Canadian Government Proposes Emissions Cap on Oil and Gas Sector

By Nia Williams and David Ljunggren

(Reuters) – The Canadian government released draft regulations on Monday to cap emissions of greenhouse gases from the oil and gas sector at 35% below 2019 levels by 2030. This move has drawn criticism from the industry, which argues it will force production cuts.

The oil and gas sector is Canada's highest-polluting industry, with emissions continuing to rise, undermining progress in other economic areas. Ottawa is likely to fall short of its commitment to reduce emissions by 40-45% from 2005 levels by 2030 unless the sector intensifies its decarbonization efforts.

Federal Environment Minister Steven Guilbeault noted that the sector's profits reached C$66.6 billion ($47.95 billion) in 2022 and expressed the government's intention to motivate producers to invest in decarbonization. "This goes after pollution, not production," Guilbeault stated at a news conference.

Canada stands as the world's fourth-largest oil producer and sixth-largest natural gas producer. Despite the emissions cap, oil and gas production is still expected to increase by 16% from 2019 levels by 2030-2032, resulting in only a 0.1% reduction in Canadian GDP.

The regulations will set up a cap-and-trade system that rewards better-performing companies while incentivizing higher-polluting firms to clean their production processes. Producers are required to start reporting their emissions by 2026, with the first compliance period from 2030 to 2032. Penalties for non-compliance are to be developed by the government.

Most emissions reductions are expected to originate from cuts in methane pollution and a proposed carbon capture project for oil sands, according to Natural Resources Minister Jonathan Wilkinson. Previously, the Liberal government aimed for a 38% cut from 2019 levels, but settled on 35% after extensive consultations on what was feasible for producers.

With a federal election looming, the opposition Conservatives, led by Pierre Poilievre, have denounced the emissions cap as an attack on the energy sector, claiming it threatens jobs amid weak economic growth. They have vowed to eliminate the policy if elected.

Industry associations have also opposed the cap, asserting it could lead to job losses and reduced tax revenue. The Canadian Association of Petroleum Producers believes it could deter investment in oil and natural gas projects. Alberta's government estimates a necessary production cut of one million barrels per day by 2030.

Francois Poirier, CEO of TC Energy, stated that an emissions cap would adversely affect Canadian families and businesses by increasing energy prices.

While climate advocates have welcomed the draft regulations, some have called for the government to address a perceived loophole that permits producers to offset 20% of their emissions by paying into a decarbonization program or purchasing credits. Environmental Defence insists the rules should align with Canada's climate goals for a 40-45% emissions reduction by 2030, urging implementation before the proposed 2030 timeline.

Formal consultations on the regulations will take place from November 9 until January 8 of the following year, with the final version of the regulations expected in 2025.

($1 = 1.3890 Canadian dollars)