By: Glenn Wright, Chad Eggerman, and Janelle Anderson
The federal government has committed to doing its part to reduce emissions of greenhouse gases (“GHGs”), the major contributor to climate change. On November 9, 2024, the 60-day public consultation period began for the proposed Oil and Gas Greenhouse Gas Emissions Cap Regulations (the “O&G Regulations”). The consultation period closes end of day January 8, 2025.
Canada first committed to cap and cut GHG emissions from the oil and gas (“O&G”) sector at the 2021 United Nations Climate Change Conference (“COP26”) in Glasgow, UK. The commitment was to ensure that O&G sector emissions would be reduced at a scale and rate necessary to ensure the sector makes a meaningful contribution to Canada’s 2030 Nationally Determined Contribution of 40–45% below 2005 emissions levels by 2030 and to achieve net-zero emissions by 2050. After more than three years and extensive consultation, the proposed regulatory text signals that the federal government intends to deliver on the commitment to cap and cut GHG emissions from the O&G sector. However, it is uncertain if the proposed O&G Regulations will deliver significant emissions reductions or accelerate the sector’s transition to net-zero. As the proposed O&G Regulations stand, it is unclear if the sector will achieve net zero emissions by 2050 at all.
As outlined in the 2024 National Inventory Report (“NIR”), Canada’s O&G sector is responsible for more GHG emissions than any other sector of our economy. In 2022, the latest year of data contained in the NIR report, the O&G sector emitted 217Mt CO2 equivalent (31% of national emissions). Furthermore, GHG emissions from the O&G sector have increased by approximately 10% since 2005, primarily due to expanded emissions related to increased oil sands production. Without policy and action to bend the O&G sector emissions curve downward, Canada’s goals to reduce national emissions would be compromised. The purpose of the proposed O&G Regulations is to reduce GHG emissions from certain activities carried out in the oil and gas sector by establishing a cap on GHG emissions.
The proposed O&G Regulations would set an emissions cap starting in 2030 for operators producing more than 30,000 barrels of oil equivalent monthly (365,000 BOE/year – the “threshold”). Operators will be required to register with the Ministry of Environment and Climate Change prior to January 1, 2026. Operators producing above the threshold would be required to submit their first reports on emissions by June 1, 2027, for the calendar year 2026. The emissions cap for the first compliance period (2030-2032) would be 73% of the reported emissions from all operators in 2026. The intention being that emissions in the first compliance period (2030-2032) would be 27% below emissions for the O&G sector in 2026.
Starting in 2029, the Minister would distribute emissions allowances to operators on an annual basis up to the level of the emissions cap. Emissions allowances would be distributed prior to the year in which they may be used. Allowances would be distributed to operators based on distribution rates (allowance per unit of production) and the three-year rolling average of historical production for each facility, taking into account the total allowances that can be distributed under the emissions cap. These emissions allowances are to be distributed on a pro-rated basis across all operators to ensure that the total of allowances distributed is equal to the emissions cap.
There is additional flexibility in the proposed O&G Regulations giving operators the option to remit eligible Canadian offset credits or decarbonization units (obtained by making contributions to a decarbonization program) to cover up to 20% of their remittance obligation. This means that there is a legal upper bound that is 20% greater than the emissions cap, meaning that the 2030-2032 compliance period could allow O&G sector emissions to be as high as 87.6% of the 2026 reporting period emissions (or only 12.4% lower than the reference year 2026). Canadian offset credits are presumably tradable or bankable to subsequent compliance periods within the same province or territory, but the decarbonization units are not. During the development of the proposed O&G Regulations, use of internationally transferred mitigation outcomes (“ITMOs”) were also considered to allow for flexibility in compliance with the emissions allowance requirements, but there are presently no provisions to use ITMOs in the proposed O&G Regulations.
