Canada’s oil and gas industry will have to cut emissions by more than one-third within seven years or buy offset credits under a new federal policy.
The framework outlining the cap was published Thursday, with plans for draft regulations next spring and final regulations in 2025.
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The Liberal government had been promising a cap on emissions from the fossil fuel sector since the 2021 election, The Canadian Press reports. The announcement Thursday spelled out the contours of the new cap-and-trade system and showed how much the government will ask the industry to cut.
By 2030, conventional oil companies, oil sands producers, and natural gas companies will collectively have to lower their emissions by 35 to 38% compared to 2019 levels. In 2022, the government estimated oil and gas would need to cut 42% over 2019 levels if Canada were to meet its climate targets in 2030.
Environment and Climate Change Minister Steven Guilbeault said the lower figure was developed after extensive consultation with industry and other stakeholders to make sure the target was achievable, and not vulnerable to a constitutional challenge from provinces over jurisdiction.
“I think what we’re doing is historic, not just in the Canadian context but in the international context, as well,” he said. “We’ve never put in place regulations in Canada that would ensure that the oil and gas sector reduces its overall emissions. We’ve never done that.”
The new policy introduces a cap-and-trade system for oil and gas companies that sets a maximum allowance—or cap—on emissions, then divides it among the relevant companies. It won’t apply to oil refineries whose emissions are already covered by clean fuel standard regulations.
Under the new system, companies that come in below their purchased or allotted emissions allowance can sell credits to those that come in above them. Fossils can also buy offset credits from other sectors or internationally, or contribute to a decarbonization fund that would lower the requirement to actually cutting just 20 to 23%.
The total number of allowances in a cap-and-trade system is typically meant to shrink over time to compel continuing emission reductions.
Rick Smith, president of the Canadian Climate Institute, described Ottawa’s approach as “reasonable and necessary” and urged the government to implement the new regulations without further delay.
“Oil and gas production is the single biggest and fastest-growing source of greenhouse gas emissions in the country, and the stubborn rise in emissions from this sector is wiping out climate progress in other parts of the economy,” he said in a statement. “Capping oil and gas emissions is a critical element of a package of policies that can ensure Canada meets its emissions reduction targets while supporting the competitiveness of the sector.”
Smith described cap-and-trade as a “proven, market-based way to encourage companies to take cost-effective steps to reduce their emissions over time,” while offering the fossil sector “flexibility in meeting global demand while maintaining incentives to reduce emissions.”
Industry: No Need for a Cap Despite Rising Emissions
The Pathways Alliance, a consortium of Canada’s biggest oil sands companies, has estimated it could cut 22 million tonnes by 2030, or more than half of what the federal government wants to see from the fossil fuel sector, CP says. Regulations published last week that require major cuts in climate-busting methane emissions will play a big role in covering the rest of the gap.
On Thursday, Pathways issued a statement saying it was still studying the new policy, but said it didn’t think the cap was needed on top of existing carbon pricing systems.
“Imposing an emissions cap, with additional regulatory complexity, does nothing to advance the certainty necessary for the planned multi-billion-dollar decarbonization projects to proceed,” said Pathways President Kendall Dilling.
Pathways has long insisted it has already cut emissions per barrel more than one-fifth, and is committed to getting to net-zero by 2050, while its members argued ceaselessly against faster emission reductions and demanded more lavish federal subsidies before investing in the carbon capture technologies they say they need. CP notes that oil sands companies have seen their actual emissions more than double since 2005 as production soared.
Oil and gas is also one of the only sectors in Canada where emissions are still rising year after year.
The Canadian Association of Petroleum Producers (CAPP) called the new system a de facto production cap that could lead the industry to curtail oil and gas extraction.
“At a time when the country’s citizens are experiencing a substantial affordability crisis, coincident with record budget deficits, the federal government risks curtailing the energy Canadians rely on, along with jobs and government revenues the energy sector contributes to Canada,” CAPP said in a release.
Brian Schmidt, president and CEO of Tamarack Valley Energy Ltd., told CP his company has spent tens of millions of dollars in the last few years on reducing methane emissions intensity from its operations, though CP appears not to have asked about the company’s actual, absolute methane output.
Schmidt said his company has oil and gas wells covering a wide geographic area of Alberta, and there is no single technology that can decarbonize its extraction processes as rapidly as Ottawa is demanding. “It’s very difficult, because of the spread-out nature of our business, to apply any sort of mitigative measure like carbon capture. We’ll be left with no other option but to shut in (production),” he said.
