Canada introduces regulatory framework for cap-and-trade system covering oil and gas emissions

On 7 December 2023, Canada announced the development of a federal cap-and-trade system for oil and gas emissions in order to achieve net-zero by 2050.

The Canadian government released a "Regulatory Framework to Cap Oil and Gas Sector Greenhouse Emissions" with key design details of the planned cap-and-trade system. The system is aimed at reducing GHG pollution from the oil and gas sector, which is Canada’s largest source of GHG emissions, and will play a critical role in meeting Canada’s climate targets. The framework is based on a discussion document on options to cap and cut oil and gas sector GHG emissions, which was published by the Canadian government in July 2022 as part of the country’s broader 2030 Emissions Reduction Plan. 

The emissions cap for the oil and gas sector will be phased in between 2026 and 2030, and decrease over time to be consistent with Canada’s 2050-emissions goal of net-zero. The 2030 emissions cap will be in the range of 106 to 112 MtCO₂e, and will be set at a single figure when the cap-and-trade regulations are finalized. The government will allocate emissions allowances equal to the emissions cap.

The maximum level of annual emissions from the sector will be set by a legal upper bound, and will include the cap, plus a quantity of other eligible compliance units. Offset credits and contributions to a decarbonization fund will be eligible for use in compliance. The legal upper bound will be in the range 131 to 137 MtCo₂e for 2030. 

Headlines for the design of the emissions cap-and-trade system include:

• The cap-and-trade system will apply to liquid natural gas installations and to upstream oil and gas installations;
• Petroleum refining is excluded; 
• The system will cover all direct GHG emissions: CO_2, CH_4, N₂O and others;
• Transportation emissions or other uses of fossil fuels by the sector will not be regulated under the system;
• Compliance periods will span three years;
• Reporting, quantification, and verifications regulations will apply for covered entities;
• Free allocation will be granted at the beginning of the first compliance period based on a baseline production level and a free allocation rate for a given product or activity;
• Auctioning of allowances might be considered in later compliance periods;
• Each allowance will be equivalent to one tCO₂e_;
• The trade of emissions allowances will only be allowed among covered installations of the oil and gas emissions cap-and-trade system;
• Banking will be allowed for up to two compliance periods (six years);
• A decarbonization fund and domestic offset credits as compliance options are being considered;
• The emissions cap will decline at a pace and scale consistent with meeting net zero by 2050;
• The regulation would be designed to complement and leverage other federal and provincial regulations.

Cap-and-trade regulations will be subject to ongoing monitoring and regular reviews.  The government is currently undergoing public consultation to gather input for the development of draft regulations within the existing regulatory framework. It expects to publish these draft regulations for the oil and gas emissions cap in mid-2024, with their enforcement scheduled for 2025.