Barack Obama’s rejection of the proposed Keystone XL pipeline is prompting growing calls for Canada to take dramatic regulatory steps, including implementing a carbon tax, to demonstrate it is serious about reducing greenhouse gas emissions.

The U.S. president leaned heavily on climate change when explaining why his government rejected TransCanada Corp.’s proposal, which would shuttle crude from the oil sands to refineries on Texas’ Gulf Coast. At the same time, the Department of State argued its decision would not “significantly” affect the pace of development in Alberta’s oil sands.

“We have to put some hefty carbon taxes in place so that we solve the greenhouse gas emissions [problem] on the consumer end,” Hal Kvisle, who served as TransCanada’s chief executive between 2001 and 2010, said in an interview Friday. “And a very hefty carbon tax could have the outcome of significantly reducing CO2 emissions.”

Such a move would make consumers realize that reducing carbon emissions comes at a price, Mr. Kvisle said, adding higher prices for products such as gasoline, while politically dangerous, will drive down consumption. Energy firms once opposed to taxing carbon and other expensive measures have now warmed to the idea, he said.

“I think business is quite happy to see a carbon tax because it will help everybody in society understand that we all have a role to play in this.”

It’s not an easy sell. Enforcing strong environmental policy that will allow the domestic oil industry to grow but, at the same time, be palatable to consumers and critics both at home and abroad is a balancing act for politicians.

The former CEO’s call comes as Alberta premier Rachel Notley’s New Democratic Party government is in the midst of reviewing environmental rules. While she expressed disappointment over Mr. Obama’s characterization of the oil sands, she said his explanation supports her government’s push for stricter environmental rules.

“It does highlight the fact that we need to do a better job in terms of our climate change,” she said Friday. “We need to work better with industry in terms of how we can reduce the emissions associated with the way in which our energy product is produced.”

Keystone XL, which Ms. Notley never favoured, was designed to ship 830,000 barrels of oil per day.

Ms. Notley supports getting Canadian oil to tidewater, specifically by expanding Kinder Morgan’s proposed expansion of its Trans Mountain network to the west coast, and TransCanada’s Energy East project the other direction.

Some energy executives argue stiff regulations could cripple the industry. A growing number, however, concede expansion will be dampened if outsiders are uncomfortable with the oil sands’ environment impact, whether perceived or otherwise.

Some companies favour a carbon tax where the entire economy shares the burden. Suncor Energy Inc., for example, believes such a tax would be the most effective way to change the way executives make financial and operating decisions tied to reducing emissions.

Executives have also touted carbon capture and storage systems as part of the solution to reducing greenhouse gas emissions. The projects are expensive, but carbon taxes would encourage oil companies to invest in CCS, according to Ben van Beurden, Royal Dutch Shell plc’s chief executive.

“It creates maybe societal value. It doesn’t create commercial value,” he said while visiting Shell’s CCS project in Fort Saskatchewan, Alta., last week. “So we will need some sort of support mechanism to incentivize companies like ourselves to do that…I think it is going to be putting a price on carbon that is going to do that.”

He is calling for a carbon tax between $60 and $80 (U.S.) per tonne.

Alberta’s current carbon levy will rise to $20 (Canadian) per tonne for certain emitters on Jan. 1, up from $15 per tonne. Some emitters will have to pay $30 per tonne in 2017. British Columbia also taxes some carbon emissions.

Premier Notley and Catherine McKenna, the federal minister in charge of the environment and climate change file, will be at the climate change summit in Paris, which starts at the end of the month. Ms. Notley said she will release “substantive parts” of her environmental strategy a week before she leaves for France.

Simon Dyer, Alberta director of the Pembina Institute – an environmental think tank – said addressing climate change is the new normal for major energy infrastructure projects.

Canada’s oil industry needs at least one more major pipeline if production is going to substantially increase, he added. To help to accomplish this Canada must prove it is meeting greenhouse gas reduction goals, he said. Otherwise, “it’s going to be a tough sell for Canada to say it’s developing responsibly.”

“We do think it’s premature to be talking about all this pipeline expansion before governments have put a plan in place,” Mr. Dyer said.

Published Sunday, Nov. 08, 2015 7:00PM EST
Last updated Sunday, Nov. 08, 2015 7:36PM EST