Ottawa plans cap-and-trade system to cut oil and gas emissions, but targets lower than expected

Open this photo in gallery:

Ottawa’s long-awaited emissions cap on oil and gas will be imposed through a cap-and-trade system, according to three sources, but require fewer reductions from Canada’s heaviest polluting sector than the industry feared. And it sets up yet another jurisdictional battle between the federal government and Alberta over environmental policies.

The new policy will take effect in 2030, requiring a significant cut in emissions that year, the sources said. At the outset it will be less stringent than many had expected, given the overall numbers in Ottawa’s emissions reduction plan released last year.

However, between 2030 and 2050, the cap will be incrementally lowered as the country moves to a net-zero economy by mid-century. Alberta has raised concerns that such a policy would act as a de facto production cap.

The sources, with direct knowledge of the federal policy, said it was crafted to address that concern, after widespread consultation with industry, climate groups, provinces, Indigenous communities and other experts. The policy will be released Thursday.

The federal government plans to grant oil and gas producers some flexibility by allowing them to buy offsets or pay into a technology fund in the event that their emissions exceed the cap, the sources said.

The Globe and Mail is not naming the sources because they were not authorized to disclose the confidential details in advance of the announcement.

Twice delayed, the cap on oil and gas emissions is a marquee policy of the minority Liberals, promised more than two years ago by Prime Minister Justin Trudeau in the 2021 election. It is critical to the government’s hopes of crafting a credible 2030 climate plan.

“We’ve done a lot of work to try to understand the perspectives of industry, to try to understand the perspectives of the producing provinces and to ensure that the methodology that we employ in the framework is thoughtful and defensible,” Natural Resources Minister Jonathan Wilkinson told The Globe after a Tuesday cabinet meeting.

He added that the oil and gas cap will be imposed through regulations under the Canadian Environmental Protection Act.

Alberta Energy Minister Brian Jean told media Wednesday that the cap was an unlawful attempt by Ottawa to control the province’s constitutional rights, which include jurisdiction over natural resources. “We will be fighting it every step of the way,” he said.

This fall, Ottawa lost in two court rulings over its environmental assessment act and plastics ban. However, the Supreme Court has previously upheld the federal carbon price.

The cap is one of various federal government policies that aim to cut emissions by 40 per cent below 2005 levels by the end of the decade. Last month, the environment commissioner said that, so far, the country is falling short of that goal.

The sources were briefed on the plans before the Tuesday cabinet meeting and did not have the final target that Ottawa will impose for the sector in 2030. However, they all said it is lower than outlined in the emissions plan, which showed the oil and gas sector cutting emissions by 42 per cent below 2019 levels by 2030. Last year, The Globe reported that the government’s internal analysis showed that such a cut was not feasible without production cuts.

The announcement on the policy will be made by Mr. Wilkinson in Ottawa, with Environment Minister Steven Guilbeault joining virtually from UN climate talks in Dubai, dubbed COP28.

“There will be some time for adoption but there will be a significant reduction in greenhouse gas emissions from the oil and gas sector by 2030,” Mr. Wilkinson said in a brief scrum on Parliament Hill Wednesday.

The policy will be released as a framework publication, the government says it will be open to consultation and is subject to change before draft regulations are released next year.

Open this photo in gallery:

A 2022 government discussion paper released last year signalled that Ottawa favoured a cap-and-trade system, which would provide more certainty in meeting emissions targets, though industry would incur a higher administrative burden.

According to the sources, the emissions cap can be achieved largely through planned carbon capture, utilization and storage and by dramatically cutting methane emissions. The latter is a more powerful greenhouse gas than carbon dioxide.

The planned emissions cap will cover individual oil and gas production facilities, the sources said, but won’t apply to the transportation or use of the fuels.

Also read: Why Canada’s recent climate-policy struggles may be its most valuable contribution to COP28

Because natural resources fall under provincial jurisdiction, experts have said that the federal government will be on stronger legal footing if it is able to show that the policy does not dictate production levels.

Mr. Wilkinson said in an interview last week that the emissions cap will be based on what is technically achievable and is aimed at maintaining the Canadian industry’s global competitiveness.

The Business Council of Canada last month released a letter arguing against the cap.

Oil companies face increasing pressure to reduce emissions and spend more to join the global decarbonization effort.

Comments from Suncor Energy Inc.’s new chief executive, Rich Kruger, put the issue in the spotlight over the summer, after he suggested that the company would not prioritize long-term energy transition, instead sticking to the core of its business: oil production.

Mr. Guilbeault has pointed to that comment as an example of why a cap on oil and gas emissions is needed.

Canada’s largest oil sands companies, including Suncor, have banded together under the Pathways Alliance and pledged to bring production to net-zero by 2050.

But they have faced criticism that they are dragging their heels, and are not spending enough to decarbonize even as they amass record profits.

An International Energy Agency report released this month found that the fossil fuel sector currently accounts for just 1 per cent of clean-energy investment globally, and warned that oil and gas producers must choose between contributing to a deepening climate crisis or becoming part of the solution by embracing the shift to clean energy.

Pathways counters that its members have spent around $1.8-billion on various technologies and pilot projects to cut oil sands emissions, including work to support a massive carbon capture and storage project at the heart of its net-zero plan. It says the project is on track to begin operating in 2030, but it can’t start before it has been approved by regulators or completed Indigenous consultation.

The Pathways plan aims to reduce emissions from oil sands production by 22 megatonnes a year by 2030.