It was nine years ago that Neil Camarta first realized an image crisis loomed over Canada’s oil sands. He and his daughter were browsing inside a small shop on London’s trendy Carnaby Street when they spotted a row of “Stop the Tar Sands” T-shirts hanging on the wall. Camarta, a longtime industry executive who’s held senior positions at Shell, Petro Canada and Suncor, braced for the inevitable as his daughter chatted with the 20-year-olds behind the counter. “She said, ‘You know, my dad works in the oil sands,’ ” he recalls. “And I was like, ‘Oh my God.’ So, all of a sudden we’re in it. I’m arguing with all these young people.”

These days Camarta runs a smaller company that makes upgrading equipment for the oil sands. He was happy to defend the industry’s record, he says, but he still wonders how Fort McMurray emerged as ground zero in the race to save the planet from climate change. After all, the energy-intensive oil sands sector accounts for less than half a per cent of global greenhouse gas emissions, although one would hardly know that based on all the attention it gets. “Literally everyone now knows what the oil sands are and they don’t think well of us,” Camarta says of the world’s third-largest proven oil reserves. “We had our heads down building these big projects. We weren’t spending enough time managing our reputation.”

Unfortunately for Canada, the oil sands’ poor image isn’t just a question of bad PR. It’s threatening the future of Canada’s economy. Anti-oil sands sentiment has made it nearly impossible to build the necessary pipeline connections producers need to get all that oil to market. TransCanada Corp.’s crossborder Keystone XL pipeline is in danger of being axed by U.S. President Barack Obama. The industry’s backup plan, Enbridge Inc.’s Northern Gateway pipeline to shipping terminals on the B.C. coast, has become bogged down in political and environmental controversy. Even TransCanada’s Energy East proposal, a sort of backup for the backup, has encountered unexpected political resistance in Ontario and Quebec—two provinces the diluted bitumen must transit through on its way to refineries in New Brunswick. Without the necessary infrastructure, Canada risks missing out on a vast opportunity for wealth and job creation.

How was this allowed to happen? The pipeline companies’ tin ears are partly to blame, but, ironically, so is Prime Minister Stephen Harper’s relentless oil and gas boosterism. Instead of convincing critics Canada could be trusted to develop a carbon-intensive resource in a sustainable fashion, Ottawa instead boasted about Canada’s “emerging energy superpower” status, lashed out at environmentalists and thumbed its nose at international climate change efforts, painting a target on the industry’s back in the process. Just a few weeks ago, Harper stood in the House of Commons and called the idea of federal emissions regulations for the oil and gas sector “crazy” when crude prices are falling (not that he was a fan when they were soaring). This while Canada and other countries were supposed to be laying groundwork for a global emissions deal during a climate change conference in Lima, Peru. “I can’t understand how he could be so careless with the oil industry, particularly the oil sands,” says David Anderson, a former Liberal environment minister. He argues that, in the case of Keystone XL, the federal government has allowed the project to become a poster child for climate change just as Obama is “trying to create an environmental legacy for himself in his last two years.”

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It didn’t have to be this way. Canada could have, for example, borrowed a page from Norway, which has both a stiff carbon tax and a huge offshore oil industry. “Canada can be both an economic and an environmental leader,” said Lorraine Mitchelmore, the president of Shell Canada, during a recent speech. Mitchelmore, who has previously called for Ottawa to move forward with greenhouse gas regulations, cited the Scandinavian country as an inspiration and said Canada should endeavour to become a global leader in carbon capture and storage technology. Or Harper could have lifted a few ideas from fellow MP Stéphane Dion. The former Liberal leader made an economy-wide carbon tax the central plank of his 2008 election campaign—an idea since successfully adopted by B.C. and, in a more limited way, Quebec and Alberta—but was rewarded with attack ads that called him a job-killer and depicted him being pooped on by a seabird.

