Good Cap, Bad Cap?

It’s here at last—but not there yet. The federal government unveiled its much hyped (and to some, much feared) oil and gas emissions cap “framework” at the midpoint of COP28, laying down its most ambitious climate policy to date.

No other oil and gas exporting nation has placed a cap on emissions. Now Canada—the world’s fourth largest oil producer—is aiming to cut emissions by 35-38% by 2030.

To get there, the government wants to limit the sector’s emissions and establish a cap-and-trade system that would charge producers for going over the limit and put the money into clean tech funds or, if necessary, carbon offsets.

The big oil producers think they’re already on a course to hit those targets, using abatement technologies like carbon capture, but won’t get there until the mid-2030s. And then there’s jurisdiction. Alberta has been quick to say Ottawa doesn’t have the right to tell provinces how to manage their natural resources.

Ottawa put the cap framework out for 60 days of consultation. Here are some of the questions we’re wondering:

  1. What will oil and gas demand look like in the 2030s? The feds have gone with a forecast from the Canadian Energy Regulator that shows oil production higher in 2030, at 5.1 million barrels a day, with most of the increase coming from the oilsands and Trans Mountain pipeline expansion project. Gas production will remain steady, while LNG exports will be much higher. If nothing were done, the sector’s emissions would go from 174 megatons in 2019 to 199 MT in 2030.  But with abatement technologies, emissions are forecast to come down to 134 MT, which would fit within the cap.
  2. Where’s the money? The sector won’t come close to cutting emissions at that scale without massive subsidies from Ottawa and the provinces. Exhibit A will be the Pathways Alliance, a group of oilsands companies looking to build a massive carbon capture and sequestration project for their emissions. They’re still negotiating the terms with government and expect to have a memorandum of understanding within weeks. But they will need to see clear financial commitments before breaking ground. That includes a lot more clarity from Ottawa on its proposed investment tax credits, which currently are set to expire in 2030.
  3. Can Ottawa set up a credible tech platform? Companies are likely to push for the right to channel their own money into their own clean tech projects, subject to emissions commitments. Others will push for an independent fund, or something like Emissions Reduction Alberta, to collect money from emitters and then disburse it to credible projects. The amounts will run into the billions, which could help position Alberta as a global leader in the energy transition. Or create a trail of boondoggles.
  4. Can the cap include a cleaner approach to offsets? The cap framework offers up a lot of flexibility for offsets, including international ones, to help those emitters who can’t get their emissions down in time. Trouble is, the global offsets business has faced growing criticism this year, largely over the integrity of climate-positive activities like forestation and land protection. The credibility of the cap will be determined in part by the credibility of the offsets that companies buy.
  5. What do other provinces think? All eyes are on Alberta and whether the federal cap can work harmoniously with the provincial system. But the challenges of “interoperability” don’t stop there. The cap also applies to British Columbia’s LNG ambitions, Newfoundland’s offshore oil dreams and Saskatchewan’s conventional oil business, each operating under a different emissions regime. Each province may want its emissions payments to remain at home, but an open market may be needed for more options.
  6. How much flexibility will there be? It’s extremely ambitious to think the sector can cut its emissions by 2030. So the framework includes some important “shock absorbers” that allow for production swings— oil and gas markets are volatile, if nothing else — and also possible delays in technology. The framework offers up something called “multi-year compliance periods” that sound a bit like a homework extension of three years should carbon reduction projects not come together by 2030.
  7. Will anyone go to jail? Penalties for non-compliance are, so far, vague, ranging from a warning letter to possible imprisonment under the environmental protection laws that will house the cap. The lack of clarity on enforcement measures will continue to cause anxiety among executives who have to make the whole thing work. A good cap will need a good cop.

After a winter of consultations, the feds will have to spend another year, in all likelihood, crafting the cap into law. And by then — if not before — Canada will be in the heat of election battle. Which means all this may be a prelude for an epic national debate about the future role of oil and gas in our economy.

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