5 takeaways from Canada’s draft rules for an oil and gas emissions cap

Canadian government ministers introduced new details of their oil and gas emissions cap plan on Monday.

If the federal draft rules are finalized as expected next year, they would represent the first time Ottawa has imposed binding obligations on the sector to slow its rising carbon emissions.

The oil and gas sector is already Canada’s biggest polluter, and Canada is the fourth-largest oil producer and fifth-largest natural gas producer in the world. On Monday, Environment and Climate Change Minister Steven Guilbeault said the move would set the country apart from its fossil fuel competitors.

“Look around the world. No other major oil and gas producer is doing what we’re doing,” he said during a press conference in Ottawa. “The United States, the United Kingdom, Norway, the Gulf states — we’re the only large oil and gas producer in the world to do this.”

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The government of the oil-rich province of Alberta as well as the official Opposition Conservative Party of Canada both denounced the move on Monday. Alberta Premier Danielle Smith said it would “hurt families, hurt businesses and hurt Canada’s economy” while Conservative leader Pierre Poilievre said it would “kill Canadian jobs, raise the cost of energy and send billions of dollars to dictators overseas.”

Their comments echo a message spread for decades by oil and gas industry lobbyists, who have warned the public that government-mandated climate policies could harm the economy.

Guilbeault made his comments after federal officials gave reporters a technical briefing of how their plan would work. But they did not share the full version of their plan prior to taking questions from the media.

Here are five takeaways from the draft emissions cap announcement on Monday:

1. The cap is a ‘backstop’ to ensure oilsands companies do what they say they can

Senior government officials said that by 2032, they expect a federal emissions cap to cut oil and gas carbon pollution by 35 per cent compared with 2019 levels.

Energy and Natural Resources Minister Jonathan Wilkinson said the “vast majority” of these cuts would come from two areas.

One area is a controversial plan put forward by large oilsands companies to reduce their own operational emissions. The Pathways Alliance has said it expects to be able to cut emissions from its facilities by 22 million tonnes per year by 2030, if it can build and operate a sprawling carbon capture and storage system.

There have been a lot of questions around the potential impacts of such a scheme on the environment, and how it might affect the ability of First Nations in the area where the carbon capture and storage system would be built, to exercise their Treaty Rights.

There are also questions about whether the companies can actually pull it off in a technical sense, given that carbon capture technology is not always successful and has not been deployed at the scale of the oilsands.

At a press conference on Monday, Wilkinson described the emissions cap as a precaution to “ensure we are holding the Pathways folks and others to their word about what they can achieve with respect to reductions.”

“You go talk to any of the Pathways CEOs — they know they must decarbonize for access to capital,” he said. He was referring to the alliance’s argument that its companies want to become the preferred supplier of oil in a future world that values lower-carbon sources of energy.

“This is essentially a backstop to ensure they do what they say they can,” Wilkinson said.

The second area is methane emissions. Wilkinson said the emissions cap would also rely heavily upon federal rules to cut the greenhouse gas from oil and gas production by 75 per cent below 2012 levels by 2030.

Methane leaks from equipment, but is also deliberately wasted by companies due to its capture being seen as unprofitable. The technology to capture methane instead of letting it escape into the air is “well understood, and it’s actually not that expensive,” said Wilkinson during the press conference.

The government already has less stringent methane standards in place, and some provinces like Alberta and Saskatchewan have reached agreements with the government that allows them to substitute their own rules on methane as equivalent to federal standards. The new, tougher methane rules are expected to be finalized this fall.

The new federal approach could create a challenge for critics in both Prairie provinces that have already accepted methane regulations and praised the technology behind the Pathways plan as a “real solution,” as Smith put it.

2. The cap would allow almost as much oil and gas growth as before

The federal government says it expects the oil and gas industry to be able to continue growing its production of fossil fuels, even with an emissions cap in place.

Senior government officials said their modeling showed the industry’s production levels would grow 16 per cent between 2019 and 2032 with their proposed emissions cap rules in place, versus 17 per cent projected growth without a cap.

That means the emissions cap would shave about 69 million barrels of oil equivalent off of the industry’s production over this time period, or a bit less than two weeks’ worth since Canada produced 5.1 million barrels per day in 2023.

The rules offer a number of “flexibility” measures for oil and gas operators in order to comply with the rules while still polluting, and those measures are part of the reason why the industry’s production will still be able to grow, officials confirmed.

The Alberta government and oil and gas lobbyists have both launched campaigns to try to convince Canadians that a federal cap on the industry’s carbon pollution would effectively limit the amount of fossil fuels the industry can produce.

Smith, the Alberta premier, said in a statement Monday that the cap will “require a one million barrel a day production cut by 2030.” The province says it is exploring legal options.

On Monday, Guilbeault dismissed Alberta’s “scrap the cap” campaign as “more hot air and disinformation,” and Wilkinson said Smith would almost certainly be issuing “predictable wild claims” about production levels.

But all of the federal government’s plans could be sent to the trash heap if Poilievre’s Conservatives defeat Prime Minister Justin Trudeau’s Liberals in an election expected within a year.

3. The cap will be phased in starting in 2026

Officials explained Monday that the cap would be phased in for a four-year period starting in 2026, with the first compliance period occurring from 2030 to 2032.

Assuming the rules are put in place next year, oil and gas operators would have to register for the scheme by Jan. 1, 2026. The program would work as a cap-and-trade system, with the government distributing allowances that companies would need to use in order to account for their emissions.

At the end of each three-year compliance period, oil and gas operators would have to either use up their allowances, or buy them from someone else who has invested in pollution reduction.

The government said only large oil and gas producers, generating over 365,000 barrels of oil equivalent each year, would have to cover their emissions with allowances — although it said these types of companies account for 99 per cent of oil and gas production emissions. All companies, regardless of size, would have to register and report their emissions.

4. The government is offering ‘flexibility’ on compliance

The rules would include exceptions that would give oil and gas producers “flexibility” under the program to continue to pollute a certain amount, government officials said Monday. They said this was “intended to provide room to increase production” to respond to global energy demands.

Two exceptions would be available. One would allow a company to use credits to “offset” emissions; credits for this would be recognized by the government as legitimate if they came from a shortlist of offset systems in place, such as the one embedded in federal carbon pricing. Companies that did this would be able to cover up to 20 per cent of their emissions this way.

The other would allow companies to pay into a decarbonization program in exchange for units they could use to comply with the emissions cap. Companies would be allowed to cover up to 10 per cent of their emissions through these types of payments.

The government said it is also considering additional compliance options and expects to publish a paper on it and offer a chance for public feedback this fall.

5. Government says it expects $428 million in ‘net benefits’

Senior government officials projected Canada would have a net benefit from the emissions cap of $428 million over the 2025 to 2032 period.

They said this calculation includes avoiding $4 billion worth of global climate change damages from greenhouse gas reductions, as well as the administrative and economic costs associated with that damage.

Meanwhile, the total cost to the economy would be $3.3 billion plus another $219 million in administrative costs for the government, leading to roughly half a billion dollars worth of net benefit.

Officials said this calculation does not include other benefits the emissions cap would provide, such as lower air pollution, or the jobs and economic activity associated with building out low-carbon technology.

And they said they expect “no impact” on the price of gasoline in Canada.