The decarbonization units’ program will be used to support O&G sector decarbonization and help facilities that receive support from the program to decrease their emissions. The decarbonization units program acts like a clean-tech fund for the O&G sector. Modelling in the Regulatory Impact Analysis Statement (“RIAS”) assumes that decarbonization units would be available at an incremental price of $50 per tonne to a maximum of 13 million decarbonization units each year (the maximum 10% of the average baseline emissions over the period of analysis). This suggests that the decarbonization fund for the O&G sector could amount to $650 million annually.
The RIAS has some discussion about the anticipated emissions reductions and the cost benefit analysis of the proposed O&G Regulations. In summary, the proposed O&G Regulations are anticipated to “reduce GHG emissions in the oil and gas sector by 20.2 Mt, and increase GHG emissions in the rest of the economy by 6.7 Mt, resulting in a net GHG reduction of 13.4 Mt compared to the baseline scenario.” Furthermore, the proposed O&G Regulations are not anticipated to have a significant effect on overall O&G sector production. Production in the 2030-2032 compliance period is estimated to be only 0.7% lower than the baseline (without the proposed O&G Regulations in place). This explains why the Canadian government has pitched these new O&G Regulations as a cap on O&G sector emissions, not production. The monetized costs and benefits of the proposed O&G Regulations nearly offset each other with the RIAS projecting a modest annualized net benefit of $57 million.
Perhaps one of the main reasons that the proposed O&G Regulations are not expected to be costly is because the O&G sector has been widely consulted in the development of these regulations as to what is “technically achievable.” The O&G sector is clearly looking to further deploy:
- the use of solvents to dilute bitumen and reduce the need to produce and use steam for in situ oil sands production;
- fuel switching to low-carbon or renewable fuels such as hydrogen;
- energy efficiency measures and other process improvements;
- methane abatement;
- and carbon capture, utilization, and storage (“CCUS”).
Another key to decarbonize the O&G sector is to explore more options to electrify production and processing to reduce GHG emissions from the combustion of fossil fuels throughout the O&G sector. Interestingly, emissions from electricity that is produced, as well as emissions associated with electricity supplied to each facility, would be excluded from an operator’s attributed GHGs under the proposed O&G Regulations.
It is understandable that the O&G sector is not motivated to pursue electrification, as that amounts to “supporting the competition”, but it would be prudent for policymakers to take a more integrated approach to considering Canada’s energy sector as a whole rather than tackle the O&G sector emissions in isolation from other energy. For example, the opportunities to apply CCUS to the electricity sector, particularly on biomass generation (i.e. bioenergy with carbon capture and storage or “BECCS”), may prove to be more attractive on a least-cost per withdrawn unit of carbon dioxide (“CO2”). Investments in CCUS for electricity generation are also less at risk of becoming stranded assets in the future as demand for electrical energy is much more likely to increase than demand for fossil fuel energy. To further support this point, the Canada Energy Regulator provided an overview for economy-wide net-zero transitions in its Future 2023 Report.This reportprojected the largest deployment of CCUS technology for BECCS by 2050 compared to CCUS on fossil fueled electricity generation, heavy industry, or the oil and gas sector.
In summary, the proposed O&G Regulations represent a progressive policy to reduce emissions in the O&G sector. As drafted, the proposed O&G Regulations are technically achievable without limiting production or having significant cost implications. However, despite the negligible impact on costs and production, it seems that provincial governments are likely to push back on Ottawa as part of the ongoing politization of energy and climate policies. If only there were some better policy to regulate the hot air from politicians? Perhaps then we could have more rational discussions about progressive policies like these proposed O&G Regulations.
All interested parties are strongly encouraged to take the opportunity to engage in the public consultation process and submit comments on the proposed O&G Regulations online before the deadline of January 8, 2025 at 11:59pm EST here:
https://canadagazette.gc.ca/rp-pr/p1/2024/2024-11-09/html/reg1-eng.html
Disclaimer
This publication is provided as an information service and may include items reported from other sources. We do not warrant its accuracy. This information is not meant as legal opinion or advice. Contact Procido LLP (www.procido.com) if you require legal advice on the topics discussed in this article.