Canada’s oil and gas emissions cap is here. How does it work?

Canada will cap emissions from the oil and gas sector and require those to drop by at least one-third by 2030, according to a draft framework released by the federal government on Thursday.

Canada’s emissions cap, which will follow a cap-and-trade model, aims to limit emissions from the oil and gas sector at 35 to 38 per cent below 2019 levels. This is below the 40 per cent target that was anticipated from a 2022 emissions reduction proposal.

The cap will set a limit on emissions and will be phased in between 2026 and 2030, with the cap being in the range of 106 to 112 million tonnes.

Under the cap-and-trade system, a regulatory body will issue an “allowance,” which is the quantity of emissions the regulated party is allowed to emit. The cap would apply to upstream oil and gas, meaning industries involved in the exploration, drilling and extraction of crude oil and natural gas. It would also extend to liquefied natural gas (LNG) facilities, which are projected to be a growing source of emissions.

Oil and gas facilities will have two options to compensate for emissions above the cap. They can offset credits from Canada’s Greenhouse Gas Offset Credit System and from provincial systems, which represent projects that reduce emissions.

They can also make contributions of a specified amount per tonne to a decarbonization fund, which would invest its proceeds in future greenhouse gas reductions.

Oil and gas facilities will have to register by the end of 2025 or before the regulations go into effect, on Jan. 1, 2026.

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“All sectors of our economy need to reduce their emissions, and that includes oil and gas companies,” Environment Minister Stephen Guilbeault said on Thursday. “The Government of Canada’s plan to cap and reduce emissions from Canada’s largest emitting sector is ambitious, but practical. It considers the global demand for oil and gas—and the importance of the sector in Canada’s economy—and sets a limit that is strict, but achievable.”

The activities covered by the proposed regulations would include bitumen and other crude oil production, surface mining of oil sands and bitumen extraction, upgrading of bitumen or heavy oil to produce synthetic crude oil, and production and processing of natural gas and LNG.

“We are moving forward on our commitment to introduce an ambitious and achievable pollution cap on oil and gas sector emissions. The pollution cap will ensure Canada’s oil and gas sector does its part to reduce emissions and it will enhance the sector’s competitiveness in the rapidly decarbonizing global economy,” Natural Resources Minister Jonathan Wilkinson said.

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While the oil and gas sector accounts for 7.2 per cent of Canada’s nominal GDP, research shows that the sector has been undercutting Canada’s progress in reducing emissions. According to the most recent National Inventory Report, Canada’s oil and gas sector accounted for 28 per cent of national emissions in 2021, making it the largest contributor to Canada’s emissions, followed by the transportation sector at 22 per cent.

“Now, we must double down to ensure that draft regulations are tabled by February and that the oil and gas industry finally does its fair share of the national climate effort,” Caroline Brouillette, executive director of Climate Action Network Canada, told Global News in a statement. “Every day of unregulated emissions from the oil and gas industry means devastating health impacts, more climate catastrophes that destroy homes, and increased cost-of-living for families and communities.”

The publishing of the regulatory framework on Thursday started the 60-day public comment period. The government will carry out public engagement over the winter, with the proposed regulations being published by mid-2024.

The final regulations are expected to be ready by 2025, before going into effect in 2026.