Canada plans to cap greenhouse gas (GHG) emissions from oil and gas companies utilizing a carbon trading mechanism, which officials say will set the sector up to decarbonize by midcentury, while still upping production this decade.
The program would set facility-specific caps on GHG emissions from mostly upstream oil and gas facilities, targeting a 35-38pc reduction in emissions from 2019 levels by 2030. The scheme would cover 85pc of all sector emissions — including from conventional oil production, oil sands, bitumen upgrading, natural gas production and processing, and LNG production. Facilities currently too small to face federal emissions reporting requirements could have obligations.
Canada would set facility caps based on baseline production levels, allocating allowances to covered sources for free and permitting them to cover some portion of their excess emissions by buying allowances, purchasing carbon offsets, or paying into a decarbonization fund.
These "compliance flexibilities" would have a clear limit: the 2030 emissions cap would start at 106-112mn metric tonnes CO2-equivalent, and sources could only collectively go over that cap by 25mn tCO2e. This "legal upper bound" of emissions would ensure that GHG emissions decline by at least 20pc by 2030 even if the program's caps are more ambitious, Canada's environment ministry said today.
Facilities could only bank unused allowances for up to two three-year compliance periods, and the government is weighing a separate limit on the total number of allowances that can be saved year to year. There are no planned restrictions on allowance trading between covered facilities beyond the legal upper bound, though a senior official said the government has not yet decided whether speculators will be allowed to enter the market.
Fuel combustion emissions associated with oil and gas extraction were nearly 64pc higher in 2021 than in 2005 according to the federal estimates. While the program would force the sector to reverse that trajectory, officials stress that the program's cap and upper limit are designed around "technically achievable" emissions reductions that account for expected production growth.
"The world needs more Canadian energy," said Randy Boissonnault, Canada's employment minister, who added that his goal is for the country to produce the "greenest barrel of oil on the planet."
A draft framework forecasts that Canadian oil production will grow 17pc from 2019 levels by 2030. But methane emissions are supposed to decline dramatically already from regulations proposed this week at Cop28, and Canada expects further emissions cuts from carbon capture and storage and increased electrification.
Canada is soliciting informal comments on the early-stage proposal through 5 February next year. It expects to release a formal draft proposal midway through 2024, finalize regulations by 2025, and have reporting requirements begin as early as 2026. Whether the cap would kick off before 2030 is unclear.
The new program would add to a suite of climate policies in Canada, including an increasingly stringent federal carbon price, a low-carbon fuel standard, and a recent proposal for a net-zero power grid by 2035. Prime minister Justin Trudeau's climate strategy has come under pressure recently, with the opposition Conservative Party campaigning to "axe the tax" on carbon and the government recently backtracking by exempting home heating oil from the federal fuel charge in response to cost concerns.
The new cap-and-trade proposal has already garnered backlash from conservative politicians — especially in oil-rich Alberta, where officials have increasingly taken steps to reject federal climate policies they dislike.
The Alberta government "will develop a constitutional shield in response to this and other recent attacks on our province by what is fast becoming one of the most damaging federal administrations in Canadian history," Alberta premier Danielle Smith and environment minister Rebecca Schulz said.
