U.S. Rules Could Change the Way Canadian Fossils Report Carbon Emissions

The officially disclosed carbon footprints of Canada’s largest oil companies could balloon in size if tough new climate rules proposed earlier this year by the U.S. Securities and Exchange Commission come into effect.

The SEC proposal—which has not yet been enacted and faces stiff opposition from industry lobbyists and conservative politicians—would require publicly-listed companies to account for their total life cycle greenhouse gas emissions, The Canadian Press reports.

The rules would apply not only to companies south of the border, but also to the more than 230 Canadian companies that are listed on U.S. stock exchanges. That includes Canadian fossil giants like Enbridge Inc., Suncor Energy Inc., Imperial Oil Ltd., and Canadian Natural Resources Ltd.

Under SEC plan, companies would have to disclose their Scope 1 and Scope 2 emissions—Scope 1 referring to greenhouse gases produced directly by a company’s operations, Scope 2 to emissions from the company purchases, like electricity to run its operations.

But they would also have to publicly account for their Scope 3 emissions, a category that takes in all the other greenhouse gases in a barrel of oil, including emissions produced by customers when they use the product. Scope 3 typically accounts for 80% or more of fossil industry emissions—and is rarely if ever included when Canadian fossils talk about bringing their operations to net-zero by 2050.

In other words, for fossil producers, Scope 1 and 2 emissions are the emissions the company generates itself (the methane emitted directly from a well, for example, or the electricity a tar sands/oil sands producer uses to power its massive facilities). Scope 3 covers the emissions the company causes when it sells its product and a driver burns gasoline in a car, for example.

“The moment we ask companies to report Scope 3, we’re now focusing on the carbon intensity of the product itself,” said Tima Bansal, Canada research chair in business sustainability at the University of Western Ontario’s Ivey Business School. “It’s not the carbon intensity of their process—which they can reduce and can reduce quite substantially. It’s the carbon intensity of their product.”

That distinction matters a great deal. Under pressure from shareholders, colossal fossil ExxonMobil disclosed in early 2021 that Scope 3 emissions had driven up its carbon pollution to 730 million tonnes in 2019. Mining giants like BHP and Rio Tinto have been seeing greater scrutiny over their Scope 3 emissions, but a study last year found that most companies’ failure to include Scope 3 in their emissions accounting was undercutting their net-zero pledges.

CP notes that many Canadian fossil producers have begun reporting their Scope 1 and 2 emissions in the years since the adoption of the Paris climate agreement in 2015. Those numbers often form the basis of some of the industry’s emissions reduction initiatives, such as Pathways to Net Zero, an alliance of the country’s biggest tar sands/oil sands producers that have jointly set the goal of reaching net-zero carbon emissions by 2050.

The roadmap laid out by alliance members Suncor, Cenovus, CNRL, Imperial, MEG Energy, and ConocoPhillips Canada relies on large-scale deployment of carbon capture and storage technology, and they’ve been lobbying hard (but not altogether successfully) for government subsidies to help do it.

However, their plan only addresses Scope 1 and 2 emissions. CP writes that the fossil industry as whole has been very reluctant to talk about the emissions produced by the combustion of its product itself.

“Reporting Scope 3 emissions continues to be a challenge at this time and will prove difficult to provide in a timely manner, if at all,” wrote the Canadian Association of Petroleum Producers in a recent submission to the Canadian Securities Administrators. (The CSA is currently mulling its own set of proposed climate disclosure rules, though the Canadian version would allow companies to opt out of Scope 2 and 3 disclosures as long as they explain their reason for doing so.)

“We believe this (Scope 3 disclosure) would not only add additional burden to industry, but is also not practical in that upstream oil and gas producers don’t have knowledge or control over the end use of their sales products,” the industry lobby group wrote.

While only a very small minority of Canadian oil and gas firms are even attempting to report Scope 3 emissions right now, it’s already apparent that having to disclose these numbers would massively increase the size of the carbon footprint that companies must report to investors and the public.

For example, Cenovus—which began disclosing its estimated Scope 3 emissions in 2020—says its Scope 1 and 2 emissions in 2019 amounted to 23.94 million tonnes of C02. Its Scope 3 emissions, generated by the final use of the company’s products by customers, amounted to an estimated 113 million tonnes.

Duncan Kenyon, director of corporate engagement with Investors for Paris Compliance, said more than 80% of emissions from fossil fuels fall under the umbrella of Scope 3—that is, they’re produced when the product is consumed.

“I hear it all the time from (fossils), that Scope 3 is ‘not our problem, it’s the consumers choice,’ “ Kenyon said. “But you can’t be a Paris-aligned climate believer if you’re going to say that 80% is someone else’s problem.”

“It also undermines the claims that ‘oh well, if we capture it all and put it underground, we’ll be OK for 2050,’” he added. “Because no, you won’t.”

Oil and gas companies have been returning major dividends to shareholders in the past year thanks to surging global energy demand, so it’s easy to question why investors would care about the Scope 3 issue at all.

But Kenyon said investors focused on environmental, social and governance (ESG) performance view climate change as a real business risk, and want to know how prepared a company is to adapt to what is coming. For example, a fossil energy company actively working to reduce its Scope 3 emissions would aim to increase the percentage of renewables in its portfolio.

“If you do bring in Scope 3 disclosure, it becomes apparent really fast where your company is in the decarbonization game,” he said. “And then you have to decide what kind of company you want to be in five years, 10 years or 25 years.”

In issuing the U.S. regulator’s proposal in March, SEC Chair Gary Gensler said greenhouse gas emissions have become a commonly used metric to assess a company’s exposure to climate-related risks that are reasonably likely to have a material impact on its business.

“Investors get to decide which risks to take, as long as public companies provide full and fair disclosure and are truthful in those disclosures,” Gensler said in a release. “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”

This report by The Canadian Press was first published May 29, 2022.