Exclusive: Canada warns EU of trade conflict over oil sands

BRUSSELS Mon Apr 4, 2011 6:43am EDT

BRUSSELS (Reuters) - The Canadian government has stepped up lobbying in Europe for its highly-polluting tar sands industry, repeating its threats of trade conflict, a leaked letter shows.

The letter dated March 18 to Europe's commissioners for climate, trade and energy follows Canada's denial it threatened to scrap a free trade deal unless the European Union alters planned environmental laws.

"Given the desire for freer trade between us, it is important that our individual efforts to address climate change do not lead to the creation of unnecessary barriers," Canadian trade official Mark Richardson said in a document sent with the letter.

"The Government of Canada believes this approach raises the prospect of unjustified discrimination and is not supported by the science."

The dispute centers around EU plans to make fuel suppliers reduce the carbon footprint of fuels by 6 percent over the next decade. The EU is now fine-tuning a ranking of fuels to help suppliers identify the most carbon-intensive imports.

Canada could challenge that ranking by launching a lawsuit at the World Trade Organization, where it has already disputed other EU initiatives.

Canada says the standards would instantly constrict a possible future market for its oil sands -- oil that is trapped in sediment and forms the world's second-largest proven crude reserves after those of Saudi Arabia.

Environmentalists oppose the tar sands industry, saying the extra energy needed to extract the oil intensifies the impact on climate by about a quarter, while polluted waste water harms wildlife and pollutes rivers.

Canada does not deny exploiting its oil sands is carbon intensive, but says the EU overestimates the impact and is wrong to single out such production without giving equal attention to other carbon-intensive crude oils, such as heavy grades from the Middle East and Nigeria.

DISCRIMINATORY

Though couched in the gentle words of diplomacy, the letter from Canada's ambassador to the European Union, Ross Hornby, has left EU officials in little doubt they are being threatened with action at the World Trade Organization and possibly over the trade talks.

Further warnings came in another note sent with the letter.

"Singling out oil sands crude creates an artificial and potentially discriminatory regulatory distinction," said the note from Mark Corey of Canada's natural resources department.

Canada's Trade Minister Peter Van Loan has denied any link between the tar sands dispute and trade talks.

The evidence of further threats of trade conflict comes at a difficult time for Canada's Conservative government, which was toppled 10 days ago by opponents accusing it of sleaze and mismanagement.

Canada has challenged the EU at the World Trade Organization in various disputes, such as over hormone-treated beef, genetically modified foods and seal products, so the European Commission is readying itself for another legal fight.

The Commission had initially proposed that tar sands should be ascribed a greenhouse gas value of 107 grams per megajoule of fuel, making it clear to buyers that it had far greater climate impact than average crude oil at 87.1 grams.

(Editing by Rex Merrifield and Elizabeth Fullerton)