The federal government released on Thursday its long-awaited draft of its cap on emissions for the oil and gas sector.
Using a cap-and-trade system, Canada is proposing a minimum 20 to 23 per cent emissions cut from the oil and gas sector by 2030, compared to 2019 levels.
The federal government has stressed it’s not a cap on production. Alberta Premier Danielle Smith and Alberta Environment Minister Rebecca Schulz call it “an intentional attack … on the economy of Alberta.”
What is a cap-and-trade system, and what exactly are the targets? Has a system like this ever been imposed on the oil and gas sector?
This is what you need to know about the new regulations.
What’s a cap-and-trade system?
Under a cap-and-trade system, oil and gas operators will have a limit — the cap part of the equation — on the amount of carbon they can burn. The federal government is targeting a 35 to 38 per cent reduction in greenhouse gas emissions by 2030, compared to 2019 levels.
But that number is the upper limit; operators in the oil and gas sector will each be given a specific number of allowances, which add up to the federal government’s total emissions cap. Operators who lower their emissions and have extra allowances, for example, can sell those to other producers. That’s where trade comes into play.
Adding to the traditional system, the government is also proposing companies have the option of instead purchasing carbon offset credits, or by paying into a decarbonization technology fund which would invest in “future greenhouse gas reductions.”
What if an operator exceeds the emissions cap?
In that case, federal officers would determine consequences depending on how severe the infraction is. The regulations fall under the Canadian Environmental Protection Act, which falls under criminal law — meaning operators who don’t meet the targets would be breaking the law.
Final limits are expected to be determined next year in draft regulations.
What exactly are the targets, and when do they start?
The 35 to 38 per cent reductions would bring down greenhouse gas emissions from the oil and gas sector between 106 to 112 million tonnes (Mt). The extra flexibility proposed would bring emissions between 131 to 137 Mt.
That’s compared to 2019 emissions of 171 Mt.
The draft regulations will be phased in between 2026 and 2030, according to the draft.
Has this type of cap-and-trade system ever been implemented?
Cap-and-trade systems aren’t a new concept — Ontario implemented a version of one in 2017, which the Doug Ford government quickly scrapped in 2018.
But a specific system imposed on the oil and gas sector doesn’t have a direct analog, said Dale Beugin, executive vice-president of the Canadian Climate Institute.
“I think it’s a little bit different than what we’ve seen elsewhere … to go up a level, I think lots of sectors and lots of countries have some combination of pricing policies and regulatory policies,” he said.
How significant are emissions from the oil and gas sector?
The oil and gas sector is Canada’s largest contributor of greenhouse gases, making up 28 per cent of all emissions as of 2021. Behind it is transport (22 per cent) and buildings (13 per cent).
That number is significantly greater in Alberta, where 52 per cent of emissions come from the sector.
Total emissions from the sector peaked in 2018 when it hit 201 Mt of carbon dioxide, according to an Environment Canada report. That number dropped to 189 Mt in 2021.
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The Pathways Alliance, a coalition of Canada’s largest oil sands producers, said in a background document this week that production increased about 220 per cent from 2005 to 2021. A recent analysis by S&P Global found GHG emissions per barrel of oil have dropped about 23 per cent since 2009.
The vast majority of energy production is centred in Western Canada, making up 80 per cent of all Canadian crude oil production as of 2020.
And, according to Environment Canada data, Alberta’s greenhouse gas emissions have increased 19 per cent since 2005.
What’s the reaction been so far?
The Alberta government and oil and gas sector have put the draft regulations in the crosshairs since Thursday’s announcement.
Smith told reporters Thursday that the federal government “will end up in court” if it continues with the regulations, and said it will damage Alberta’s investment climate.
The Canadian Association of Petroleum Producers (CAPP) said the proposal is “effectively a cap on production.”
“CAPP believes the proposed policy risks triggering unforeseen socioeconomic consequences not the least of which is likely to be higher energy prices for Canadians,” wrote Lisa Baiton, CAPP president and CEO.
The Pathways Alliance said in a statement that the existing systems such as carbon pricing and Alberta’s Technology, Innovation and Emissions Reduction (TIER) system “already provide appropriate regulation to drive emission reductions.”
“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.”
Meanwhile, the renewable energy sector and climate groups say they approve of the policy.
The federally funded Canadian Climate Institute called the approach “reasonable and necessary.”
The Pembina Institute, a clean energy think-tank, also said it supports the measures.
“Government policies that lower the emissions intensity of Canada’s oil and gas production will help to ensure Canada’s oil and gas sector is competitive in a lower-demand and carbon-constrained future at the end of this decade,” its statement said.