Canada Weighs Enforcement Options for Oil Emissions Cap

Canada is weighing two options for an oil and gas industry cap on greenhouse gas (GHG) emissions in support of its economy-wide reduction goals: an industry-specific carbon price and a sector-wide cap-and-trade system.

The preferred options for enforcing a cap on oil and gas emissions were outlined earlier this month by the Canadian federal government, which is accepting comments through Sep. 30.

Several questions are under consideration as both options are examined:

• whether to give more flexibility to smaller emitters;
• whether to exempt refineries and natural gas transmission lines;
• and how stringently to set or ratchet up the cap’s trajectory over the next decade through 2050.

Ottawa is targeting economy-wide emissions cuts of 40%-45% below 2005 levels by 2030 and net-zero emissions by 2050. Reducing emissions from the oil and gas sector, which is responsible for 27% of Canada's emissions, is considered a major prong of the strategy to get there.

But questions remain over how exactly the government might enact a cap, including whether and how different provinces might have leeway in implementation.

Here's what we know so far.

Cap and Trade

This option envisions an aggregate quota of GHG emissions allowed for specific time frames that would decline over time. Each covered operator would receive a certain number of allowances, or credits, that could be traded to operators with higher emissions, according to the Jul. 18 government discussion draft.

The draft suggests the federal government is open to the select use of offsets to count toward corporate emissions reductions: “If enabled, eligible facilities subject to the cap would be able to remit eligible offset credits in place of allowances for a time-limited period, up to a predefined limit.”

This would grant operators some flexibility, although environmental groups are vocal in their opposition to offsets, given efficacy concerns.

“The biggest concern is around offsets — the point is to drive down emissions,” says Julia Levin, national climate program manager at Environmental Defence.

Still, Levin acknowledges that in some ways, a cap-and-trade system could bring more bite: it would offer a binding cap, backed by regulatory powers — some with criminal penalties — and more compliance mechanisms, as long as strict trading rules that forbid trading outside the sector were enforced.

However, a cap-and-trade system would likely take longer to get off the ground, as it would require full rulemaking and public comment rounds, which would not begin until 2023, when the government plans to announce its chosen path.

Ottawa is looking to California, the EU, Nova Scotia and Quebec for trading program models in assessing this option, according to the discussion draft.

Modified Carbon Price

Canada currently has an economy-wide carbon price of C$50 (US$39) per ton that is set to ramp up to C$170/ton by 2030. But under consideration is an adjusted (read: higher) carbon price for oil and gas operators that would incentivize a faster rate of emissions reduction than the underlying economy-wide carbon price would support.

Separate criteria for the sector would be established and evaluated every five years, according to the discussion draft. Provincial governments would then enact changes within their own pricing systems.

“A higher oil and gas price will serve to incent investments in higher cost emissions intensity improvements that will reduce emissions further than the economy-wide price,” the discussion draft says.

The benefit of this approach is faster potential implementation and transparent, consistent pricing.

However, the adjustments under consideration would not carry the same enforcement backing of the economy-wide carbon price, which is cemented in legislation.

The government warns that this discrepancy could lead to “lower certainty of achieving the emissions cap level."