Canada orders landmark emissions cuts of up to 38% for fossil fuel firms

OTTAWA – Canada will require its oil and gas industry to cut emissions to 35 per cent to 38 per cent below 2019 levels in six years, in what the government is calling a historic first for a major fossil-fuel producing country.

Minister of Environment and Climate Change Steven Guilbeault announced the long-promised oil and gas emissions cap on Dec 7 at the COP28 summit in Dubai, a policy likely to inflame tensions with conservative leaders of western provinces that are home to the bulk of the industry.

Prime Minister Justin Trudeau’s government will implement a cap-and-trade system to achieve the cuts. It will set a legal limit on the sector’s emissions and then allow companies to buy and trade a limited number of emissions allowances or permits. Companies that reduce emissions will be able to sell more permits, thereby rewarding those who innovate to cut pollution.

“There is no future for this industry unless they decarbonise,” Mr Guilbeault said in an interview.

Producers will be allowed the flexibility to emit up to a level of about 20 per cent to 23 per cent below 2019 levels through the ability to buy carbon offsets or pay into a fund that promotes decarbonisation in the sector if their emissions exceed the cap.

The cap will go down over time until Canada’s economy reaches net-zero in 2050. Dec 7’s announcement is a framework that lays out the plan, with more details to be released in draft regulations in the middle of next year, Mr Guilbeault said. Those regulations will narrow down an exact emissions target for 2030, he said.

Industry reaction

The Pathways Alliance, a group of six Canadian oil-sands producers, laid out a plan in 2021 to lower emissions by 22 million tonnes a year by 2030. The government’s new target, then, leaves as little as 12 million tonnes of reductions for the remainder of the oil and gas industry to achieve.

The emissions cap policy “is in line with what the industry said is doable”, said Associate Professor Sara Hastings-Simon from the department of earth, energy and environment at the University of Calgary. “If there is pushback on this, that calls into question whether they are really serious and really committed.” 

The Pathways Alliance gave a measured response, saying it will take time to review the framework and how it will affect oil-sands operations. Other industry players and officials were more critical of the plan. 

The Canadian Association of Petroleum Producers, the main trade group representing oil and gas companies, said the emissions cap was “effectively a cap on production” that could result in “significant curtailments”. Another trade group, the Canadian Association of Energy Contractors, said the policy would hinder the industry’s ability to attract capital. 

The premiers of oil-producing Saskatchewan and Alberta provinces blasted the move by the government of Prime Minister Justin Trudeau. Alberta Premier Danielle Smith said the measure amounts to a forced cut in production for the province’s most important industry and said there was “no doubt” the matter would end up in court. Ms Smith has already vowed to outright defy other federal energy policies – even threatening to create a provincial corporation that would not be beholden to federal rules, if necessary.

“If we have to, in some way, create some certainty so that we do not have a production cap, so we do not have our production shut in, we will also be the producer of last resort, whatever that may look like,” Ms Smith said in a press conference from Dubai.

The emissions cap will apply to a broad range of activities related to oil and gas, including oil-sands extraction, conventional oil and gas drilling and the country’s small but growing liquefied natural gas export industry. 

Oil sands producers already have their production concentrated in a limited area among a handful of producers that operate mines, oil sands upgraders and well sites, a fact that Pathways argues makes it easier to deploy carbon capture and storage technology. 

Conventional producers of oil and gas include dozens of companies with well sites spread across Western Canada, adding complexity to the process of cutting carbon emissions. They will need to do things such as convert from natural gas to electricity on their rigs, which will require a larger electricity network, Mr Kevin Birn, vice-president in the GHG estimation and coordination group at S&P Global, said by phone. 

For drillers in Western Alberta and eastern British Columbia, hydropower would provide a low-emissions solution. But if the electricity comes from natural gas-fired plants, emissions reductions could be limited. 

The oil and gas sector is the largest single source of emissions for Canada, accounting for 28 per cent of that pollution in 2021, according to Canada’s government. Emissions from the sector were 201 million tonnes in 2019, 20 per cent higher than 2005.

The cap-and-trade system will cover all direct greenhouse gas emissions, while also accounting for indirect emissions related to the production of oil and gas and carbon storage. The cap will regulate upstream oil and gas facilities, including offshore operations, and will also apply to liquefied natural gas plants.

Mr Guilbeault said the regulations will ensure that oil and gas companies making record profits invest them in Canadian jobs, communities and the economy. There was no new government funding announced Thursday to help industry meet the targets, though Canada previously promised C$12.4 billion (S$16.6 billion) in tax credits for building carbon capture systems.

The minister said he had been speaking with other major fossil fuel-producing countries at COP28 and none had capped emissions from their sector. “It’s never been done before.” BLOOMBERG