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An oil well service rig and storage tanks near Cremona, Alta., on July 5.Jeff McIntosh/The Canadian Press

The federal government says it plans to implement its oil and gas emissions cap through a new carbon pricing system, leaving the sector worried it will be charged more for greenhouse gas emissions than other heavy industries.

And Canada’s largest oil-producing province says it won’t accept any federal plan that would harm its ability to produce fossil fuels.

The plan stems from a cap on oil and gas emissions that Prime Minister Justin Trudeau announced in last year’s federal election campaign. In a discussion paper released on Monday, Ottawa outlined two carbon pricing options it says it could use to implement the oil and gas emissions cap: a national cap-and-trade system, or changing the existing industrial carbon pricing system to include criteria specific to the fossil fuel sector.

A cap-and-trade system would provide more certainty in meeting emissions targets, but the industry would incur a higher administrative burden, the document says. Alternatively, strengthening the current industrial carbon price for the sector would come with less certainty that the emissions cap would be achieved, according to the paper.

The Alberta government, federal Conservatives and some industry groups have warned the proposed cap would lead to a de facto production cut if emissions reductions can’t be met by technology changes.

Ottawa has repeatedly said that is not its aim, and has acknowledged that reducing oil and gas production before demand would hurt Canada’s economy. However, an internal analysis obtained by The Globe and Mail shows a substantial gap between the ambition the government has set for the industry and what is technically feasible by 2030.

In an interview on Monday, Environment Minister Steven Guilbeault was unable to explain how the proposed emissions cap would avoid a production cut, but noted that companies in the sector have already pledged to hit net-zero by 2050.

The Oil Sands Pathways to Net Zero Alliance represents six companies that operate about 95 per cent of Alberta’s oil sands production and that have committed to hit net-zero by 2050. The region produces about 75 per cent of Canada’s oil. Several other oil and gas companies have also implemented net-zero goals.

Mark Cameron of the alliance said on Monday the group was studying Ottawa’s proposed options. But he’s worried that whatever tool the federal government chooses could leave the oil and gas sector facing higher carbon prices and fewer compliance options than other industrial sectors.

Mr. Cameron added that if the government doesn’t ensure the industry has the means of meeting new regulations, then “they are in fact going to require production cuts,” he said.

Lisa Baiton, president and chief executive officer of the Canadian Association of Petroleum Producers, said in a statement that both choices could limit oil and gas production in Canada “by adding regulatory burden and eliminating options for economywide co-operation on emissions reductions.”

The oil and gas sector accounts for more than a quarter of all of Canada’s greenhouse gas emissions, but also makes up 16 per cent of Canada’s exports and nearly 6 per cent of GDP, according to the federal government. While trying to tackle emissions, Ottawa must also contend with an energy security crisis sparked by Russia’s war in Ukraine that is also leading to more demand for Canadian fossil fuels.

Under the proposed cap, the federal government would impose a sector-specific emissions ceiling that would continually decrease in five-year increments. The pledge is part of Canada’s plan to slash emissions by at least 40 per cent below 2005 levels by 2030 and reach net-zero emissions by 2050.

But the government has been slow to release details about the cap. Last year, the Liberals said the ceiling would be set at current levels. However, Mr. Guilbeault said the government hasn’t yet decided if the cap will be based on 2021 or 2022 levels.

The federal NDP on Monday accused the government of giving the industry another pass and failing to propose a cap that will ensure emissions cuts.

Consultations on the emissions cap are open until Sept. 30, and Ottawa will release its final plan by early 2023. Provinces have jurisdiction over resource development, but Mr. Guilbeault said the federal government has the power to impose a nationally managed cap-and-trade system for the oil and gas sector through the Canadian Environmental Protection Act. If it changes only the existing industrial carbon price, that would be done under the Greenhouse Gas Pollution Pricing Act.

Mr. Guilbeault noted the record heat wave disrupting daily life in Europe and the wildfires scorching parts of British Columbia as the latest reminders of the importance of tackling climate change. “How many more examples of the impacts of climate change do some provinces need to have?” he asked.

In a joint statement on Monday, Alberta Energy Minister Sonya Savage and Environment Minister Whitney Issik said the province would not accept any plan from Ottawa that would interfere in its ability to develop its natural resources.

“The federal government cannot act unilaterally to meet their emissions targets,” they said. The province also took issue with the timing of the discussion paper, two weeks after an energy ministers meeting.

Dan Wicklum, co-chair of Ottawa’s Net-Zero Advisory Body said on Monday a cap is necessary because 30 years of voluntary action from the oil and gas sector has not done enough to reduce emissions.

Mr. Wicklum said the government largely listened to his group’s advice on the emissions cap, but added that the cap should cover all emissions created during the production of oil or that come from energy consumption used to operate plants (called scope 1 and scope 2 emissions). Mr. Guilbeault said the government is still consulting on whether all scope 2 emissions will be covered by the cap.

Chris Severson-Baker, senior director with the Pembina Institute, said the federal government needs to nail down its approach for the emissions cap as quickly as possible.

That will do two things – shore up investor confidence and hasten emissions reduction. He said the think tank is still reviewing which of the two options is best. “In our view, you’ve got to go with the one that is going to get you there the fastest,” he said.

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