d. Making Contributions to a Decarbonization Fund

The Framework is proposing the introduction of a “Decarbonization Fund”:

The government is exploring options to include a decarbonization funding program as a compliance option. If included, covered facilities would have the option to make contributions into the fund in exchange for decarbonization fund units, which would be recognized as an eligible compliance unit. Use of decarbonization fund units for compliance under the regulations would be limited to 10% of a facility’s GHG emissions.  Contributions to the decarbonization fund would be used to support oil and gas sector decarbonization and would help decrease emissions at facilities that receive support from the fund.

It is proposed that the contribution rate to be issued a decarbonization fund unit would be set in the regulations at the estimated allowance price needed for the sector to reduce GHG emissions in-line with the legal upper bound. For example, modelling suggests when emission reduction incentives from other policies are taken into account (e.g., carbon pricing), the 2030 allowance price in an emissions cap-and-trade system to achieve a legal upper bound of 131 Mt to 137 Mt could be around $50 per tonne CO2e. [100] [Emphasis added]

This is quite simply a bad proposal that should be opposed.  There are five reasons for this.

The first reason is that we need to cut emissions from the production of oil and gas, not create excuses, in the form of “compliance flexibilities”, for oil and gas producers to emit more GHGs.

Policies employed to date to reduce GHGs from oil and gas production have been a patent failure:  Emissions from Canadian oil and gas production were 103 Mt in 1990.  They rose to 171 Mt in 2005 (which is the base year for the Paris Agreement national emissions targets and for Canada’s Emissions Reduction Plan).  By 2019, at 203 Mt, emissions from oil and gas production had almost doubled from 1990 levels. [101] In 2020, they were the biggest single source of Canadian GHG emissions, at 28% of the total, up from 26% in 2019. [103]

The total GHG emissions from Canada’s other industry sectors – Electricity, Transport, Heavy Industry, Buildings, Agriculture, and “Waste and Others” – fell from 565 Mt in 2005 to 565 Mt in 523 Mt in 2019.  In stark contrast to this trend, emissions from oil and gas production rose from 168 Mt in 2005 to 201 Mt in 2019. [104]

A “compliance flexibility” that lets oil and gas producers pay into a “decarbonization fund” is not a way of reducing emissions from oil and gas production; it is simply a way of not reducing emissions from oil and gas production while making it look like the government has done something about emissions from oil and gas production.

The second reason why paying into a “Decarbonization Fund” is a bad policy proposal is because it is absurd to permit oil and gas producers to emit more GHGs as long as they pay into a fund that will benefit themselves.  This is exactly what the Framework is proposing:  “Contributions to the decarbonization fund would be used to support oil and gas sector decarbonization and would help decrease emissions at facilities that receive support from the fund.” [105]

Even worse, the design of the proposed Framework would give companies credit twice under the cap for spending the same funds. To illustrate, if a company contributes $1,000 to the decarbonization fund, they get credit equivalent to 20 tonnes of CO2e. They can either emit that 20 tonnes themselves, or sell the credit to someone else who will emit it. Then later, when they access money (say $1,000) from the decarbonization fund to reduce their GHG emissions (e.g., through CCS), they would get credit again for whatever amount of GHGs they reduce. 

Oil and gas firms are already at liberty to reinvest as much of their profits as they wish into reducing leakage, finding efficiencies, and technical innovations such as CCS that will reduce their GHG emissions.  Indeed, beyond merely being at liberty to do so, the federal government has already provided “compliance flexibility” by way of an investment tax credit with which to support the development of CCS (despite their pledge to eliminate “inefficient” subsidies to the fossil fuel sector). This program is expected to cost Canadians $2.6 billion in the first five years, reaching up to $8.6 billion by 2030. [106]  It is perverse to reward them further by letting them emit more GHGs if they put money into a fund that will benefit themselves.

Despite significant government financial support and the industry’s own record profits, Canadian O&G companies have failed to reduce their GHG emissions. If the decarbonization fund proposal is not eliminated, the funds should go to organizations with a proven track record of reducing GHG emissions, such as the renewable energy sector.

