2030 Emissions Reduction Plan will involve directing regulations specifically toward the highest emitters in Canadian industry, the oil & gas sector. In July 2022, Environment and Climate Change Canada (ECCC) released the Options to Cap and Cut Oil and Gas Sector Greenhouse Gas Emissions discussion document. The potential options for reducing emissions included a regulated cap-and-trade system or modifications to the existing GHG pricing mechanism. This was open for comment until the end of September 2022, with the expectation that the regulations would be outlined by early 2023. By August, Environment Minister Steven Guilbeault pushed the deadline to release the proposed emissions cap to before COP 28 at the end of this month. However, the recent Supreme Court decision, which ruled that portions of the Impact Assessment Act (IAA) as unconstitutional, has resulted in the deadline being pushed back further.
The Supreme Court determined that the section dealing with designated projects overstepped federal jurisdiction by applying the same conditions of federal approval to all “designated projects”. This meant that regardless of whether a project was subject to complete federal oversight or only partial federal considerations, the proponent would be subjected to the entire IAA’s approval process to proceed. The ruling upheld the respective powers of the federal and provincial governments as outlined in the Constitution; this maintained the legislative power that the province has over natural resources within provincial boundaries, while maintaining federal jurisdiction over impacts on federal and Indigenous lands, navigable waters, fisheries, interprovincial and international boundaries. Essentially, this reinforced the constitutional requirement for cooperative federalism forcing the governments to collaborate on project approvals that overlap over both jurisdictions while limiting their influence to areas specifically under their respective legislative powers.
Although this did not overturn the IAA, it did instigate the review and revision of the sections deemed unconstitutional. Guilbeault confirmed that the government would begin the process to improve the IAA under the guidance of the Supreme Court’s ruling through parliament. Meanwhile, as the federal government responds to the court’s decision, they must also take additional steps to ensure that future regulations will withstand judicial scrutiny. That includes thoughtful consideration of the impending emissions cap, and Guilbeault has indicated that they are now aiming to release the details by the end of the year.
At the beginning of this week, the ECCC released the proposed amendments to the Regulations Respecting Reduction in the Release of Methane and Certain Volatile Organic Compounds (Upstream Oil and Gas Sector) which immediately received pushback from the Alberta and Saskatchewan provincial governments. They have referred to the proposed amendments as another breach into provincial jurisdiction and as a “production cap by default”; however, the proposed amendments clearly stated that the emissions cap is still being developed in addition to the proposed enhancement to the methane regulations. The rationale is that the emissions cap is broadly applicable to all GHG emissions and does not target methane specifically; however, all of the emissions reductions specific to methane will positively impact the industry’s ability to meet the requirements of a potential emissions cap.
As industry braces themselves for the potential changes to emissions regulations, this is a good opportunity to review which activities may be affected, the changes being considered, and the steps to prepare industry for more stringent standards. These modifications are focused primarily on upstream activities, which represented 91% of Canada’s total GHG emissions from the oil and gas sector in 2021, but downstream operations, including petroleum refineries and pipeline transmissions, are also under consideration. The direct emissions that are under the ownership or control of these regulated facilities would be subject to an emissions cap that would decline over time to meet national commitments. This would leave Scope 3 emissions outside the cap limitations.
According to the discussion document, there are two potential mechanisms for control that are under consideration: a regulated cap and trade system or an adjustment to the current carbon pricing system. This emissions cap, regardless of the option chosen, will be in addition to already existing regulations regarding carbon emissions, and will be structured to ensure that it will specifically target the oil and gas industry. This is through the removal of the ability to trade offsets or credits with other industries or carbon markets, resulting in emissions reductions that would be directly attributable to the imposed emissions cap. In addition, both systems will apply to all GHG emissions that are included in the National Inventory Report (NIR).
Unique to the oil and gas specific carbon pricing system is the five-year intervals for evaluation. When the economy wide carbon pricing system is encouraging emissions reductions that are on track with the emissions cap trajectory, it will remain as the only system enacted. Periods requiring further reductions to meet the emissions cap would have an additional price imposed on oil and gas emissions. In the cap-and-trade system, there would be quotas established for specified time periods and the proportion of allowances available to be auctioned could vary over time.
The intention of the emissions cap is to meet international commitments without leading to a reduction in production. The goal is to establish a framework that will encourage investment into emissions reduction technology that will continue to allow uninterrupted oil and gas production here in Canada. There is recognition that a cap that causes a reduction in production will reduce Canada’s emissions footprint; however, those reductions would be at the cost of global emissions. A reduction in the production of Canadian oil and gas opens the opportunity for increased access to markets by countries with less stringent emissions standards. This carbon leakage – the lowering of emissions in one area just to increase them in another jurisdiction – has a negative impact on overall global emission reduction efforts. As such, the Discussion Document delineates that care is being taken to ensure that emissions cap will not hinder current production rates.
The federal government has committed to maintaining the current federal backstop for carbon pricing as is until 2026 to allow industry to prepare. However, anyone familiar with the process and timelines for project approvals will testify to the need to start preparing now, even before the emissions cap is released. In the short term this can start with lower hanging fruit such as a review of process level efficiencies. This can improve long term costs while reducing emissions output. With the medium and long term in mind, companies should start or accelerate their efforts at understanding the decarbonization of their operations.
This does not mean reducing production, nor does it mean the divestment of oil and gas assets. This could simply mean assessing the opportunities to include technologies such as carbon capture and storage (CCS), waste to energy, and power cogeneration. It could involve a deeper dive into asset diversification and net zero strategies. Each company is unique and will need to consider their assets and their emissions targets individually.
At GLJ we have been working with our clients to help them address their specific needs. For some this is a Life-Cycle Analysis (LCA) to fully evaluate their process from cradle to gate or, in the case of circular economics, cradle to cradle. This allows companies to identify process inefficiencies, data gaps, and showcase products against competitors. When clients wish to extend this knowledge for planning for the future, GLJ has contributed to their decision making through emissions forecasting and economic scenario analysis to allow them to fully understand potential asset diversification and the business case for change. Moreover, as tactical analysis intensifies, GLJ has utilized our full circle of Sustainability & Emissions Management services to advise our clients on potential pathways forward including decarbonization and Net-Zero strategies with business resilience at the forefront.
The government has so far failed to provide clarity on what to expect regarding the impending emissions cap other than to assure greater stringency is coming for the Canadian oil and gas industry. GLJ is here to support the energy sector evaluate their current position, understand their potential pathways forward, and identify the value proposition behind their decarbonization strategies. Deliberate planning and consideration with your trusted advisors can ensure that that your company is prepared to thrive in the continually evolving regulatory framework. Whether you are just starting the process or looking for an independent third-party evaluation of your strategy, GLJ is here to support you.
We would love to hear from you send us your comments to firstname.lastname@example.org
Kelley Rutledge is a member of GLJ’s Sustainability and Emissions Management team. As a Sustainability and Emissions Management Analyst, Kelley brings 15 years of operational experience in the oil and gas industry, along with expertise in Sustainable Energy Development. She holds a Bachelor of Science degree from the University of Alberta, a Power Engineering Certificate from NAIT, and, most recently, a Master's in Sustainable Energy Development from the University of Calgary. Ms. Rutledge is certified as a Sustainability Excellence Associate. At GLJ, Kelley combines her professional and academic background in Sustainable Energy Development to drive forward the energy transition.