On November 4, 2024, the Canadian government released draft regulations with the aim of significantly curtailing greenhouse gas (GHG) emissions from the oil and gas sector. These regulations, proposed under the Canadian Environmental Protection Act, 1999 (CEPA), seek to reduce emissions by 35% below 2019 levels by 2030-20321. This initiative is part of a broader strategy by the Canadian government to achieve its national climate goals, including a 40-45% reduction in GHG emissions by 2030 and net-zero emissions by 20502.
These draft regulations are a critical step towards mitigating the environmental impact of the oil and gas sector, which currently accounts for 31% of Canada's total emissions3. This proportion has been steadily increasing, underscoring the urgent need for effective emission reduction measures3.
The regulations aim for a 35% reduction in GHG emissions from the oil and gas sector by 2030-2032, compared to 2019 levels1. The first compliance period, 2030-2032, is projected to reduce emissions by 27% from 2026 reported emissions4. This translates to an estimated reduction of 13.4 million tonnes of greenhouse gas emissions, potentially avoiding nearly $4 billion in climate change damages6.
The core measure proposed in the draft regulations is the cap-and-trade system4. This system aims to create a market-driven incentive for companies to reduce emissions4. It operates by setting a limit (cap) on overall emissions from the sector and providing companies with emissions allowances4. Each allowance permits the emission of one tonne of carbon dioxide equivalent. The government will gradually reduce the number of allowances available over time, in line with the declining emissions cap. This creates a scarcity of allowances, encouraging companies to prioritize emission reductions to avoid the need to purchase additional allowances in the market. Companies that successfully reduce their emissions below their allocated allowances can sell their surplus allowances to other companies that may need them. This market mechanism promotes cost-effective emission reductions by allowing companies to find the most efficient ways to meet their obligations.
The regulations are expected to have a notable impact on the Canadian oil and gas industry, which is currently the world's fourth-largest oil producer and sixth-largest natural gas producer7. While the government maintains that the regulations target pollution and not production, some industry stakeholders have expressed concerns7.
However, the government projects that oil and gas production will still grow by 16% from 2019 levels by 2032, even with the emissions cap in place6. The economic impact is estimated to reduce Canadian GDP by only 0.1%7. Over the time frame of 2025 to 2032, the proposed regulations are estimated to result in net cumulative GHG emissions reductions of 13.4 Mt8. These reductions are valued at almost $4.0 billion in avoided climate change damages8. The regulations are also estimated to have some incremental impacts on the economy, valued at $3.3 billion, and some administrative costs to industry and government estimated to be $219 million8. The draft highlights that while there will be some economic costs—estimated at $3.3 billion—mainly from the oil and gas sector's efforts to cut emissions, the regulations are expected to bring net benefits of $428 million6. These estimates do not include benefits from reduced air pollution, job impacts from carbon capture technology investments after 2032, or the potential growth of new low-carbon industries like clean hydrogen6. In addition to the economic benefits, the regulations are expected to contribute to improved air quality, with positive implications for public health and the environment6.
The draft regulations are open for public comment from November 9, 2024, to January 8, 20251. This consultation period allows stakeholders and the public to provide feedback and contribute to the development of the final regulations.
Following the public consultation period, the government intends to publish the final regulations in 20255. The final regulations will incorporate feedback received during the consultation process and will provide a clear framework for emission reductions in the oil and gas sector. However, concerns have been raised about a potential loophole in the proposed "decarbonization program," which could lead to the double-counting of emission reductions3. The International Institute for Sustainable Development (IISD) has recommended removing this loophole to ensure the effectiveness of the regulations in driving genuine emission reductions3.
While the Canadian regulations are unique in their specific approach, many countries are implementing measures to reduce GHG emissions and combat climate change. These initiatives include:
These examples illustrate a growing global trend towards stricter regulations and initiatives aimed at reducing emissions and promoting environmental sustainability. However, Canada's approach stands out due to its comprehensive nature. The combination of a cap-and-trade system with declining allowances, tax credits for emission reductions, and a compliance fund offers a multi-faceted approach to incentivize emission reductions and support the transition to a low-carbon economy. This contrasts with the approaches taken by other countries, which may focus more narrowly on specific aspects of environmental regulation or rely solely on market-driven mechanisms.
Canada's draft regulations represent a significant step towards reducing GHG emissions from the oil and gas sector and achieving the country's climate goals. The proposed cap-and-trade system, combined with tax credits and a compliance fund, provides a comprehensive approach to incentivize emission reductions. While there are concerns about the potential impact on the industry, the government maintains that the regulations will not hinder production and will have a minimal impact on the economy. In fact, the regulations are projected to generate net economic benefits and contribute to improved air quality. The public consultation process ensures that stakeholders have a voice in shaping the final regulations, which are expected to be published in 2025. However, it is crucial to address concerns about potential loopholes, such as the "decarbonization program," to ensure the effectiveness of the regulations in driving genuine emission reductions. These regulations, along with similar initiatives in other countries, demonstrate a growing global commitment to addressing climate change and transitioning to a more sustainable future. The success of Canada's approach will depend on effective implementation, ongoing monitoring, and continuous improvement to ensure that the regulations achieve their intended environmental and economic outcomes.