By Patrick Rucker and Nia Williams
WASHINGTON/CALGARY, Dec 9 (Reuters) - Canada is running out of time to offer U.S. President Barack Obama a climate change concession that might clinch the controversial Keystone XL oil pipeline, as the country's energy industry continues to resist costly curbs on greenhouse gas emissions.
Two years of negotiations between the Canadian government and the energy sector to curtail carbon pollution have not produced an agreement. Oil producers have balked at anything more than the 10-cents-a-barrel carbon tax imposed by the province of Alberta.
Late last month, Environment Minister Leona Aglukkaq pointed to "good progress" in the talks but was unable to say when a resolution might come.
Concessions from Canada would make the pipeline more palatable in Washington, experts say, since Obama has made fighting climate change a second-term priority and has said that Canada could do more to reduce carbon emissions.
By linking Alberta's fields to refiners in the Gulf Coast, the 1,200-mile (1,900-kilometer) Keystone XL pipeline would be a boon to an energy patch where oil sands are abundant but lead to more carbon pollution than many other forms of crude.
Keystone's foes say that burning fossil fuels to wrench oil sands crude from the ground will worsen climate change, and that the $5.4 billion pipeline, which could carry up to 830,000 barrels a day, would only spur more production.
Increasing oil sands production will put Canada on track to miss its target of curbing greenhouse gas emissions by 17 percent below 2005 levels by 2020, according to a government report (full report:).
Keystone supporters say that is why Canada would be wise to offer a carbon-trimming plan before the White House decides the pipeline's fate.
"If Canada were to volunteer new greenhouse gas restrictions, that would certainly help," David Goldwyn, a former State Department official and energy consultant, told an industry conference in late October.
But the clock is running out. The U.S. State Department is finishing work on a report that will weigh the climate impacts of the pipeline in what could be one of last words before a decision. The White House is expected to rule on Keystone by next spring.
Canada and the United States have often moved together on climate policy, developing similar rules on auto and power-plant emissions while turning their backs on the Kyoto Protocol to limit climate change.
Regulating the oil and gas sector has been thornier, though, with oil sands producers particularly concerned that higher costs will erode their already narrow margins.
"Anything more stringent than today's system will increase costs, possibly lowering investments and reducing production," the Canadian Association of Petroleum Producers wrote in a memo to regulators in March that was made public under a freedom of information request.
Canada's fast-growing oil sands sector will soon exceed the capacity of existing pipelines, and analysts say producers will be forced to rely on trains, barges and other transportation alternatives if Keystone XL and related projects are rejected. Those options are generally costlier and less certain than pipelines.
Nevertheless, industry executives say they doubt yielding on tougher pollution regulations will help secure Keystone.
"I don't know any policies in Canada with respect to (greenhouse gas) emissions that would have any sort of material impact on the approval process," Russ Girling, president of TransCanada, the pipeline operator, said last month.
Even if Prime Minister Stephen Harper were to offer new greenhouse gas limits this year, the vagaries of the regulatory process virtually guarantee those plans will not be in place until after a Keystone decision.
Canada needed 12 months to finalize regulations curbing emissions from coal-fired power plants that were ratified last year, and the rules were significantly weaker in the end than originally proposed.
"Judging by what we saw with coal-fired power plants, there is a real risk that a proposal to limit oil and gas emissions could be watered down before it's final," said P.J. Partington of the Pembina Institute, a think tank that has opposed oil sands development, which reviewed the industry memos disclosed under the freedom of information request.