Minister of Environment and Climate Change Steven Guilbeault joins Minister of Energy and Natural Resources Jonathan Wilkinson and fellow colleagues as they hold a press conference in Ottawa on Nov. 4.Sean Kilpatrick/The Canadian Press
Kevin Krausert is the chief executive officer and co-founder of Avatar Innovations Inc., Canada’s first energy transition corporate venture studio.
On Monday, on the eve of a U.S. presidential election with profound consequences for the future of energy, climate change and geopolitics, Environment Minister Steven Guilbeault boasted that Canada will become the first major energy producer to implement an emissions cap on the oil and gas sector.
Mr. Guilbeault announced draft regulations to limit greenhouse-gas emissions from oil and gas to 35 per cent below 2019 levels. While this is a uniquely Canadian challenge, with 31 per cent of our national emissions coming from that sector (by way of comparison, only 6 per cent of U.S. emissions come from oil and gas), it is not a milestone worth celebrating.
Not only will the emissions cap have the opposite effect of its intended goal, it will also hinder Canada’s ability to align our emission-reduction strategy with that of whoever becomes the next president.
Regardless of politics or technological advances, Canadian energy companies are facing an investor-driven mandate to reduce emissions. Global capital markets are driving a transformational wave of major energy-transition projects.
While energy companies are taking longer to meet those goals than anyone wants, there is a good reason for this.
It is certainly not for a lack of regulation or ambition. We have a surplus of both. It is because the incentive mechanisms for Canadian energy producers to invest in emission-reduction technologies are either insufficient or do not measure up to what is available globally. It is clear the federal government doesn’t understand this.
The emissions cap risks delaying – if not derailing – a whole suite of emissions-reduction technology projects. The reason is simple: It has added yet another layer of uncertainty and complexity on already skinny investment decisions by weakening the most effective mechanism Canada has in place.
A corporation makes a decision to invest in energy-transition technologies when it believes the cost-benefit analysis supports making the investment. When talking about the billions of dollars required for an industry as capital-intensive as oil and gas, investors, which include pensioners, are rightly demanding that the risk be minimal.
In Canada, this has largely happened through carbon markets, where an emitter can either pay for emissions or offset them through a government-verified compliance market. The first carbon market was established in Canada (in Alberta) in 2007.
It has been a bumpy ride. But after nearly 15 years of experimenting in a complicated regulatory system, we’ve finally landed on one of the most globally effective and fungible carbon markets in the world in Alberta, called TIER. While far from perfect, it currently provides the majority of Canadian oil and gas production with price certainty on a per-tonne basis and a verified offset market that ensures emissions removed are verified. It also creates a fungible market that reliably values those offsets.
This has driven massive investments in everything from oil and gas methane reductions to the same carbon-capture projects Mr. Guilbeault has praised.
What the federal emissions cap has done is introduce uncertainty about the future of TIER. That’s because the cap has its own newly created cap-and-trade system. It takes TIER’s 15 years of experience and market knowledge and either duplicates functioning markets or creates a whole new market that may take another 15 years to get right.
Instead, simplifying our existing carbon markets would create greater investment certainty for companies to pursue relevant technologies. Streamlining the regulatory approval system needed to reach investment decisions will ease the burden on corporations, making risk capital available to get first-of-its-kind projects built and increasing the entrepreneurial capacity of Canada’s innovation system to help get the tech built.
These decisions, which establish an investment framework, are all decisions that can be made in Ottawa. The reality, however, is that the decision to actually invest in emissions-reduction projects will not be made in Ottawa or Calgary. It will be made on Wall Street.
Until we have an adequate investment framework, shuttering production from oil and gas to avoid the emissions-cap penalties will remain a likely option. While this certainly reduces Canada’s emissions, such an abrupt production cut will ripple widely in Canada’s energy-dominated economy, curtailing innovation.
Canadians deserve better than Monday’s announcement.