2024 Oil & Gas Emissions Cap POLICY TOOLKIT – 4. HOW THE O&G EMISSIONS CAP WORKS

Oil & Gas Cap Policy Toolkit​

4. How the O&G Emissions Cap Works

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Toolkit Contents

  1. EXECUTIVE SUMMARY
  2. BACKGROUND – THE OIL & GAS SECTOR GHG EMISSIONS PROBLEM
    1. Production Emissions
    2. Consumption Emissions
  3. BACKGROUND – A TRICKY JURISDICTIONAL BALANCE
  4. HOW THE O&G EMISSIONS CAP WORKS
    1. Scope of Application
      1. Covered Facilities
      2. Covered Activities
      3. Covered Greenhouse Gasses (GHGs)
    2. The Emissions Cap Level: The Starting Point
    3. The Legal Upper Bound: How Much Can Really Be Emitted
  5. THE PROBLEMS WITH THE FRAMEWORK
    1. The 2030 Cap Level Is Not Ambitious Enough – The Numbers
    2. The Cap Proposed by the Framework Will Make It Almost Impossible to Meet Our Canada-Wide 2030 Target
    3. The Framework’s O&G Emissions Cap Will Do Less Work Than It Appears
    4. The O&G Emissions Cap Has Effectively Been Dictated by the Oil and Gas Producers
    5. The Oil and Gas Industry’s Re-investments to Reduce Emissions Has Been Contemptible
    6. The O&G Emissions Cap is based on O&G Production Increasing by 2030
    7. The “Other Compliance Units” Are Mostly a Very Bad Idea
  6. COMPLIANCE FLEXIBILITIES
    1. Emissions Trading
    2. Multi-Year Compliance Periods
    3. Banking of Emissions Allowances
    4. Making Contributions to a Decarbonization Fund
    5. Domestic Offset Credits
    6. Internationally Transferred Mitigation Outcomes (ITMOs)
    7. Delayed Reporting and Verification
  7. SUGGESTED RESPONSES TO THE FRAMEWORK’S DISCUSSION QUESTIONS
  8. I DON’T HAVE TIME TO READ THIS LONG DOCUMENT. WHAT SUBMISSIONS SHOULD I CONSIDER MAKING?
  9. ACRONYMS & GLOSSARY

The Framework proposes creating a cap-and-trade system.  Covered facilities would be prohibited from releasing GHGs unless they have first registered in the system.  They would then be prohibited from releasing any GHGs without remitting a sufficient number of “compliance units” to cover those emissions.

Compliance units can be either “emissions allowances” or “other compliance units”. Allowances are like a licence to emit GHGs, and one allowance would permit the holder to emit one tonne of CO2e. O&G facilities would be able to purchase other compliance units to emit more than their allowances.

In crude terms, therefore, the O&G Emissions Cap would operate like this:  The federal government says, “Together, Canadian oil and gas producers can only emit a total of X Mt of GHG emissions from their production activities in a given year, and they need allowances to do that.”  Then the federal government gives out those allowances and monitors each facility’s emissions.  If any facility emits more GHGs than it is allowed to, that facility (and some of the people in leadership positions who operate it) will be liable to criminal-like punishment (including warnings, compliance orders, fines and possibly jail sentences).

a. Scope of Application

i. Covered Facilities

The Framework would apply to production activities at upstream oil and gas facilities, including offshore facilities, and to Liquid Natural Gas (“LNG”) facilities [19].  (Offshore facilities are offshore oil rigs that operate within Canada’s national offshore boundaries.)  These facilities are called “covered facilities”. 

Small facilities, defined as those that emit less than the reporting threshold for the federal Greenhouse Gas Reporting Program (GGRP) of 10 kilotonnes of CO2e per year, are responsible for one third of the sector’s emissions [20] and would be included in the cap. However, the Framework seems to be worded in a way that could leave the door open to these facilities being excluded from the forthcoming draft regulations. The Framework states that provincial approaches to regulate small facilities, “are being examined to support an efficient federal approach to covering smaller emitting facilities under the emissions cap-and-trade regulations.” [21] Reading between the lines, the government may be worried about imposing reporting requirements on facilities that are currently exempt from the GGRP. Obviously, if the cap is to have any meaning at all, the one third of O&G sector emissions represented by small facilities must be covered.

Furthermore, the proposed Framework covers fewer oil and gas facilities than ECCC previously envisioned being covered by the O&G Emissions Cap. [23]  Specifically, it removes 20 Mt of emissions from natural gas transmission pipelines and downstream petroleum refineries from the O&G Emissions Cap.  The consequences of this are discussed below.

