Oil and gas sector pollution has long been the elephant in the room in Canadian climate policy, but on Monday, the federal government launched consultations on how to best cap and curb emissions from that industry, teeing up a political battle.

A discussion paper published Monday outlines two possible ways to introduce an emissions cap. One option is to modify the existing carbon price to encourage steeper reductions from the oil and gas sector. Another option is to amend the Canadian Environmental Protection Act to introduce a new cap-and-trade system that issues “emission allowances” that trend down over time. Those allowances would be unique to the cap-and-trade system, meaning they couldn’t be traded with other types of allowances or credits used by other regulations. Consultations are open until Sept. 30.

Steven Guilbeault, the Environment and Climate Change minister who is stickhandling the file, said the prime minister intends to keep his election promise to cap oil and gas emissions, a pledge he reiterated at COP26 in November.

“It was one of the cornerstones of our last election platform on environmental or climate change issues,” Guilbeault told Canada’s National Observer Monday. “We want to move as quickly as we can while respecting the necessary duty we have to consult as part of the Canadian federation, so that's the balancing act we're trying to do.

“We don't necessarily have a whole lot of time ahead of us. I mean our [minority Parliament] agreement with the NDP gives us a bit more breathing room, but climate change is happening, so we need to act.”

While there is a very technical conversation to be had about how to best implement new regulations, Guilbeault’s bigger challenge may very well be political. The proposed regulation is already being met with hostility from some provinces.

In a statement, Alberta’s energy minister, Sonya Savage, accused Ottawa of failing to work with provinces to develop this regulation. Savage said the discussion paper “is yet another example of a lesson Ottawa refuses to learn: the only way to actually cut emissions and keep life affordable is to work with the provinces to create environmental policies that will actually work.

“Alberta will not accept any plan from the federal government that seeks to interfere in our constitutionally protected ability to develop our resources,” she said. “Provinces are the owners of these natural resources, which have been responsibly managed on behalf of Canadians for decades.”

Shots at the government are also coming from the NDP. Environment critic Laurel Collins and natural resources critic Charlie Angus pounced on the proposed regulation, saying in a statement that the “Liberals’ discussion document” has “little accountability” for the oil and gas sector.

Climate progress has been "overshadowed by Canada's continued expansion of oil and gas... By naming and tackling this [sector's emissions], this elephant in the room, this policy could be really big" says @carobrouillette with @CANRacCanada.

“Any emission cap must show accountability mechanisms are in place and will guarantee that the worst emitters reduce their emissions. This so-called plan doesn’t do this. They haven’t even committed to a credible emissions target yet,” the statement reads. “The Liberals keep saying the right things about climate change, but their actions don't match their words. Instead, they keep siding with rich oil and gas companies — protecting profits over people.”

Provinces have jurisdiction over natural resource production, but last year, the Supreme Court of Canada ruled the federal government has jurisdiction over emissions. That effectively puts Ottawa on a tightrope where it can ultimately affect natural resource production through its jurisdiction over emissions but needs to be careful about how programs are implemented or risk court challenges.

“We live in a democracy, so provinces or companies are free to bring forward court cases if they want,” Guilbeault said. “But I think the courts have been pretty clear in terms of the ability of the federal government to reasonably act using its powers when it comes to fighting pollution.

“Pollution knows no boundaries — and certainly no provincial boundaries — and if we needed yet more examples of why we need to put in place these kinds of policies to reduce our carbon pollution, look at what's happening again in B.C. this year, or in the U.K., or Europe, or so many other regions of the world,” he added. “We have to act, and I think Canadians throughout the federation, including in Alberta, would want their government to act.”

Climate Action Network Canada’s national policy manager Caroline Brouillette said the oil and gas cap offers an opportunity to seriously tackle climate change. As the highest-emitting sector in the country, placing a hard cap on emissions that are ratcheted down over time could be an effective tool if implemented properly, she said.

