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Tar Island facility located at the Athabaska Oil Sands north of Fort McMurray, Alta.Kevin Van Paassen/The Globe and Mail

Canada is experiencing growth in oil and gas development with no end in sight.

With 175 billion barrels of proven oil reserves and another 63 trillion cubic feet of natural gas, billions of dollars are being spent on accelerating resource extraction in virtually every corner of Canada. One recent estimate places total incremental investment in the oil sands sector alone, which accounts for almost all of proven Canadian oil reserves, at $100-billion by 2020.

Rapid oil and gas development poses environmental challenges. Notably, the oil and gas sector's greenhouse gas (GHG) emissions have been steadily rising since 2005, with IISD forecasting a 50 per cent increase by 2020 over 2005 levels. This means 25 per cent of Canada's total GHG emissions are likely to come from the oil and gas sector by 2020.

Recognizing that reducing oil and gas emissions is central to achieving Canada's GHG target of 17 per cent below 2005 levels, the federal government is developing performance-based regulations for the sector to be released in 2013. Performance regulations can be designed to cost-effectively deliver emission reductions but, in the context of oil and gas, challenges exist.

Importantly, there are limited opportunities for GHG abatement in the oil and gas sector prior to 2020. IISD will soon release a paper that shows the sector has little short-term room to reduce GHG emissions at costs short of slowing production.

At carbon costs in the order of $100 a tonne, emission reductions are at best forecast at 30 Mt – or 20 per cent below 2020 forecast levels. To put this into perspective, a $100 carbon cost would be 10 times greater than current European Union Emission Trading Scheme carbon price of US$10, and emissions from Canada's oil and gas sector would still be 10 per cent greater than 2005 levels.

The challenge for Canada's GHG regulator is to balance the rapidly expanding sector with GHG performance. Successful regulations will require flexibility on compliance. One option is a maximum compliance price safety value or ceiling, with industry payments to leverage private sector investment and spark innovation in next generation low-carbon technologies. Driving down the costs of future emission reductions through innovation today will lower the costs of achieving Canada's longer term GHG goals. Allowing the sector to purchase low-cost domestic reductions from unregulated sectors such as waste, forestry, transportation and manufacturing is another option Canada might consider to achieve compliance.

These policy options are similar to Alberta's oil and gas GHG policy but could represent an opportunity for performance regulations that drive much deeper reductions. A pragmatic GHG policy for Canada's oil and gas sector would enable compliance flexibility that contain costs but importantly could increase the level of ambition of the GHG policy to better align with federal GHG targets.

The contribution of the growing oil and gas sector to the country's economy – and Alberta's in particular – can't be understated. Proven reserves in the ground have a potential rent value of $1-million per resident of Alberta . The Government of Alberta receives about one third of its tax revenue from the oil and gas development, with royalties from oil sands alone forecast to more than double to $10-billion in 2015 from $3.7-billion in 2011 . Government spending both regionally and nationally on social services is tightly tied to oil and gas success.

The sector's expansion is not going to stop anytime soon. Economic growth that delivers environmental performance requires sensible and flexible GHG policy.

David Sawyer is vice-president, climate, energy and partnerships at International Institute for Sustainable Development

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