The third reason why paying into a “Decarbonization Fund” is a bad policy proposal is because the federal government has already proven itself to be incompetent to design and successfully implement such a funds.  This was made clear in the Auditor General of Canada’s Report 4—Emissions Reduction Fund—Natural Resources Canada, released in November 2021:

4.5   In November 2020, the government launched the Onshore  Program of the Emissions Reduction Fund, which was part of Canada’s 

COVID-19 Economic Response Plan. The government saw the Onshore Program as a way to help the energy sector deal with lower oil prices  during the pandemic. The program was designed to support emission reduction efforts by providing financial support to struggling companies in the sector. It offered up to $675 million to help onshore (that is, land-based) oil and gas companies maintain employment, attract investments, increase global competitiveness, and accelerate their deployment of equipment to reduce greenhouse gas emissions, with a  particular focus on methane… 

4.14   Overall, Natural Resources Canada did not design the Onshore Program of the Emissions Reduction Fund to ensure credible and sustainable reductions of greenhouse gas emissions in the oil and gas sector or value for the money spent.

4.15 …We found that, when designing the Onshore Program, Natural Resources Canada did not apply greenhouse gas accounting principles or the concept of additionality—that is, emission reductions attributed to the program should be in addition to what would have happened without it. As a result, more than half of the total reductions targeted by the program had already been accounted  for under the federal methane regulations. Even though the Onshore Program enables companies to comply with regulatory requirements, the department should not have attributed regulated reductions to the program and misstated what the  program could achieve.

4.16   Natural Resources Canada did not require that companies apply greenhouse gas accounting principles or the concept of additionality as defined in recognized standards when estimating projects’ expected emission reductions. For two thirds of the 40 submissions to the first intake period of the program, the department made funding decisions on the basis of overestimates of expected reductions. For 27 funded projects, companies had indicated in their submissions that these  projects would also accommodate an increase in oil or gas production. However, companies excluded from their final estimates the increases in emissions that would result from such increases in production. Had these increases in emissions been accounted for, they would have lessened or even outweighed the emission reductions expected from these projects… [107] [Emphasis added.]

There is no good reason to create such a “Decarbonization Fund” in the first place.  In light of the fact that the federal government has already demonstrated incompetence at designing and implementing such a program, it is unacceptable that they would be allowed to try again.

The fourth reason why permitting more GHG emissions if the producers pay into a “Decarbonization Fund” is a bad policy proposal is because it unfairly distorts the cost of carbon.  In 2030, regular citizens who must pay the “carbon tax” on consumer fuels such as gasoline for cars and “natural” (methane) gas for home heating will be paying it at a rate of $170/tCO2e.  Meanwhile the Framework proposes to let oil and gas producers emit additional tonnes of CO2e for $50/tCO2e in 2030. [108]

The fifth reason is that, depending on what ECCC does or does not do to prevent a glut of emissions allowances, and the corresponding drop in the cost for one tonne of emissions allowance, the $50 allowance price of “around $50 per tonne CO2e” could be entirely undermined.

The only way that the price of $50/tCO2e can be conceived of as reasonable is if one recalls that, under the federal Output-Based Pricing System (commonly referred to as the “OBPS”), the “carbon tax” – be it at today’s rate or at the 2030 rate of $170/tCO2e – applies to only a very small fraction of an oil and gas producer’s emissions.  ECCC has determined that to be a necessary evil, in order to prevent the oil and gas producers from leaving Canada and producing the oil and gas – and creating their GHG emissions – somewhere else, which is referred to as “carbon leakage”.  However, a major reason why we need the O&G Emissions Cap is because the OBPS has been singularly useless at reducing emissions from oil and gas production, as described above.

Recommendations:

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

• Contributions to the decarbonization fund would go to the oil and gas industry to help them reduce GHG emissions. This “double dipping” is absurd, giving the industry credit for the same funds twice under the cap. 

• In November 2021, the Auditor General released a report outlining how, when the federal government tried to design and implement an emissions reduction fund, it failed badly. They should not try again.

• The decarbonization fund should be eliminated, or at the very least the funds should be given to organizations with a proven track record of reducing GHG emissions rather than the O&G industry.