Responsible for over a quarter of the country’s emissions, the oil and gas sector’s emissions have grown 87 per cent since 1990 and are a major contributor to Canada’s “highly insufficient” climate record. As the only G7 country where emissions have significantly increased since the Paris Agreement was signed, a study from the Canadian Centre for Policy Alternatives found that without efforts to slash oil and gas emissions, that sector alone would cause Canada to miss its 40 per cent emission reduction target by 2030. That’s why many environmentalists understand the proposed emissions cap as a crucial step, and why it has since become a defining promise for Prime Minister Justin Trudeau’s climate legacy.

“There have been substantial steps forward in climate policy in recent years during Trudeau's mandate, but all of these were kind of overshadowed by Canada's continued expansion of oil and gas production,” Brouillette said. “By naming and tackling [the sector's emissions], this elephant in the room, this policy could be really big.

“But that's only if it's done right ... and if Trudeau doesn't succumb to industry pressure to delay and dilute the policy itself,” she added.

The discussion paper does not set out a specific emissions target, but in Canada’s emissions reduction plan, the expected contribution of oil and gas sector emission reductions is 31 per cent below 2005 levels by 2030. Climate Action Network estimates the sector’s fair share to be at least 60 per cent.

In a report published earlier this year, the Pembina Institute estimated that if Canada is going to meet its goal of reducing emissions 40 to 45 per cent by 2030, then the oil and gas industry’s target should be at least a 45 per cent reduction from 2019 levels. That translates to slashing just over 100 million tonnes (MT) of emissions by 2030.

Because the vast majority of Canadian oil is exported and when burned does not count towards Canada’s emissions, many environmentalists want to see oil production reduced rather than a narrow focus on emissions. Data from Environment Canada and obtained by Ecojustice found emissions from exported fossil fuels reached 954 MT in 2019, far higher than the 730 MT recorded for all domestic emissions.

Climate advocates are pointing to record profits in the oil and gas sector to make the case the industry is well positioned to invest in the energy transition. Because Canadian oil is overwhelmingly emissions-intensive and expensive, as demand for oil declines globally, Canadian oil is vulnerable to price swings. Advocates say improving emissions performance would help the industry better manage the energy transition.

Profits from the oil and gas sector are expected to be much higher this year than any other in the past decade. The ARC Energy Institute estimates over $145 billion in profit this year, far higher than the estimated $81-billion pull last year.

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"One option is to modify the existing carbon price to encourage steeper reductions from the oil and gas sector."

Currently, AB's oil & gas sector is subject to provincial, not federal, pricing for large industrial emitters. Presumably, that would have to change.

The federal Output-Based Pricing System (OBPS) for large industrial emitters does not apply to large emitters in Alberta. The province has its own far less rigorous industrial pricing regime (TIER) that supposedly meets the federal standard.
Canada's federal and provincial governments shield heavy emitters from effective carbon costs.
O&G companies pay pennies on the dollar in carbon costs. Federal and provincial carbon pricing systems do not impair their profits — or reduce their emissions.
The federal OBPS is a joke, but AB's system is even worse.

Under Alberta's Technology Innovation and Emissions Reduction Regulation (TIER), large industrial emitters pay a small fraction of federal rates. TIER dollars are effectively recycled back to industry to fund carbon capture technology and research. Projects industry should be paying for in the first place.

"There's a patchwork of OBPS policies across the country, and some provinces have implemented 'weak' or 'non-existent' systems that have let many big polluters off the hook."
"Federal watchdog warns Canada's 2030 emissions target may not be achievable" (CBC, Apr 26, 2022)

"Biggest industrial emitters don't pay fair share for pollution, critics say" (April 14th 2022)

"Canada's biggest emitters are paying the lowest carbon tax rate" (January 17, 2022)
"Oil and gas producers pay among the lowest average carbon costs of any sector…
"But although Canada is heralded as having one of the most ambitious prices on carbon in the world, rising from its current $40 per tonne to $170 by 2030, Suncor and other large industrial emitters pay only a tiny fraction of it.
"[In 2020, Suncor's] average carbon cost was roughly $2.10 per tonne, about one-14th of the full carbon price.
"… Alberta's oil sands operations face lower trade exposure than virtually every other industry in the province. Nevertheless, the CICC found that Canada's O&G producers have among the lowest average carbon costs of any sector."

Woodside and Pounder - an excellent combination.