Most perplexing, there is evidence Ottawa has held fruitful discussions with industry and the provinces on everything from a national cap-and-trade system to sector-specific CO2 regulations. In the case of the latter, former environment minister Peter Kent now says he believes he lost his job because he pushed too hard on the file. But it’s not like Harper needed to transform Canada into a granola-crunching utopia to keep the oil sands out of the international spotlight. He just needed to do something, say many critics. “I think if Canada stayed in Kyoto and adopted some regulations for oil and gas, it would have been a lot harder for environmentalists to point the climate change finger at Canada,” says Chris McDermott, a former Canadian climate change negotiator who now works for a New York hedge fund. Now, he says, the worry is the oil sands’ nasty—and mostly undeserved—reputation may prove impossible for future leaders to unwind. “The question, today, is even if there’s an about-face, could they actually get these projects permitted or has the train left the station?” asks McDermott. “That should be the bigger concern of Canadians: Has this thing been screwed up so bad that it can’t be recovered?”

With oil prices plummeting and oil sands production on the rise, operators now find themselves in a sticky situation. As many as 14 new oil sands projects are scheduled to come online this year with a combined capacity of close to 267,000 barrels a day, according to a report by Bloomberg. That includes a 118,000-barrel-per-day joint project between ConocoPhillips and Total SA. While future projects may be put on hold, most producers have little choice but to weather the slump in oil prices because of the high upfront costs and long-term nature of oil sands work.

Adding to the headaches is North America’s pipeline capacity crunch. Alberta estimates its inability to get oil to world markets—nearly all the pipeline infrastructure connected to the oil sands runs south to the United States—costs the province’s oil and gas industry $10.5 billion in lost sales last year; the Canadian and Alberta governments lost about $6 billion in royalties and tax revenue. What’s more, efforts to find a workaround by shipping crude on railcars, at twice the cost, no longer makes much sense at current oil prices.

Nor does it look like proposed pipeline projects will be getting under way anytime soon. Obama recently appeared on the popular satirical TV show The Colbert Report and hinted he may not approve Keystone XL, the proposed $8-billion pipeline linking Hardisty, Alta., and Steele City, Neb. “We’ve got to measure [Keystone’s benefit] against whether or not it’s going to contribute to an overall warming of the planet, which could be disastrous,” Obama said.

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Meanwhile, TransCanada’s $12-billion Energy East pipeline, linking the oil sands to export terminals in Quebec and New Brunswick, is fast becoming mired in a similar debate. Greenpeace recently obtained documents from public relations firm Edelman that outlined a plan to aggressively investigate Energy East’s opponents and spread unflattering information through a network of third parties, prompting TransCanada to cut ties with the firm. And, in early December, TransCanada said it was stopping work on the Cacouna export terminal in eastern Quebec after a federal study raised concerns about a nearby beluga habitat. While more of a setback than a deal killer, the last thing TransCanada needed was to be seen as threatening a vulnerable species—and a smiley-faced whale at that.

By far, the biggest blow came from the premiers of Ontario and Quebec. Signing a co-operation agreement in late November, Kathleen Wynne and Philippe Couillard proposed a list of seven requirements before they would endorse Energy East, including whether the project would contribute to increased emissions. The move was meant to provide clarity on the two provinces’ thinking, but only served to sow further confusion.

Alarm bells immediately went off in Ottawa. Natural Resources Minister Greg Rickford promised to dispatch federal ministers to Quebec to emphasize the strides made in pipeline regulation. Saskatchewan Premier Brad Wall lectured Ontario and Quebec about imposing conditions on Canadian crude that aren’t being applied to oil imported from other countries. And Alberta Premier Jim Prentice flew across the country to meet with both Wynne and Couillard personally—an experience apparently akin to having one’s mind altered by a Jedi knight. Both Couillard and Wynne abruptly dropped the climate change-related condition following the meeting, with no good explanations given. “We’re not talking about upstream emissions,” Wynne later told confused reporters, leaving some to wonder what other types of atmospheric emissions a pipeline produces.

Prentice, for his part, did little to shed light on what transpired behind closed doors. “I think I was persuasive in convincing them [oil sands emissions] are our responsibility and we’re working hard at it,” he says.

What’s clear is that both Ottawa and Alberta can ill afford to have yet another pipeline project founder on the shoals of interprovincial bickering. B.C. Premier Christy Clark famously demanded a share of energy royalties for allowing Enbridge’s Northern Gateway to connect Alberta’s oil sands with a proposed shipping terminal in Kitimat, B.C., touching off a war of words with former Alberta Premier Alison Redford. The two later came to an agreement, but Clark has clung tenaciously to the idea that B.C. should be financially compensated by someone for accepting the pipeline’s potential environmental risks. (Now yet another pipeline project in B.C., the expansion of Kinder Morgan’s Trans Mountain pipeline, is getting ugly. Police recently arrested more than 100 protesters on Burnaby Mountain who tried to prevent workers from doing survey work).

