Operators Can Pay Into a Decarbonization Fund and Emit More GHGs

The Draft Regs are proposing the introduction of a “Decarbonization Fund”:

[U]p 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.^[73]

The oil and gas industry seems to have convinced ECCC that compliance flexibilities such as  the decarbonization fund are necessary to keep the Canadian oil and gas industry viable.  Practically speaking, by this stage of the policy development process, it will probably be almost impossible for climate activists who oppose the decarbonization fund to have it eliminated from the final regulations.

However, climate activists would still do well to understand some of the reasons – and arguments – against a decarbonization fund.  Here are five reasons to consider, and possibly raise in your unique individual submissions to ECCC’s consultation:

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).  In 2019 – the last year before the production downturn caused by Covid – emissions from oil and gas production was 226 Mt.  Of that amount, 20 Mt was from “downstream production” (such as petroleum refining and natural gas distribution) and 206 Mt was from “upstream production” (such as natural gas production and processing, conventional oil production, and oil sands mining, in-situ, and upgrading).^[74]  In 2022, emissions from all Canadian oil and gas production were 217 Mt.  That was 31% of Canada’s total emissions, making oil and gas production the largest single source of Canadian emissions.^[75]

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 491 Mt in 2022.  In stark contrast to this trend, emissions from oil and gas production rose from 195 Mt in 2005 to 217 Mt in 2022.^[76]

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.”^[77] 

Even worse, the design of the Draft Regs 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, meaning they can emit an additional 20 tonnes of GHGs. 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.^[78]  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 fund.  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…^[79]  [Emphasis added.]

ECCC seems to have been convinced, mostly by the oil and gas industry, that the creation of a “Decarbonization Fund” is a necessary compliance flexibility. in the first place, especially in light of the fact that the federal government has already demonstrated incompetence at designing and implementing such a program. However, since it appears that they will be proceeding with it, it will be important that they design a system that functions properly.

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.^[80]

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:

Citing some of the facts and information above (and any other research you want to do), and using your own words, consider making submissions to the online public consultation similar to these:

Tell the federal government:

• 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:  Once when they pay to pollute and a second time when they use the money they paid in to try to reduce their emissions.
• 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. Since ECCC seems intent on trying it again, they should not repeat the same mistakes.
• 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.