Canada's oil sands, the second largest reserve of oil after Saudi Arabia, are a mixture of sand, water, clay and bitumen that is extracted mostly via open-pit mining.
Critics say the production of oil from oil sands -- also called tar sands -- creates more greenhouse gas emissions and is more toxic to the environment than conventional crude oil.
"This will be a system like no other in Canada and, indeed, around the world -- and it needs to be," said Alberta Environment Minister Diana McQueen in announcing the agency this week.
"We will continue to demonstrate to Albertans, Canadians and the world that we can and will develop our natural resources in a responsible and sustainable way,"
Alberta's oil sands production is expected to increase from 1.31 million barrels per day in 2008 to 3 million barrels per day in 2018, the government says.
University of Alberta ecologist David Schindler commended the move, saying it is a key step in restoring public trust in the government.
"The agency needs to be independent and it looks like it will be set up that way," he told the Calgary Herald.
In 2010, Schindler co-authored a report that indicated that levels of toxic chemicals in Alberta's Athabasca River watershed are significantly higher downstream of oil sands developments.
The new agency will not be responsible for monitoring whether companies are complying with environmental laws but will instead examine broader ecological trends, the government said.
McQueen said she hopes the agency can be ready in six to eight months, but Howard Tennant, former president of the University of Lethbridge, chair of the management board that will create the agency, said it could take two to three years, the Edmonton Journal reports.
The source of funding for the new agency also is not clear, but a report co-authored by Tennant released this week suggests greenhouse gas and water levies, a $40-million annual tax on oil sands producers, currently equal to about 6 cents a barrel as well as a "broad sustainability tax."
Jennifer Grant, director the oil sands program for Canadian think tank the Pembina Institute, expressed concern about the time line to get the agency established.
"Good work takes time, but there are a number of major oil sands projects that are in the regulatory queue," Grant was quoted as saying by the Journal.
Noting that a hearing is set to begin Oct. 29 for Shell's Jackpine oil sands mine expansion, Grant asked, "How are regulators to make good decisions for these interim projects when they're likely basing their environmental impact assessment data on flawed information and monitoring data that is no longer considered credible?"
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