Prentice insists the problems Canada is having building pipelines have nothing to do with Ottawa or Alberta’s approach to climate change. But the fact remains: three different proposed pipeline projects, all pointed in different directions, have all run into a very similar set of problems.

The striking thing about Canada’s pipeline purgatory, and the oil sands debate that’s fuelling it, is how quickly it became a global issue. Politicians across the U.S. are now required to have a view on Keystone XL, regardless of how far away from the proposed route their constituents live. “Each new project becomes more about climate change and less about not-in-my-backyard,” says McDermott. “Originally, when the Keystone protests first started, it was a bunch of Nebraska farmers who didn’t want a pipe going through their local aquifer.” The European Parliament, meanwhile, only narrowly voted down a proposal that would have labelled oil sands crude imports “dirty” based on estimates that each barrel releases between 17 per cent and 22 per cent more emissions than conventional crude over its life cycle, from well to wheel.

Ottawa’s role in contributing to this mess can’t be overstated. On Keystone, the federal government failed to recognize the U.S. debate was shifting from U.S. energy security to one of climate change until it was too late. Harper was reportedly taken off guard when Obama phoned him back in November 2011 and said he was putting the pipeline’s approval on hold. The delay apparently shook Harper’s belief that the U.S. could be counted on to buy as much oil as Canada could produce, prompting him to aggressively pursue rival pipeline projects so Canada could sell its oil to other countries. It was a sensible response, under the circumstances, but the way Ottawa went about it left many scratching their heads. A bid to speed up the lengthy federal approvals process was interpreted as an attempt to silence critics, while then-minister of natural resources Joe Oliver’s now infamous 2012 open letter, with its talk of “radical groups” seeking to “hijack” approval processes with their “radical ideological agenda,” only spurred environmentalists to dig in their heels. But the most curious move, at least from a public relations perspective, was the decision to formally withdraw from the Kyoto Accord in December 2011. By doing so, Canada confirmed it had no intention of living up to its pledge to reduce greenhouse emissions below 1990 levels, and probably couldn’t be counted on to meet its own watered-down targets of a 17 per cent cut from 2005 levels by 2020.

Harper’s abandonment of Kyoto made him a villain in the eyes of climate change activists, but it’s not like he’s dismissed the idea of tougher greenhouse gas regulations outright. Indeed, one of the more curious aspects of Ottawa’s approach to the file are reports that senior Conservative cabinet ministers have seriously explored the idea of a national emissions regime with industry and the provinces, only to have their efforts killed later on—presumably by the PMO. Back in 2009, Prentice, then the federal environment minister, tried to woo Alberta into a national cap-and-trade program that would “send the appropriate price signals to encourage changes and ultimately help reduce emissions,” according to a briefing obtained by Canadian Press. Such programs generally set limits on carbon emitters, but allow businesses who go over the threshold to buy credits from those who don’t. But an agreement never materialized and Prentice resigned in 2010. Similarly, in a recent interview with Maclean’s, former environment minister Peter Kent suggested he lost his cabinet job in 2013 because he pushed too hard for a deal to regulate emissions in the oil and gas sectors in Alberta, B.C. and Saskatchewan. “We had great buy-in from the province of Alberta, supportive buy-in from Saskatchewan and British Columbia, in principle, on a number of things, and [the Canadian Association of Petroleum Producers] were for the most part participating in the discussions and the negotiations really positively,” said Kent.

How to explain the seemingly schizophrenic approach? Anderson says it usually boils down to politics. During his days as minister, back in the early 2000s, he recalls enjoying fruitful discussions with industry players on climate change issues and achieving an “agree-to-disagree understanding” with Alberta and other provinces, only to return to Ottawa and find his colleagues fretting about how an emissions regime would play out among voters. In the case of Harper’s Conservatives, they may be influenced by findings of a recent Nanos poll that found Canadians are essentially split on further development of the oil sands, with most of the support for the industry focused in the Prairie provinces—a key Conservative stronghold. “Climate change is an issue where delay is often the easiest path to follow,” Anderson says.

