The Government of Canada is seeking views on the guiding principles, policy design considerations, and policy options presented in the paper, Options to Cap and Cut Oil and Gas Sector GHG Emissions to Achieve 2030 Goals and Net-Zero by 2050.
As outlined in the 2030 Emissions Reduction Plan (ERP), Canada aims to reduce emissions by 40% below 2005 levels by 2030 and net-zero emissions by 2050. The ERP projects a contribution from the oil and gas sector of reducing emissions by 31% below 2005 levels in 2030 (or by 42% below 2019 levels). To reach these levels, two regulatory options have been proposed as:
Option 1: A new cap-and-trade system under the Canadian Environmental Protection Act
Option 2: Modification of the current carbon pricing approach under the Greenhouse Gas Pollution Pricing Act
Key similarities:
- Common criteria of scope, coverage, time-limited compliance flexibility, emissions baseline, emissions cap trajectory
- Each option will include multiple steps of cap-and-trade and modifying existing carbon pricing systems
- Guiding principles will shape the plan to be accountable, ambitious, effective and achievable, and to enable investment in Canada
- Key considerations are environmental outcomes, policy coherence, cost effectiveness, and administrative burden
- Will emphasize evolving energy security considerations, including international energy supply and energy affordability for Canadians through the energy transition
Key differences:
Option 1:
- More certainty
- A cap-and-trade system provides a high level of certainty of achieving the emissions cap trajectory
- Less cost effective
- As coverage increases, so would policy complexity, as opportunities, costs and timelines for reductions vary across the many oil and gas sub-sectors
- Additional compliance costs
- Depending on the approach to allowance allocation and the level of the cap, facilities subject to existing regulations and carbon pricing may face additional compliance costs under the cap-and-trade system. The scope of the cap-and-trade system may also have implications for oil and gas offset projects that currently exist in some provincial systems
- Higher administrative burden
- A cap-and-trade system would be implemented through new regulations and would create new monitoring, reporting and verification requirements for oil and gas facilities, in addition to existing pricing and regulatory requirements and Canada's Greenhouse Gas Reporting Program
Option 2:
- Less certainty
- Although it would enable adjustments to existing pricing systems to achieve desired emission reductions, the actual caps would not be prescribed in the regulation and would not be enforceable
- More cost effective
- Carbon pricing is widely recognized as the most cost effective way to reduce emissions. This option would continue to make use of pricing to encourage the lowest cost reductions within the sector
- Equivalent compliance costs
- This approach would make use of existing regulatory instruments to achieve the oil and gas cap, although significant changes to that framework would be required
- Lower administrative burden for industry
- This option would place less administrative burden on the oil and gas industry than Option 1 as emissions would not be subject to two separate regulations. However, due to the backstop approach, the system would be very complex to administer, as it would require making potentially significant changes to the benchmark, the federal OBPS and individual provincial/territorial systems every five years
Policy will be drafted once feedback from stakeholders has been received. Stakeholders include industry, provinces and territories, Indigenous Peoples, Canada’s Net-Zero Advisory Body, House of Commons Standing Committee on Natural Resources, international partners such as the U.S., and the financial community.
Informal engagement to date has included recommendations for:
- Overall policy flexibility
- Leveraging existing instruments
- Realistic implementation timelines
- Ensuring Indigenous groups and communities are consulted in an effective and meaningful way
- Avoiding “carbon leakage”
- Not picking “technology winners and losers”
- Supporting a positive investment climate for clean technology
- Avoiding unintended consequences from layering of climate policies
- Coordination between federal and provincial/territorial and industry-led initiatives
- Ensuring the oil & gas sector makes a “fair” contribution to Canada’s overall emission reduction goals
Formal written submissions in response to the discussion document are welcome and encouraged during the public comment period from July 18 – September 30, 2022. Submissions are to be sent to: PlanPetrolieretGazier-OilandGasPlan@ec.gc.ca. A series of engagement sessions will be shared in the coming weeks. The form of the cap is to be communicated by early 2023.
Please consider providing feedback on upcoming policy initiatives and reach out to us if you have any questions or concerns.