As for LNG production, this is a new fossil fuel product for the Canadian O&G sector. The Framework notes that LNG production was zero in 2019 and projects that it will grow to 3.91 billion cubic feet per day by 2030. [24] It is not a good thing that Canada will be expanding fossil fuel production at a time when the UNIPCC and International Energy Agency have both said that no new fossil fuel infrastructure should be built if we are to limit warming to 1.5°C. [25] But at least these new LNG facilities will be included under the cap. 

However, the Framework does not address the expected emissions from the production of LNG or how it is possible to add an entirely new fossil fuel industry and still meet the sector’s emission reduction targets under the cap. Publicly-available information from other sources is difficult to find. This makes it difficult to assess the cap’s treatment of LNG facilities and provide input to the consultation on the Framework.

ii. Covered Activities

The Framework is designed to apply only to the GHG emissions from the production of oil and gas. It does not cover the emissions from using/burning the fossil fuels produced.

The ERP describes three types of GHG emissions in the oil and gas sector:

The oil and gas sector can be subdivided into three stages of production (upstream, midstream, and downstream), with significant differences within and between them. There are 3 scopes of emissions in the sector:

• Scope 1 emissions originate directly from sources that are owned or controlled by a sector (i.e., combustion, process, and fugitive emissions).

• Scope 2 emissions are those generated indirectly.

• Scope 3 emissions are indirect emissions resulting from an organization’s operations (i.e., emissions from supply chains). These emissions are often combusted in other sectors or other jurisdictions (e.g., exported crude oil; gasoline in internal combustion engine vehicles). [26]

The Framework states the emissions cap would apply to Scope 1 and Scope 2 emissions. [17] With respect to Scope 2 (indirect) emissions, it states: 

The oil and gas emissions cap-and-trade system would account for transfers of thermal energy, hydrogen, CO2, and electricity to ensure that all GHG emissions that relate to the production of oil and gas are covered. This would aim to prevent GHG emissions from being shifted to unregulated facilities and to avoid creating an uneven playing field and unintended competitiveness impacts. Facilities would be required to report and quantify information related to the purchase/sale, production, use and import/export from the facility of thermal energy, hydrogen, electricity, and transfers of CO2 for storage. Where facility-specific information is not available, a default factor would be provided to estimate emissions. [28]

Scope 3 emissions from the consumption (i.e., burning) of Canadian oil and gas are NOT included under the cap.

The Framework provides a more specific list of activities that would be covered by the emissions cap:

It is proposed that the following activities would be covered by the regulations:

• Bitumen and other crude oil production, including upstream oil gathering pipelines when they are part of a covered facility, — other than bitumen extracted from surface mining and other than petroleum refining, including:

• extraction, processing, and production of light crude oil (having a density of less than 940 kg/m3 at 15°C) 

• extraction, processing and production of bitumen or other heavy crude oil (having a density greater than or equal to 940 kg/m3 at 15°C)

• Surface mining of oil sands and extraction of bitumen

• Upgrading of bitumen or heavy oil to produce synthetic crude oil 

• Production and processing of natural gas and production of natural gas liquids, including upstream gas gathering pipelines when they are part of a covered facility

• Production of liquified natural gas [29]

iii. Covered Greenhouse Gasses (GHGs)

The Framework states:

The GHGs covered would include carbon dioxide, methane, nitrous oxide and others (for a complete list, see items 65 to 70 of Part 2 of Schedule 1 to CEPA). [30]

The relevant sections of Part 2 of Schedule 1 to CEPA list the following GHGs:

• 65 – Carbon dioxide, which has the molecular formula CO2

• 66 – Methane, which has the molecular formula CH4

• 67 – Nitrous oxide, which has the molecular formula N2O

• 68 – Hydrofluorocarbons that…

• 69 – The following perfluorocarbons…

• 70 – Sulphur hexafluoride…

Recommendations:

Tell the federal government (using references to the Framework and to any papers we cite here, as you may wish):

• It is good that the government plans to include small facilities, which account for one third of the sector’s emissions, in the cap. The government must ensure that small facilities remain within the scope in the forthcoming regulations, despite potential reporting challenges.

• It is good that LNG facilities will be included under the cap. However, the government must address the serious lack of information on the anticipated emissions from the production of LNG and explain how it is possible to add an entirely new fossil fuel industry and still meet the cap’s emission targets.

• Downstream pipelines and refineries, which account for 20 Mt of emissions annually, must be included under the emissions cap, as originally envisioned.

b. The Emissions Cap Level: The Starting Point

The Framework states:

There are two key values in the proposed approach: (1) the emissions cap level, which is equivalent to the total emission allowances issued by the government for a given year, and (2) the legal upper bound, which is the maximum emissions the sector will be allowed to emit that year, comprised of the total number of emission allowances issued plus the maximum allowable quantity of other eligible compliance units. [31]

The regulator would issue a number of emissions allowances that add up to the “emissions cap level”.  The regulator would provide these emissions allowances for free, under a system deemed to be fair, among oil and gas producers.  