Prentice, for his part, argues that he’s since come to believe that unilaterally adopting a carbon-pricing scheme without the U.S. onboard is akin to economic suicide. “We did a great amount of analytics about the consequences of attaching a price to carbon in Canada relative to our competitors in the U.S.,” he says. “I became quite convinced that we needed to be very careful that we don’t damage jobs and investment in Canada. I think the Prime Minister might have been influenced by that same thinking.” Kent, too, says that Harper was right to abandon the idea of regulations for the sector because it “would definitely wrong-foot Canadian producers with the current prices.”

Further confusing matters, Harper recently told the CBC he’s open to building on a carbon-pricing scheme like Alberta’s—the province imposes a penalty of $15 per tonne for those who exceed emissions limits, with the money going into a technology fund that can be used to pay for new carbon-capture and storage research—as part of a continent-wide strategy. “I think it’s a model on which you could go broader,” Harper said. On the other hand, critics have argued that Alberta’s approach has been mostly ineffective, and that prices of $100 to $150 per tonne are needed to truly change behaviours.

In the absence of clear federal leadership, several provinces have moved on without Ottawa. Alberta has its levy on industrial emitters, though many say it is weak. Quebec has a cap on emissions for petroleum producers, refiners and distributors. And B.C. implemented a graduated, economy-wide carbon tax in 2008 that’s been called a “textbook” example of the genre. So far, B.C.’s fossil-fuel use has declined 16 per cent per capita and GDP has held steady, seemingly dispelling the notion that carbon taxes are necessarily job-killers (B.C.’s carbon tax was offset with cuts to personal and income taxes), according to a report from the Pembina Institute. “Emissions have gone down, GDP has tracked the rest of the country and there’s no macro-evidence the B.C. economy has taken a hit,” says Chris Ragan, an associate professor of economics at McGill University, adding that a province-by-province approach to reducing emissions may well prove the best way forward for Canada, given its sprawling geography and diverse industries.

However, the federal government’s own climate change reporting shows the current patchwork of efforts will fall woefully short of meeting Canada’s stated emissions goals. At this rate, Canada will spew 734 megatonnes of greenhouse gases into the atmosphere by 2020, about 122 megatonnes above its targets—and a big chunk of that is due to ongoing oil sands development, according to Environment Canada. The question is whether Ottawa’s history of foot-dragging and false starts will ultimately lead to Canadian crude being frozen out of markets like Europe or, perhaps, even the U.S. by regulations targeting carbon-intensive feedstock. Anderson points to the recent emissions agreement between China and the U.S., two of the world’s biggest polluters, as evidence that Canada risks being left behind. “We can’t assume that oil is going to be a fungible commodity on the world market as it has in the past,” Anderson warns. “There will be clean oil and dirty oil.”

None of this is news to Camarta. He says most oil sands executives generally support a national carbon tax, depending on the penalties involved, for that very reason. Among those who have spoken in favour of a carbon tax are Andre Goffart, the president of Total’s Canadian subsidiary, and Brian Ferguson, the CEO of Calgary-based Cenovus Energy. “It affects our markets and how we’re perceived,” Camarta says. “Anything that draws attention to carbon emissions in Canada, we draw fire from that, too.”

Camarta argues that the industry is doing its part, noting producers are making strides in reducing the carbon intensity of each barrel of oil—down 28 per cent since 1990. But as overall production rises, so will Canada’s greenhouse gas emissions. And all the carbon capture and sequestration technology in the world isn’t going to fundamentally change the dirtier nature of oil sands crude. “It’s hard oil,” says Camarta. “It takes a lot of engineering, a lot of capital, a lot of people and a lot of energy.” If Canada truly wants to be an “energy superpower,” it needs to do a much better job offsetting those extra emissions—or else face a future where a trillion-dollar resource is undermined by a $20 T-shirt.

Pipe dreams: A timeline of setbacks

In 2005, TransCanada first proposed its Keystone pipeline, to unlock Alberta’s oil sands. The first leg of Keystone began pumping oil to Illinois in 2010. But the Keystone XL expansion, announced in 2008 to link the oil sands to refineries in the Gulf of Mexico, has suffered repeated setbacks. Timeline design by Adrian Lee using TimelineJS.