Letters February 5, 2024

Re-evaluating the proposed oil and gas regulatory framework

Michael Gullo – Vice President, Policy, Business Council of Canada

Climate Change and Clean Growth Industry and innovation Natural Resources Regulation Resources and the Environment

Letter to Mr. John Moffet, Assistant Deputy Minister Environmental Protection Branch, regarding the proposed Regulatory Framework for an oil and gas emissions cap.

Dear Mr. Moffet,

Last year the Business Council of Canada (BCC) wrote to the Minister of Environment and Climate Change to express concerns with the government’s intention to impose a cap on the emissions produced by Canada’s oil and gas sector. After reviewing the proposed Regulatory Framework released in December, our concerns remain, and we continue to believe that an emissions cap is unnecessary.

In our letter we wrote that imposing a cap on the oil and gas sector would represent a significant departure from the national approach to reducing emissions through a broad-based and sector-agnostic price on carbon emissions. The proposed Regulatory Framework provides minimal evidence to suggest that the competitiveness of the oil and gas sector will be protected, and that the government is serious about preventing carbon leakage. As written, the oil and gas emissions cap is duplicative and will destabilize existing carbon pricing regimes and credit markets.

We understand that Environment and Climate Change Canada is focused on reducing emissions in accordance with the government’s Emissions Reductions Plan. However, we believe it would be irresponsible for the department to disregard the current economic context and the substantial implications a proposed cap on oil and gas emissions will have on Canadians.

Canada’s GDP outlook for this year will be a dismal 0.6 % and Canada is poised to be the worst-performing advanced economy from 2020 to 2030 and from 2030 to 2060. Our energy sector is a stalwart of the country’s economy. It accounts for more than 10 per cent of Canada’s GDP, drives our trading relationship with the United States, and props up real wages and household and retirement incomes.

Imposing an emissions cap will likely force operators to involuntarily curtail their production. This would effectively reduce the overall capacity of the most productive segment of Canada’s economy at a time when investment and growth is desperately needed. It would also deprive Canada of its ability to use its low-emitting energy wealth to offset global emissions and meaningfully help its allies address their energy security challenges.

Some of Canada’s most reputable economists believe that an emissions cap would exacerbate the country’s inflation and affordability problems by applying a broad-based economic shock that will reduce tax revenues and add pressure to the federal deficit. A 10 per cent decline in oil and gas productivity will lower the economic output of Ontario and the Atlantic provinces by 0.6 and 0.5 per cent respectively. At a national level, this would translate into a loss of roughly $35 billion per year, or nearly $900 per person per year.

We appreciate the opportunity to review the proposed Regulatory Framework and offer three comments for consideration:

The proposed timelines are unrealistic and out of sync with other policies.

The Regulatory Framework states that the regulations are targeted to come into force in 2025 with companies obliged to begin meeting their compliance obligations in full or in part as early as 2026. Substantive emissions reductions in the realm of 66 MMT will need to be achieved by 2030.

The proposed framework aspires to achieve emissions reductions through technologies and projects that have yet to be deployed. Investments are not made on speculative legislation. It is simply unrealistic to assume that projects, technologies and decarbonization strategies will be deployed, permitted and operational in four years.

Furthermore, emissions reductions in the sector will be achieved through projects that lack the required fiscal and regulatory support to secure investment and be deployed at scale. The government has yet to implement key policies that would help industry de-risk decarbonization investments. Some of the most urgent elements include proposed investment tax credits to accelerate investment in CCUS and a suite of clean technologies, an offset protocol for direct air carbon dioxide capture and sequestration, and a program to create carbon contracts for difference.

Canadians also continue to wait for the government to fulfil its overdue commitment to improve the project approval and permitting regime of clean growth projects in Canada.

Compatibility with existing emission reduction policies and programs is unclear.

The Regulatory Framework states that the emissions cap will be designed to complement and leverage other federal and provincial regulations to minimize administrative costs. However, it falls short in detailing how performance under a provincially regulated program will be treated under the federal emissions cap.

We are concerned that oil and gas sector emissions will be subject to duplicative and redundant regulation under federal and provincial programs. From a policy standpoint, a new oil and gas emissions cap would need to work in concert with the federal and provincial Output-Based Pricing Systems, potentially creating duplicative carbon pricing regimes and a high potential to destabilize carbon prices, credit markets and future compliance costs for oil and gas assets. This level of uncertainty will be exacerbated given the governments of Alberta and Saskatchewan intend to challenge the federal government’s ability to enact a constitutionally valid emissions cap under federal law.

Oil and gas operators are no different than any other major emitting operator in Canada. They require a sufficient level of detail of all regulatory requirements to properly assess and deploy the capital required to decarbonize their operations and remain competitive. At the time of this writing, much work remains to be done to clarify the interoperability of the proposed cap with existing and forthcoming federal and provincial programs designed to reduce oil and gas emissions.

Lastly, an oil and gas emission cap would undoubtedly ramp up the administrative burden and compliance costs for producing oil and gas in Canada, compromising the ability of producers to provide competitive products to their customers in Canada and to international markets.

An oil and gas emissions cap threatens to divert capital away from deep and meaningful emission reductions.

Our previous work broadly explains the investment strategies in place to decarbonize emissions in the oil and gas sector. Deployment of these strategies requires a clear policy trajectory and a concerted effort by the government to follow through on its commitments to accelerate investments and approvals for clean technology projects. Climate policy needs to enable long-lead compliance planning by providing companies with a visible policy pathway that aligns with their investment strategies to achieve net zero by 2050.

Unfortunately, the proposed oil and gas framework narrowly focuses on achieving emission reductions by 2030. Its stringent timelines could force companies to divert capital away from their decarbonization strategies and into the emissions cap’s proposed compliance pathways, the Decarbonization Fund or domestic offset credits. At the same time, the cap-and-trade approach may make it more challenging for the sector to continue its collaborative approach to emission reductions as companies will be in competition for free allowances.

The government has yet to provide sufficient information about each pathway and if it can be leveraged to support the wide and diverse strategies companies have in place to achieve net zero emissions by 2050. The government’s inability to clearly describe each compliance option threatens to delay final investment decisions and exacerbates the conditions for capital flight by companies and their respective investors and shareholders.

The proposed Regulatory Framework does little to instill confidence that the oil and gas emissions cap will incent the record levels of investment required to reduce emissions in accordance with Canada’s ambitious 2030 target and the industry’s commitment to be net zero by 2050. We urge the department to take the long view and develop are regulatory and policy environment that is conducive to attracting investor confidence and unlocking the capital required to decarbonize Canada’s upstream oil and gas sector.

Sincerely,