Plan for oil and gas sector might be an overly political, unnecessary relic

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If the Canadian government is looking to reduce greenhouse gas (GHG) emissions across the country, an industry-specific plan capping and cutting emissions from the oil and gas sector is one of the clunkier ways to go about it. It’s likely to start another political battle with Alberta when across-the-board climate policies and carbon pricing already exist.

But the discussion document for the industry-specific cap is exactly what was laid out by Ottawa this week, building on a 2021 campaign promise from the federal Liberals. It was Prime Minister Justin Trudeau’s centrepiece pledge from COP26.

Environment and Climate Change Canada lays out two scenarios in its document. The first possibility is for emissions from the oil and natural gas sector to be subject to a cap-and-trade system, with a series of emission quotas that fall over time. The second option is a more nuanced take on the idea of a cap – that energy producers would potentially face an “oil and gas-specific carbon price” (i.e. a higher carbon price) if they don’t get their emissions down hard and fast enough. The final plan is set to come out early next year.

Oil and natural gas production is a huge slice of the pie when it comes to Canada’s emissions, accounting for more than one quarter of Canada’s GHG output. It’s also growing. “Absolute GHG emissions from Canada’s oil and gas sector grew by 5 per cent from 2005-2020″ as oil and gas production jumped by 26 per cent, according to the federal discussion paper. Although production methods in the energy-intensive oil sands have become more efficient over the past 20 years, increases in production mean that absolute emissions have gone up.

So if you’re serious about reducing the country’s GHG emissions, why not cap oil and gas?

Because there are already enough tools in Canada’s climate tool kit. There is already a price on carbon – on both the industrial and individual consumer space – that will hit $170 per tonne by 2030. It applies to everyone, including oil and gas producers. Within the carbon pricing system for industrial emitters, there are ways of driving emissions down further – for instance, cutting the output subsidy that emissions-intensive and trade-exposed sectors receive.

There is also a new Clean Fuel Standard, under which fuel suppliers have to cut the carbon intensity of gasoline and diesel. “Given these two policies are already in place, a cap on oil and gas emissions adds little to Canada’s tool kit, and is potentially more costly than beneficial,” University of Calgary economist Jennifer Winter told the House of Commons standing committee on natural resources earlier this year.

A cap specifically for oil and gas, Dr. Winter noted, means the sector would be forced to engage in more costly emission-reduction schemes than in other parts of the economy. “There is nothing special about oil and gas emissions,” she told the MPs. “A tonne is a tonne is a tonne, and prices should apply uniformly to all sectors.”

The cap also adds an extra layer of complexity to an already crowded Canadian climate policy landscape. There are a host of other significant regulations, such as requiring the oil and gas sector to reduce methane emissions by 40-45 per cent below 2012 levels by 2025.

Climate is a global crisis. Environment Minister Steven Guilbeault told The Globe in an interview this week that the record heat wave disrupting daily life in Europe and the wildfires scorching parts of British Columbia are just the latest reminders of the importance of tackling climate change. “How many more examples of the impacts of climate change do some provinces need to have?” he asked.

The federal government is also offering the oil and gas industry a carrot to deal with its emissions problem – as oil sands and producers pledge to hit net-zero targets by 2050 – through the CCUS Investment Tax Credit. It puts the onus on industry to prove they can reduce emissions while also maintaining or increasing production.

The political problem is near three-quarters of Canada’s GHG emissions come from sources other than the oil and natural gas production sector, and they are not facing a specific cap. There is carbon pricing but no sector-specific emission caps for transportation or other heavy industries, or for anyone who uses fossil fuels, for that matter.

“Some provinces” really only applies to a few oil-producing parts of Canada. Those provinces do the emissions-intense work of producing 5-6 per cent of the world’s still-growing demand for oil. About 75 per cent of the oil and gas industry’s emissions are from Alberta.

Any sector-specific cap will hit Alberta companies in a lopsided manner. This will be difficult for Albertans, and Alberta politicians, to stomach as the rest of Canada not only benefits from the economic contribution of Canada’s massive oil export volumes, but is less likely to feel the economic pain of federal climate policies.

The federal government says it will implement policies “in a way that allows the sector to compete in a global economy that is transitioning to net-zero.” But it comes back to the eternal question of whether a proposed cap would lead to a de facto production cut, if emissions-reduction targets can’t be met by using technology such as carbon capture. An internal analysis obtained by The Globe and Mail shows a substantial gap between the ambition the government has set for the industry and what is technically feasible by 2030.

The politics of all of this has also changed since the cap was promised last year. At that time, oil and natural gas prices started going up – for lack of supply – but climate was still the top energy concern. Russia’s invasion of Ukraine and its energy war against Europe have made price and supply volatility worse.

While Europe burns this summer, powerhouses such as Germany are also likely to shut down parts of their economy in the cold of this winter, because of shortages of natural gas. Russia has been strategically keeping exports restrained. This week, the International Energy Agency said “the world is experiencing the first truly global energy crisis in history.” Conservation is key, with the European Union telling reluctant member states Wednesday to cut gas usage by 15 per cent until March.

Canada’s abundant supplies of natural gas have suddenly become much more important. And the world is waking up to the idea that it wasn’t a great idea to become heavily reliant on Russian oil and natural gas.

Last fall, before the war in Europe, Premier Jason Kenney said Alberta wasn’t necessarily opposed to a cap on oil and gas emissions, depending on how it was structured. But the language has become harder edged with the release of the federal discussion paper details this week.

“Alberta will not accept any plan from the federal government that seeks to interfere in our constitutionally protected ability to develop our resources,” Ministers Whitney Issik and Sonya Savage, respectively responsible for Environment and Energy in Alberta, said in a joint statement. “The federal government cannot act unilaterally to meet their emissions targets.”

This harder line might be coming in part because Alberta feels snubbed in the consultation process, and because of a continuing United Conservative Party leadership race where candidate Danielle Smith is dragging the party further toward autonomy and standing up to Ottawa with her “Alberta First” policies. But it’s also because oil and natural gas has been given more geopolitical weight in recent months.

While the new cap-and-cut discussion paper makes mention of energy security in the coming years, the government of Canada has not responded in any real way to this looming political and societal challenge. This plan for the oil and gas sector might be an overly political, unnecessary relic of 2021.

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