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The Imperial Strathcona Refinery which produces petrochemicals is seen near Edmonton on Oct. 7, 2021.TODD KOROL/Reuters

The federal government significantly lowered its expectations for the direct emissions cuts it will demand from the oil and gas sector by 2030, but will require the industry to pay for reductions in other areas of the Canadian economy to make up the difference.

In a policy framework for the long-awaited oil and gas emissions cap, released Thursday, the minority Liberals proposed a two-pronged approach to reduce the pollution from Canada’s largest-emitting sector.

While Ottawa believes the fossil-fuel industry can reduce its greenhouse-gas emissions by 20 to 23 per cent though technological changes, it will impose additional payments for offsets and a new decarbonization fund in order to bring total emissions reductions to between 35 and 38 per cent below 2019 levels by 2030.

The final upper and lower limits will be subject to consultations and then set in draft regulations next year.

The federal government says its softened approach shows that it listened to industry concerns about the planned cap, but the sector roundly criticized the policy. By creating an entirely new regulatory system, industry groups say the government is imposing an unnecessarily complex set of rules.

The emissions cap will apply to all on- and offshore oil producers – including Alberta’s oil sands and upgrading activities that convert bitumen or heavy oil to synthetic crude – as well as natural-gas production and processing. It won’t apply to refining and downstream operations, which are already subject to Canada’s Clean Fuel Regulations.

Operators that don’t meet the targets will face consequences ranging from a warning letter to legal action and financial penalties.

The policy details were released at a press conference with Natural Resources Minister Jonathan Wilkinson in Ottawa and Environment Minister Steven Guilbeault at the COP28 climate talks in Dubai.

“What we’re trying to get at is reducing emissions. We’re not trying to burden the industry with regulations,” Mr. Guilbeault said.

The ministers said the estimated cost for industry to comply with the new rules will be released in the draft regulations.

Prime Minister Justin Trudeau first announced the policy in the 2021 election. At the time, he said his government would make sure the sector’s emissions stay on a downward trajectory from then onward. But the policy is now so delayed that the earliest it will take effect is 2026 – after the next federal election.

That raises questions about whether the cap will ever see the light of day, said Catherine Abreu, a member of the federal government’s net-zero advisory board and founder of Destination Zero. She said the delays were her “chief concern.”

The government says its proposed two-pronged approach reflects the action needed to meet Canada’s emissions-reduction plan, and what is technically achievable without production cuts.

Beginning in 2030, the cap will be less stringent than many had expected, given the overall numbers in Ottawa’s emissions-reduction plan released last year. However, between 2030 and 2050, it will be incrementally lowered as the country moves to a net-zero economy by mid-century.

In its proposal, the government says the new cap-and-trade system would distribute initial emissions allowances for free, with each facility having one allowance for each tonne of carbon pollution it emits. Over time, the government will allocate fewer allowances, which will then require the sites to cut their emissions or buy allowances.

Then, in order to bridge the gap between the direct emissions cuts the industry believes it can make and the reductions the government wants, the industry can purchase offsets in other Canadian sectors or pay into a decarbonization technology fund.

How the fund will work has not yet been determined. But Kevin Krausert, chief executive and co-founder of Avatar Innovations, a Calgary energy-transition corporate venture studio, said it could be a game-changer for oil and gas decarbonization.

If managed correctly, Mr. Krausert believes the pool of capital could help attract international investment in emissions-reduction projects like carbon capture and low-carbon hydrogen production.

“No one is talking about punitive measures at COP28. Everyone is talking about how we incent and attract investment,” he said in an interview from Dubai.

Alberta has insisted for years that an emissions cap would be unconstitutional, because it would act as a de facto production cap. Premier Danielle Smith doubled down on that position Thursday from the COP28 summit.

Ms. Smith told media that the proposed cap “undermines the unity of our country” and discourages investment in the oil and gas sector, adding that Alberta will take Ottawa to court if it continues with the policy.

But Mr. Wilkinson said the cap will help keep Canadian oil and gas competitive as the world moves to reduce fossil-fuel emissions and demands energy with the lowest environmental footprint.

Therefore, he said, ensuring the long-term health of Canada’s oil and gas sector means it must achieve “significant and sustained reductions in absolute emissions” as it moves toward net-zero production by 2050.

“Aggressively reducing production-related emissions early and boldly can provide a significant competitive advantage for the sector and its workers,” Mr. Wilkinson said.

Under the proposed policy, Ottawa has set out a plan to push the industry as far as possible on emissions cuts, without impacting production, said Stewart Elgie, a professor of law and economics at the University of Ottawa.

“It’s probably the biggest emission-reduction requirement in the world for oil and gas by 2030,” he said. Given the industry is the largest driver of emissions in Canada, he said it was appropriate.

Prof. Elgie has been involved in many environmental-law challenges at the Supreme Court since the 1990s and said he believes the federal government is on solid legal ground.

Oil and gas industry groups came out swinging against the policy on Thursday, saying it was unnecessary, risked thousands of jobs in the sector, and could result in significant production cuts.

The energy services sector said it is particularly worried about the latter concern, which would directly impact drilling contractors.

Mark Scholz, president and chief executive of the Canadian Association of Energy Contractors, said his members are already unable to access federal programs to help decarbonize, and the cap will only compound that challenge.

“We’re all trying to achieve common objectives, but the policy that we’re seeing is not conducive to that,” he said in an interview.

Major oil sands companies contacted by The Globe and Mail on Thursday wouldn’t comment on the emissions cap, pointing instead to a statement from Pathways Alliance, which has pledged net-zero production in the region by 2050.

Pathways president Kendall Dilling said in a statement that existing, economywide carbon-pricing systems already provide appropriate regulation to drive emission-reductions toward net zero by 2050.

“Imposing an emissions cap, with additional regulatory complexity, does nothing to advance the certainty necessary for the planned multibillion-dollar decarbonization projects to proceed,” Mr. Dilling said.

The emissions cap is one of various federal government policies that aim to cut emissions by 40 per cent below 2005 levels by the end of the decade. Last month, the environment commissioner said that, so far, the country is falling short of that goal.

Environmental groups said Thursday that the emissions cap doesn’t go far enough, and that deeper emissions cuts are needed to oil and gas production if Canada is to meet its climate goals.

The federal NDP accused the government of caving to industry, giving the sector a low target “riddled with loopholes.” The Official Opposition Conservatives meantime said if they are elected the will “repeal Justin Trudeau’s destructive, job killing, anti-energy policy.”

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