This is the second part in a two-part series this week on the issues involved in a federal emissions cap. Vincent Lauerman provided his take on the issue on Monday. Click the link below to access it.

Lauerman: Time For Kenney To Play Climate Poker With The Feds

Prime Minister Justin Trudeau confirmed at COP26 what the Liberal Party announced on the federal election campaign trail: Ottawa will cap and cut emissions from the oil and gas sector on the road to net zero by 2050. The announcement was met by consternation from some in oil and gas producing provinces.

But what if this is an opportunity?

If there was ever a time for producing provinces to strike a deal with Ottawa, this is it. The federal government has made its intentions clear. What do producing provinces and industry need from Ottawa in return?

There is much greater consensus in Canada on the need to reduce emissions and capitalize on the country’s energy resources. Canadians increasingly want climate action and say oil and gas is important to Canada's future. Industry is increasingly aligned on net zero by 2050, whether through individual company commitments or through collective efforts like the Oil Sands Pathways to Net Zero alliance.

The country is well poised to bend its emissions curve downwards once and for all.

But consensus can be a fragile thing — the window of opportunity to make durable progress on energy and climate could be lost if the country gets mired in division, conflict or even a national unity crisis.

A deal between Ottawa and producing provinces could avert that.

At a minimum, it could address five things.

First, clarity on how net zero will be defined, which emissions will be counted and how the cap and subsequent reductions will be operationalized. There is a laundry list of unanswered questions. Does net zero refer to emissions from oil and gas production or to the country's overall net zero by 2050 goal? Which emissions are we talking about — Scope 1, Scope 2, Scope 3? How will the cap and subsequent reductions be operationalized — at the individual company level, the sector level, something else? Will an emissions trading system be developed? If so, how will it interface with existing output-based pricing systems?

The federal government has referred these sorts of questions to its Net Zero Advisory Body, but this approach runs the risk of inadequate engagement with the provinces and industry, getting many noses out of joint in the process. Effective and durable policy design will require robust federal-provincial collaboration and close engagement with industry.

Second, a deal could include policy, regulatory and financial support from Ottawa for the technologies needed to reduce emissions in oil and gas production. First on this list should be carbon capture, utilization and storage (CCUS). It is crucial that support for CCUS be seen as an investment in emissions reductions and not a fossil fuel subsidy. The COP26 agreement commits to phasing out “inefficient” fossil fuel subsidies. This must not be defined to exclude support for CCUS. Not only will capture technologies be crucial for emissions reductions in oil and gas production, but as the IEA noted in its net zero by 2050 scenario, CCUS developments in the oil and gas sector will be needed to support decarbonization in other hard to abate sectors like cement and steel.

A meaningful discussion of CCUS would also open the door to provinces pressing Ottawa to reconsider its exclusion of CCUS that involves enhanced oil recovery (EOR) from eligibility for the forthcoming federal CCUS tax credit. CCUS-EOR is disliked in some quarters because it facilitates oil production, but it is recognized by the International Energy Agency as a legitimate form of storage and is the most commercially advanced form of CCUS.

But support from Ottawa for technology development and deployment should not be just about CCUS. It needs to extend to other emerging technologies like small modular nuclear reactors (SMRs) for their potential to reduce emissions through non-emitting electrification and process heat.

Third, an agreement could include recognition and support from Ottawa for the transformation and diversification of the oil and gas sector to new energy sources like hydrogen and new products like carbon fiber. Mobilizing the oil and gas sector’s know-how and investment in blue hydrogen can help build the needed supply chains and infrastructure to develop the hydrogen economy in Canada. And federal support and recognition for bitumen beyond combustion would help to ensure Canada taps the full potential of oilsands resources in the years ahead.

Fourth, the accord could address sustainable finance. COP26 moved the yardsticks on sustainable finance, notably with the Glasgow Financial Alliance for Net Zero, an alliance representing $130 trillion worth of capital from firms in 45 countries, spearheaded by former Bank of Canada governor and UN special envoy on climate and finance Mark Carney. Canada also emerged from COP26 with a commitment to host a hub of the International Sustainability Standards Board in Montreal.

The oil and gas industry is betting heavily on ESG. A deal with Ottawa to help ensure that emissions reductions efforts are recognized and defined as sustainable investments by the global financial community would help unlock the private capital needed to pursue net zero.

Fifth, an agreement could incorporate support from Ottawa for international emissions reductions transfers. COP26 reached a deal on Article 6 of the Paris Agreement for internationally transferred mitigation outcomes (ITMOs). There remain many complexities to operationalizing ITMOs, but Ottawa could commit to working towards transfers for projects like LNG exports that reduce emissions elsewhere.

Negotiating a deal between producing provinces and Ottawa would unquestionably be challenging. There would no doubt be big moments of conflict. But the window’s wide open for producing provinces to invite the federal government to the table. For Ottawa, the risks of not showing up are substantial: if it doesn’t collaborate with the provinces and industry, it will struggle mightily to translate its ambitious commitments into effective action. Energies that could have been used to take action could be used instead to fight.

Done well, a deal would also enable Canada to have a robust policy discussion on the role of oil and gas on the road to net zero by 2050 — something that’s been sorely lacking to date. Most importantly, it could help the country bend its emissions curve downwards once and for all.