Canada is proposing to use a cap-and-trade system to reduce greenhouse gas (GHG) emissions from its oil and gas sector, a long-promised but politically contentious move.
The proposed program aims to reduce emissions from the sector by 35pc, compared to 2019 levels, by 2030-32, according to a draft rule published by Environment and Climate Change Canada (ECCC) on Monday. It would cover upstream production activities, both onshore and offshore, including for oil, natural gas and liquified natural gas. After an initial four-year phase-in over 2026-29, entities would then need to meet their emissions obligations over the first 2030-2032 compliance period.
While all operators must report emissions, only those producing more than 365,000 b/yr of oil equivalent, equal roughly to 99pc of upstream emissions, would be covered by the trading program.
Covered entities would receive free allowance allocations, which would decline in line with their emissions cap. Companies could also buy allowances on the secondary market if needed, use carbon offsets or contribute funds to a decarbonization program.
The first three-year compliance period of 2030-31, would be set at 27pc below emissions reported for 2026, which ECCC said would be equivalent to the 35pc target.
The federal program will not link with the California-Quebec joint carbon market, known as the Western Climate Initiative, regulators said.
ECCC officials stressed that the resulting program would cap emissions, not production, for Canadian oil producers, pushing back at a common criticism from opponents.
The federal move will keep the industry accountable to its own promise of net-zero by 2050 and result in a greener and more competitive industry, said Canada Natural Resources Minister Jonathan Wilkinson.
"As the world moves to reduce emissions generated by the production and combustion of fossil fuels, oil and gas extracted with the lowest production of emissions will have value in the world," Wilkinson said.
But Alberta premier Danielle Smith claimed on Monday that the proposed program violates Canada's constitution. Provinces have exclusive authority over non-renewable natural resource development and the proposal ignores ongoing projects in the province, such as the Pathways Alliance, she said. Canadian Natural Resources, Cenovus, ConocoPhillips Canada, Imperial, MEG Energy and Suncor Energy are involved in the project.
The program is a cap on production and will cost the province "anywhere from C$3bn-$7bn ($2.1-5bn)/yr" in absent royalty payments because of a loss of 1mn b/d in production, Smith said, promising future legal challenges against the federal government.
"The only way to achieve these unrealistic targets is to shut in our production, I know it, they know it. We are calling them out on it, and they have to stop it," she said.
Canada, a major net exporter of oil, has committed to reducing emissions by 40-45pc, compared to 2005 levels, by 2030 and net-zero by 2050.
But emissions from the country's oil and gas sector remain an obstacle to meeting those goals.
The sector accounts for 31pc, or 217mn metric tonnes, of the country's emissions in 2022, according to the most recent federal data. Emissions from this sector increased by 83pc from 1990 to 2022. Over the past year Canada's federal government has focused on competitive climate change-related policies, from rolling out investment tax credits for decarbonization technologies to enforcement of the government's new Clean Fuel Regulations.
But the road for the Liberal Party-led government to meet the climate goals remains a rocky one ahead of a federal election that must take place no later than October 2025.
In September, the Conservative Party, led by Pierre Poilievre, attempted a no confidence measure on prime minister Justin Trudeau's government, fed by discontent around the federal carbon tax. While the motion failed, it highlights the balancing act for the Liberal Party ahead of the election.
Trudeau has resisted calls from within his party to cede the field as his popularity waned, to the benefit of Poilievre.
ECCC plans to request public comment on the proposal through 8 January 2025 and estimates it will finalize the regulations next year.
