Feds Propose Cap-and-Trade System To Curb Oil and Gas Emissions

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The federal government announced this morning a proposal to cap 2030 emissions from the oil and gas sector at 35 to 38 per cent below 2019 levels, while providing “compliance flexibilities” to emit up to a level about 20 to 23 per cent below 2019 levels, through a cap-and-trade system.

The proposed target requires that the sector reduce emissions from 171 Mt in 2019 to 106-112 Mt in 2030, but allows companies to defer some direct reductions by buying offsets and allows companies to pay into a fund as an alternative to reducing emissions.

This effectively lowers the amount that the industry has to reduce emissions to about 131-137 Mt, an absolute reduction of at least 34 Mt.

Caption: This graph shows two bars representing greenhouse gas emissions from the oil and gas sector. The first bar shows that GHG emissions from the upstream and LNG subsectors were estimated to be 171 Mt in 2019. The second bar shows projected emissions from the oil and gas sector in 2030. The 2030 bar is divided in two parts. One part represents the 2030 emissions cap (allowance level of 106-112 Mt) and the other represents the amount of compliance flexibility for covered facilities (25 Mt), which combine for a total legal upper bound of upstream and LNG subsector emissions of 131-137 Mt.

The cap was promised by the Liberals in the 2021 election and is more than a year behind the schedule Environment Minister Steven Guilbeault initially wanted.

It requires a smaller cut to emissions than initially estimated in the government’s emissions reduction plan last year. That plan, which laid out a sector-by-sector list of what each industry needs to do to help reach that goal, wanted oil and gas to cut its emissions by more than 42 per cent from 2021 levels, to 110 Mt.

Industry had been clear that it could not achieve those reductions without also cutting production.

“Despite the federal government’s stated objective that the emission cap should not put a limit on Canadian oil and natural gas production, the unintended consequences of the draft framework announced today of a cap-and-trade system with an interim target of a 35 to 38 per cent emissions reductions below 2019 by 2030 could result in significant curtailments — making this draft framework effectively a cap on production,” Lisa Baiton, president and CEO of the Canadian Association of Petroleum Producers, said in a prepared statement.

“I think what we’re doing is historical not just in the Canadian context but in the international context as well,” Guilbeault said in an interview. “We’ve never put in place regulations in Canada that would ensure that the oil and gas sector reduces its overall emissions. We’ve never done that.”

The government proposes to implement the national cap-and-trade system through regulations to be made under the Canadian Environmental Protection Act, 1999.

The government is planning to publish draft regulations by mid-2024.

The cap-and-trade system would cover all direct greenhouse gas emissions, while also accounting for indirect emissions related to the production of oil and gas and carbon storage.

The greenhouse gases covered would include carbon dioxide, methane, nitrous oxide, and others. Each emission allowance will be equivalent to one tonne of carbon dioxide equivalent emissions (CO2e).

The greenhouse gas cap would regulate upstream oil and gas facilities, including offshore facilities, and would also apply to LNG facilities. These subsectors represent the majority of emissions from the oil and gas sector — the upstream subsector represented 85 per cent of sector emissions in 2021.

The emissions cap will cover activities such as oilsands and conventional oil production, natural gas production and processing, and production of LNG.

The greenhouse gas cap puts a limit on the amount that the sector can emit and will “be key to making sure we reduce our emissions as a country, on the road to reaching net zero by 2050,” the government said.

Facilities will be able to buy a limited amount of carbon offset credits or contribute to a decarbonization fund, which would hold them accountable for a limited volume of emissions above the greenhouse gas cap.

The compliance flexibility options will both help reduce emissions — offsets will result in reductions in other sectors, and proceeds from the decarbonization fund will be reinvested to support emissions reductions within the oil and gas sector, the government said.

The federal government said it will continue engaging with industry, Indigenous groups, provinces, territories, and all other stakeholders “to get this system right.”

Written comments in response to the framework should be submitted by Feb. 5, 2024.

Earlier this week, Canada outlined new regulations specifically to cut methane from the oil and gas sector by at least 75 per cent over 2012 levels by 2030. Those cuts will be a key part of the overall emissions cap.

Alberta Premier Danielle Smith said Wednesday on CTV News that she would wait to hear the details of the government’s emissions cap but added, “If an emissions cap is so stringent that it will shut in production, we won’t let that happen.” – with files from Bloomberg and The Canadian Press

Note: The DOB will be gathering industry reaction during the day.

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