay for their pollution? And when money runs out who pays then? Are we prepared to pay for environmental quality? Are we prepared to ensure we mitigate against further marginalization of environmental harms? This is a difficult policy area to navigate made even more so by current economic and pandemic dynamics. Yet we must.
In Alberta, the sector under significant strain is also the sector with some of the highest outstanding environmental obligations – oil and gas. Our province’s regulatory requirements adopt the polluter pays principle by placing an obligation on operators to abandon and reclaim sites once a well reaches the end of its productive life. But this regulatory obligation is often not being met due to firms going insolvent without having addressed their abandonment and reclamation requirements.
Currently, many oil and gas firms are insolvent or near insolvent. The Alberta Energy Regulator (AER) uses a Liability Management Rating (LMR) system to attempt to evaluate the ability of firms to meet their “deemed liabilities” and is a determining factor of whether financial security must be posted. The AER expects an LMR above 1 to be maintained otherwise financial security is required to cover future environmental liabilities. (For more information see the liability management program of the AER.) According to AER data, as of May 2, 2020, 235 Licencees had an LMR rating of 0 and an additional 115 had an LMR below 1. AER data indicates “deemed liabilities” at over $30 billion and it holds ~$290 million in financial security (excluding oilsands mines).
This has resulted in one of the major moves of government funding with a grant program of $1B (supported by $1.3B in federal money committed to Saskatchewan, Alberta and British Columbia) to assist in addressing abandonment and reclamation obligations of firms.
Despite this money, there remains a vast disparity between estimated liabilities and financial security available. The light at the end of the oil and gas liability tunnel is difficult to see. Realizing the significance of the problem, the Government of Alberta has said changes will be forthcoming. Some changes came in the form of Bill 12 (see Nigel Bankes regarding the bill here), including expanding the powers of the Orphan Well Association.
There are a host of other measures that we should take to create a higher level of certainty that environmental liabilities are dealt with prior to insolvency of firms (and the environmental due diligence that this can foster).
A key measure is moving to a system of financial assurance that minimizes the risks that activities on the landscape will fail to account for their end of life obligations. This can include requiring full financial security being provided to government by an operator prior to operations or some variant to better manage risks around abandoned sites (see for example the approach proposed by the CD Howe Institute, combining partial security with insurance requirements).
As well, there is a need for timely abandonment and reclamation of sites through either financial or regulatory prodding. Reclamation timing in particular (i.e. once a well has been abandoned in line with AER Directives) should be regulated. British Columbia recently brought in regulations to deal with dormant sites and impose timelines on inactive sites (see the Dormancy and Shutdown Regulation).
We also need an effective audit regime, with heightened public participation, to address any abandonment or reclamation failures.
Overall there is a need to have greater clarity in how liabilities are assessed and paid for, as well as how the system provides accountability to abandonment and reclamation standards. There is also a need to ensure transparency and public interest oversight in the administration of the liability system. This has been highlighted by Nigel Bankes, Shaun Fluker, Martin Olszynski and Drew Yewchuk in Governance and Accountability: Preconditions for Committing Public Funds to Orphan Wells and Facilities and Inactive Wells.
There also needs to be increased clarity as to the interaction of the provincial regime with federal insolvency laws. The Supreme Court of Canada decision Orphan Well Association v. Grant Thornton Ltd (a.k.a. Redwater) had the effect of ensuring that an insolvent estate’s assets went to meeting the environmental obligation prior to paying creditors. In effect, this approach can be viewed as a “beneficiary pays” system as opposed to the “polluter pays” system, as the assets of the insolvent estate, assets to which creditors have a clear legal right, must address environmental obligations prior to being paid to creditors.
The ELC’s report Clean Slate, Contaminated Land: The “untidy intersection” of Insolvency and the Polluter Pays Principle and Recommended reforms to the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act looks to reform federal insolvency laws to provide additional clarity and to ensure the statutes reflect the Redwater outcomes. The project was spurred by the need for a clear articulation of the nature and priority of environmental orders and environmental claims by the Crown.
As we start to relaunch our economies, with the looming threat of potential future shutdowns, the risks remain significant that our ability to effectively move towards a more robust polluter pays system will be undermined. Economic and environmental prosperity (including the ability for nature to prosper) will rely on how we respond in this challenging time. And in every challenge there is the opportunity to move forward with foresight and purpose.
CLEAN SLATE, CONTAMINATED LAND:
The “untidy intersection” of Insolvency
and the Polluter Pays Principle
and Recommended reforms to the
Bankruptcy and Insolvency Act and
the Companies’ Creditors Arrangement Act
Environmental Law Centre
Authored by Jason Unger
Stay tuned for an upcoming webinar regarding the Polluter Pays Principle in Alberta law on June 24, 2020.
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The Environmental Law Centre (ELC) has been seeking strong and effective environmental laws since it was founded in 1982. The ELC is dedicated to providing credible, comprehensive and objective legal information regarding natural resources, energy and environmental law, policy and regulation in Alberta. The ELC’s mission is to educate and champion for strong laws and rights so all Albertans can enjoy clean water, clean air and a healthy environment. Our vision is a society where laws secure an environment that sustains current and future generations.
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The ELC would like to thank the Alberta Law Foundation for its support of the ELC’s Polluter Pays project.