Schmidt added that an emissions cap is likely to scare off oil and gas investors and cause Canadian companies to continue directing their profits into their shareholders’ pockets instead of new projects.
“My worry is what does this mean for investment, because you know, you get paid for growth,” he said. “If you can’t grow and you’re shrinking instead, that makes things pretty tough.”
At multiple points in their news conference Thursday, Guilbeault, Natural Resources Minister Jonathan Wilkinson, and Employment Minister Randy Boissonnault said they had delayed an urgent, cornerstone climate policy to allow time to meet with industry, understand what emission reductions were realistic and achievable, and adjust their targets accordingly. Wilkinson said the CER’s net-zero model shows demand for Canadian oil and gas growing this decade before declining through 2050, and the cap-and-trade provisions in the new rule are meant to enable that short-term business activity.
Janetta McKenzie, acting director of oil and gas at the Calgary-based Pembina Institute, said the targets in the new rule are not that far off the Pathways Alliance’s own stated targets—and it’s not wrong for the government to want to give them a push.
“Given the technology solutions that the industry has, this is a realistic target on a realistic timeline,” she said. “It’s not a business-as-usual target—it will require that industry take action and make investments to achieve this target. But that’s the purpose of it, to prompt investment in emissions reduction and finally begin to bend the curve on Canada’s highest emitting sector.”
Alberta: We’ll See You in Court
Hope of avoiding a legal challenge was limited at best as Alberta Premier Danielle Smith had already signalled plans to challenge the policy in court. She reiterated that threat Thursday.
She called Guilbeault an “eco-extremist” minister and vowed to establish a “constitutional shield” to keep Ottawa out of all Alberta’s affairs.
“This proposed cap also undermines the unity of our country. Albertans will not tolerate it,” Smith said in a statement.
But University of Alberta energy economist Andrew Leach suggested Ottawa is on relatively firm constitutional grounds, CP writes. Although Alberta may argue the cap is a backdoor attempt to manage oil and gas, the Supreme Court has ruled previously that the federal government has the right to manage toxic emissions.
“The smart betting money is on the side of the federal government,” he said.
Smith insisted the emissions cap is a “de facto” cut to production, but federal ministers strongly denied that claim.
“I don’t know how I can be more clear about this,” said Boissonnault, a Liberal MP from Edmonton.
“The premier’s wrong. This is about reducing emissions, not putting a cap on production.”
Wilkinson said the policy even takes into account the expectation that production will continue to rise for several more years before demand begins to level off, based on the net-zero pathway published earlier this year by the Canada Energy Regulator (CER).
The cap asks oil and gas producers to eliminate between 40 and 46 million tonnes of greenhouse gas annually by 2030. That’s about the same as what the seven biggest oil sands facilities emit together, or about what between nine and 10 million passenger cars will emit over the course of a year.
It’s also less than one-fifth of the carbon Canada has to cut to meet its current 2030 target of reducing overall emissions by 40 to 45% below what they were in 2005.
Climate Groups: Let’s Get On With It
Most environment groups grudgingly welcomed the policy Thursday, CP writes, disappointed the cap was not as strict as they feel necessary and believing the government caved to the demands of big oil.
But it’s at least a start, they said.
Caroline Brouillette, executive director of Climate Action Network Canada, said the fear now is that the measures are still several years from actually being implemented.
“Every day of unregulated emissions from the oil and gas industry means devastating health impacts, more climate catastrophes that destroy homes, and increased cost of living for families and communities,” she said.
“By publishing Canada’s framework to cap oil and gas emissions at COP28, Minister Guilbeault is backing his diplomacy with domestic action,” she added “But Canadians and the world cannot afford three more years of the oil and gas industry wreaking havoc. For this regulation to become operational in 2026 is simply unacceptable.”
“For decades, Canada’s credibility on the world stage has been weakened as it missed climate target after climate target. The emissions cap framework released today finally addresses the root of the problem: the oil and gas industry,” said Harjeet Singh, head of global political strategy at CAN-International. But “Canada must move faster and farther in tackling the gargantuan climate footprint of its fossil sector. Failing to meet its obligations of climate action, Canada risks exacerbating climate impacts worldwide, particularly in developing countries which will bear the brunt of these consequences.”
“Canada cannot deliver on its climate commitments as long as its largest and fastest-growing source of emissions is left out of Canadian climate policies,” said Destination Zero Executive Director Catherine Abreu. “With the framework released today, Canada is finally taking a step towards regulating the oil and gas sector so that it pulls its weight in the national effort.”
The main segments of this report were first published by The Canadian Press on December 7, 2023.