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    Greenhouse Emissions Cap and Trade Framework for the Oil and Gas sector

    Shae Moren - January 03, 2024


    The Canadian government is committed to reducing greenhouse gas (GHG) emissions from the oil and gas sector, aiming to meet 2030 climate goals and achieve net-zero GHG emissions by 2050. The focus is on decarbonizing the oil and gas sector, which is the largest source of GHG emissions in the country. 

    Proposed Regulatory Framework

    The government plans to establish a national cap-and-trade system through regulations under the Canadian Environmental Protection Act (CEPA). This market-based instrument aims to cap GHG emissions from the O&G sector, supporting cost efficient emissions reduction while ensuring emissions decline over time.

    Key Components

    In a cap-and-trade system, a regulator will issue emission allowances to define an emissions cap, with some flexibility for compliance that allows emissions to exceed the cap up to a legal upper bound. Regulated entities must remit one allowance or other eligible compliance unit for each tonne of GHG emissions, and these allowances can be bought and sold on an emissions trading market. The regulations identify regulated parties, establish terms for system registration, emissions allowance issuance, use and trading, and set criteria for eligible compliance units. The regulations enforce a prohibition on GHG emissions beyond a legal upper bound, defining total allowable emissions from covered facilities.

    Design Principles

    The proposed emissions cap-and-trade regulations aim to achieve a decline in GHG emissions, particularly in the upstream and liquified natural gas (LNG) subsectors, leading to net-zero emissions by 2050. The design considers technically achievable emissions reductions and accounts for forecasted global oil and gas demand, establishing a legal upper limit on GHG emissions from covered sources. The regulations prioritize minimizing administrative burden by aligning with existing federal and provincial programs. Additionally, a commitment to ongoing monitoring and regular reviews is emphasized, including assessments of the upper legal bound on GHG emissions, allowance quantity, allocation approach, and compliance flexibility.

    1. Scope of Application:

      Applies to LNG facilities and upstream O&G facilities, including offshore facilities.
      Covers various activities, such as crude oil production, surface mining of oil sands, natural gas production, and liquified          natural gas production.

    2. Emissions Cap:

      Aims to cap GHG emissions, not production.
      Establishes reporting and verification requirements with a legal upper bound on GHG emissions.

    3. Allocation of Emission Allowances:

      Each allowance equals one tonne of CO2e, and regulated entities must remit one emission allowance per tonne of GHG emissions up to the legal upper bound.
      Initially allocated free of charge, considering better performers, and ensuring consistency and transparency.
      Adjustment of total free allocation based on production variations.

    4. Emission Allowances and Legal Upper Bound in 2030:

      2030 emissions cap set slightly below achievable reductions, aiming for 35-38% below 2019 levels.
      Legal upper bound set based on achieving net zero by 2050, considering global climate targets.

    5. Treatment of Indirect Emissions and Stored Emissions:

      Applies to direct (Scope 1) GHG emissions.
      Accounts for transfers of thermal energy, hydrogen, CO2, and electricity to prevent emissions shifting to unregulated facilities.

    6. Compliance Flexibility:

      Facilities may trade emission allowances, utilize multi-year compliance periods, and bank allowances for up to six years.
      Proposes a decarbonization fund for contributions and explores options for domestic offset credits, internationally transferred mitigation outcomes (ITMOs), and offset funding.

    7. Emissions Trading Among Covered Facilities:

      Allows trade of emission allowances unique to the O&G cap-and-trade system.
      Does not accept surplus credits or permits from other systems.

    8. Reporting, Quantification, and Verification:

      Facilities must submit annual reports on GHG emissions, production, and indirect emissions.
      Quantification methods align with existing regulations, with third-party verification.

    9. Coming into Force and Timelines for Compliance:

      Targeted for registration in 2025, requiring facilities to register by the end of 2025 or before emitting GHGs from covered activities after January 1, 2026.
      Phased implementation between 2026 and 2030, with compliance periods lasting three calendar years.

    In summary, the proposed regulatory framework aims to establish a comprehensive cap-and-trade system for the O&G sector, aligning with Canadas climate goals and global objectives while providing flexibility for emissions reduction with draft regulations expected in mid-2024.

    Read more on the government of Canada's plan to achieve net zero by 2050 here.