Oil and gas emissions cap

The oil and gas sector is a major contributor to Canada's economy. It is also Canada's largest source of greenhouse gas emissions and, as such, has a critical role to play in meeting the country's climate objectives.

The Government of Canada's approach to the cap will hold the oil and gas sector accountable for its emissions and will be in line with the country's climate ambitions and commitments outlined in the 2030 Emissions Reduction Plan (ERP).

The ERP modelling presents an efficient, affordable pathway to meet Canada's 2030 target. Drawing on that modelling, the ERP projects a contribution from the oil and gas sector of reducing emissions by 31 percent below 2005 levels in 2030 (or by 42 percent below 2019 levels). This analysis will inform the Government of Canada's work with industry, provinces and territories, Indigenous Peoples, and other stakeholders to develop a cap on oil and gas sector emissions.

The cap will focus on emissions and will not be a cap on oil and gas production. It will maximize opportunities to invest in decarbonizing the sector while accounting for evolving energy security considerations. And it will be designed to manage competitiveness challenges and minimize carbon leakage risks.

The cap is part of a larger approach of policies and investments, including to support workers. The design of the cap will take into account other regulations, such as the commitment to reduce oil and gas methane emissions by at least 75 percent by 2030, as well as complementary climate policies by federal and provincial governments. Some of the  Government of Canada emissions reduction measures already under way include:

• Carbon pricing
• Methane Regulations
• Clean Fuel Regulations
• Carbon Capture, Utilisation and Storage (CCUS) Investment Tax Credit
• Emissions Reduction Fund
• Clean Growth Program
• Best in Class Guidance for new oil and gas projects subject to a federal review

Next Steps

On July 18, 2022, the Government of Canada published a discussion paper to launch formal engagement on two potential regulatory options to cap and reduce oil and gas sector GHG emissions. Interested parties are invited to submit responses to the discussion paper by September 30, 2022.

The options proposed for consultation are:

1. A cap-and-trade system (under the Canadian Environmental Protection Act) that sets a regulated limit on emissions from the sector. This would include:
   • A national cap-and-trade system which would distribute allowances equal to the level of the cap. At the end of the compliance period, every facility that operated during the period would need to remit one allowance for every tonne of emissions it emitted.
   • Oil and gas facilities that have a surplus of allowances can trade them on an emissions trading market, promoting the lowest cost reductions across the sector.
   • Allocation of allowances would be partially or fully auctioned to producers.
   • The total number of allowances allocated would decline over time.
   • Emissions reductions to meet other GHG regulations and pollution pricing would contribute to meeting the cap.
2. Modifying the pollution pricing benchmark requirements to create price-driven limits on emissions from the oil and gas sector. This option would include:
   • Revising the benchmark criteria to ensure emissions from the sector decline in line with the oil and gas sector cap trajectory.
   • Reviewing, and if necessary revising, the carbon price for the oil and gas sector to ensure emissions reductions are in line with the oil and gas sector cap trajectory.
   • In circumstances when it is necessary to impose a higher carbon price on the oil and gas sector, restricting trading of credits/allowances between the oil and gas sector and other sectors in pollution pricing systems for industry.
   • Working with provinces and territories that have their own carbon pricing systems to ensure that they make the same changes to their systems as part of the planned Interim Review of pollution pricing.

Both options could include some time-limited flexibilities to reflect the timelines of major emission reduction projects.

The design of the cap will be guided by the following five principles, informed by the independent Net‑Zero Advisory Body.

1. Accountable: The approach will hold the oil and gas sector accountable for its emissions.
2. Ambitious: The obligations under the cap will align with Canada's climate ambition and commitments, with the aim to move swiftly and deliver significant emissions reductions in the near term.
3. Effective and achievable: The approach will be designed to achieve the desired environmental outcomes, while minimizing impacts on workers and communities and avoiding an unnecessary administrative burden.
4. Enable investment in Canada: The approach will manage competitiveness challenges and minimize carbon leakage risks; it will also maximize opportunities for ongoing investment in decarbonizing the sector to achieve net zero by 2050.
5. Certainty: The approach will provide long-term clarity for industry and Canadians and help achieve the sector's contribution to 2030 targets.

The design of the cap will also be informed by the Parliamentary Standing Committee on Natural Resources study of the Greenhouse Gas Emissions Cap for the Oil and Gas Sector.

The Government expects to outline the design of the oil and gas emissions cap early next year.

Best-in-class draft guidance

Canada is taking a leadership role by being the first major oil and gas producer that is putting in place a cap on oil and gas sector emissions, and in developing guidance to support "best-in-class" GHG emissions performance for oil and gas projects throughout their lifetime.

As part of the next steps to develop the "best-in-class" guidance, Environment and Climate Change Canada has opened a 60-day engagement period to inform the development of guidance for proponents of oil and gas projects subject to a federal impact assessment under the Impact Assessment Act (IAA).

Once finalized, the guidance will apply to designated oil and gas projects, including the following:

• exploration;
• offshore production;
• onshore production;
• pipelines; and processing facilities, including oil refineries, heavy oil upgraders, natural gas processing and LNG.

Proponents should provide the information required by the Government of Canada's Strategic Assessment of Climate Change (SACC) to show how and when the project will be best-in-class – or if not, to explain why not – including by:

• Demonstrating that the project will integrate advanced technologies and best environmental practices (BEPs), including emerging technologies, to minimize GHG emissions either now or when the technology becomes feasible;
• Comparing the project's GHG emissions performance with leading projects globally that are within the same activity as the project;
• In making that comparison, indicating either that the project will align with that best-in-class emissions performance or, if not, why not; and
• Developing a plan to achieve net-zero emissions by 2050 if the project will continue to operate after that year.

Following the conclusion of the public comment period on December 3, 2022, the Government of Canada expects to finalize the best-in-class guidance by early 2023.

Recent oil and gas announcements

• July 18, 2022 - Government of Canada outlines next steps to develop an oil and gas emissions cap
• April 6, 2022 - Government of Canada to develop guidance for best-in-class new oil and gas projects and net-zero emissions requirements by 2050
• March 29, 2022 - 2030 Emissions Reduction Plan: Clean Air, Strong Economy