The Framework proposes that the emissions cap level for 2030 be between 106 and 112 Mt. The final cap level will be, “set based on the best available information at the time the regulations are finalized.” [32]

Recall that when the ERP set out “Where we could be in 2030”, the government stated that we could be at 110 Mt in 2030. [33]  That was 2 Mt below the top range of what the Framework is now proposing.  Moreover, the ERP did not say anything about allowing more emissions above and beyond that amount by way of “compliance flexibilities” (see below).

Recommendations:

Tell the federal government (using references to the Framework and to any papers we cite here, as you may wish):

• The proposed level of the oil and gas sector emissions cap is nowhere near ambitious enough. It is not aligned with the emissions reductions being required in other sectors of the economy, with Canada’s 2030 Target under the Paris Agreement (enshrined in law in the Canadian Net-Zero Emissions Accountability Act), or with a pathway that sees Canada reaching net-zero GHG emissions by 2050.

• Hold the federal government accountable to deliver the emissions reductions promised in their 2022 Emissions Reduction Plan, which suggested the cap for the O&G sector would be 110 Mt in 2030. [34]

c. The Legal Upper Bound: How Much Can Really Be Emitted

The 2030 “emissions cap level”, however, is not the total GHG emissions that oil and gas producers can emit.

The total they can emit is called the “legal upper bound”, and it is 25 Mt per year higher than the cap level, i.e. between 131 and 137 Mt in 2030. Over the first five years of the cap’s operation, that would amount to an extra 125 Mt of GHG emissions, more than a whole year of emissions allowances!

The Framework states that this additional 25 Mt of emissions per year would be permitted by the use of “other compliance units”.  It specifically states that these could be made up of domestic or international offset credits and contributions to a “decarbonization fund”. [35] Each of the compliance flexibilities are discussed in detail later in this document.

It is by adding the 25 Mt permitted by “other compliance units” to the 106 to 112 Mt “emissions cap level” that one arrives at the Framework’s “legal upper bound” of between 131 and 137 Mt in 2030.

Recommendations:

Tell the federal government (using references to the Framework and to any papers we cite here, as you may wish):

• To ensure Canada can meet our emissions reduction targets, the “compliance flexibility” allowing fossil fuel companies to pay to emit 25 Mt per year over and above the cap must be eliminated. Another way to put it is that the legal upper bound for emissions should be the same amount as the emissions cap.

• The legal upper bound for oil and gas sector emissions in 2030 should be no more than the 110 Mt promised in the Emissions Reduction Plan.

 
Citations
  1.  Framework, p. 2.
  2.  Framework, p.3.
  3.  Framework, p. 3.
  4. On 18 July 2022, ECCC released Options to Cap and Cut Oil and Gas Sector Greenhouse Gas Emissions to Achieve 2030 Goals and Net-Zero by 2050 – Discussion Document.  Its release started an online public consultation that lasted until 30 September 2022.  The Discussion Document specifically stated “the government is seeking input on whether the cap should apply to natural gas transmission pipelines and petroleum refineries.”  [p. 17].  Of the 22 specific questions that ECCC asked for submissions on, Question #7 was “Should consideration be given to facility emission thresholds to set different approaches and requirements for small versus large emitters?” [p. 29].  Discussion Document retrieved on 8 January 2024 from https://www.canada.ca/en/services/environment/weather/climatechange/climate-plan/oil-gas-emissions-cap/options-discussion-paper.html
  5.  Framework, p. 3.
  6.  Framework, p. 12.
  7.  International Energy Agency, “The path to limiting global warming to 1.5 °C has narrowed, but clean energy growth is keeping it open”, 26 September 2023. https://www.iea.org/news/the-path-to-limiting-global-warming-to-1-5-c-has-narrowed-but-clean-energy-growth-is-keeping-it-open
  8.  Environment and Climate Change Canada, 2030 Emissions Reduction Plan: Canada’s Next Steps for Clean Air and a Strong Economy, 29 March 2022, p. 171. Retrieved on 16 January 2024 from  https://publications.gc.ca/collections/collection_2022/eccc/En4-460-2022-eng.pdf.
  9.  Framework, p. 6.
  10.  Framework, p. 6.
  11.  Framework, p. 3.
  12.  Framework, p. 3.
  13.  Framework, p. 4.
  14.  Framework, pp. 3-5.
  15.  ERP, pp. 89-90.
  16.  Environment and Climate Change Canada.  2030 Emissions Reduction Plan: Canada’s Next Steps for Clean Air and a Strong Economy.  Released 29 March 2022. Retrieved on 14 August 2022 from https://publications.gc.ca/site/eng/9.909338/publication.html
  17.  Framework, p. 5.