How the Draft Regs Work in Detail

The Draft Regs would prohibit operators in the upstream oil and gas production sector from emitting any GHG emissions unless the operator registers with the Environment and Climate Change Minister and provides specific information about their emissions.^[13]  “Operators

would be required to have their annual reports verified by an accredited third party and to keep records in Canada.^[14]  Operators whose cumulative annual production in a calendar year is 365,000 of oil equivalent are “covered operators”.^[15]

ECCC would use the total emissions reported by operators for calendar year 2026 as the basis for the emissions cap.  The cap would be set at 27% below these 2026 emissions.^[16]  “The emissions cap would remain at this level for subsequent compliance periods until regulatory amendments are made.”^[17] In addition, emissions allowances, as outlined below, are the tradable instruments in this proposed cap-and trade system. Each allowance represents one tonne of carbon emissions.

As the RIAS states,

Starting in 2030, operators that meet the threshold set out in the proposed Regulations [i.e., covered operators] would be prohibited from emitting any GHG from an industrial activity unless they remit sufficient eligible compliance units to cover their GHG emissions…

Beginning in 2029,emissions allowances (for 2030) would be distributed free of charge to operators that are covered by the remittance obligation, with the total number of allowances equal to the emissions cap. The distribution would occur annually and would be based on operators’ historical production and the distribution rate for the applicable industrial activity, pro-rated such that the emissions cap is fully distributed each year.

In addition to emissions allowances [covered operators’]… would be able to remit a limited quantity of compliance flexibility units (eligible offset credits and decarbonization units).^[18]

The draft regulations authorize the Canadian government to distribute all emissions allowances free of charge to covered oil and gas operators, rather than also permit them to be purchased at auctions or directly from other operators (third parties) that have excess. Many Canadian environmental nongovernmental organizations have recommended that the new cap-and-trade system allow for emissions auctioning because it is more transparent. In fact, auctioning is the principal method for distributing the majority of emissions allowances in the European Union’s emissions trading system.^[19] According to RIAS, “ENGOs recommended that, if free allocation is the chosen approach, it should recognize better emissions performance. Although not included in the proposed Regulations, auctioning of allowances, either in combination with free allocation or as a means to distribute all allowances, may be considered during the regulatory review, for introduction in later compliance periods.”^[20] 

Recommendation:

• ECCC should consider using auctions to distribute emission allowances after the first two compliance periods.

“Compliance Flexibility”: “Canadian Offset Credits” and “Decarbonization Units”

Under the heading “Compliance Flexibility”, the RIAS states:

In addition to emissions allowances, covered operators would have the option to remit eligible Canadian offset credits or decarbonization units (obtained by making contributions to a decarbonization program) to cover up to 20% of their remittance obligation. Covered operators would be able to remit any combination of Canadian offset credits or decarbonization units to meet their remittance obligation, up to specified limits. Up to 20% of a covered operator’s obligation within a compliance period could be satisfied with offset credits, and up to 10% of a covered operator’s obligation within a compliance period could be satisfied with decarbonization units obtained through contributions to a decarbonization program at $50/tonne of CO2e. Decarbonization units would not be tradable between operators or bankable to subsequent compliance periods. The proposed Regulations would require that contributions to the decarbonization program be used to fund projects that support the reduction of GHG emissions from the oil and gas sector.

The total offset credits and decarbonization units remitted for a facility cannot exceed 20% of its total obligation within a compliance period. For example, if 5% of a facility’s remittance obligation is met with decarbonization units, the covered operator would be limited to a maximum of 15% use of offset credits for that facility.

Only offset credits issued under the Canadian Greenhouse Gas Offset Credit System Regulations and provincial offset units or credits recognized for use under the federal OBPS Regulations associated with the reduction or removal of GHG emissions that occurred no more than five calendar years before the compliance period for which the credit is remitted would be considered eligible offset compliance units under the proposed Regulations.^[21]