Calgary Chamber submission on the proposed Regulatory Framework for an Oil and Gas Sector Greenhouse Gas Emissions Cap

Calgary Chamber of Commerce submission regarding the proposed Regulatory Framework for an Oil and Gas Sector Greenhouse Gas Emissions Cap

The Calgary Chamber of Commerce welcomes the opportunity to comment on the federal government’s proposed Regulatory Framework for an Oil and Gas Sector Greenhouse Gas Emissions Cap, recognizing climate policy is integral role in emissions reduction and economic growth.  

After consultation with members across economic sectors including traditional energy, aviation, agriculture, telecommunications, finance, petrochemicals, electricity, clean technology, and others, the Calgary Chamber contends that the emissions cap, as drafted, imposes untenable financial and regulatory consequences on industry. Businesses have strongly advised the proposed regulations be withdrawn, as they do not adequately consider the current policy landscape, Canada’s economic competitiveness, and our responsibility to safeguard energy security while reducing emissions both domestically and internationally. Instead, we strongly recommend the use of existing policies and incentives to meet the climate and energy needs of the country for today, and for the future.

Policy efficiency & effectiveness

As drafted, the proposed emission cap is inefficient, punitive and overly prescriptive, leading to higher cost abatement and discouraging investment. This approach would result in monumental economic dislocation – regionally and nationally, without meaningfully decreasing global emissions.

Existing tools are working but take time to demonstrate full efficacy.

Effective policy must be equitable, flexible, efficient and sector-agnostic to incent investment. Existing policy, such as Output-Based Pricing Systems (OBPS) and provincial equivalents, is already in place and has proven effective at encouraging emissions reductions across industries. In fact, significant progress has been made under the current systems, with emissions for the conventional oil and natural gas sectors falling 27 per cent and 22 per cent, respectively, between 2012 and 2021, and current analysis is forecasting an absolute emissions decline from the oil sands sooner than anticipated. Additionally, other major sectors have seen year-over-year absolute emissions reductions, highlighted by a 56 per cent decrease in the electricity sector, a 10 per cent decrease in the waste sector and a 4 per cent decrease in the transportation sector, since 2005.

The current suite of climate policies is on track to further reduce emissions, however sufficient time is required to demonstrate full efficacy given the long-term nature of major infrastructure projects. Under the existing policy landscape – and accounting for all federal, provincial and territorial measures announced up to September 2019 – a report by the federal government concluded that initiatives outlined in A Healthy Environment and a Healthy Economy (2020) will allow Canada to exceed its 2030 Paris Agreement target. However, despite modeling indicating emissions goals are on track, the government has continued to layer policies that undermine existing carbon pricing systems, creating uncertainty for many industries looking to invest in Canada.

Clarity on interactions with current provincial and federal policy is needed.

We recommend the federal government undertake an economy-wide analysis on the current policy landscape – federally and provincially – to clarify the need for an emissions cap and how a cap-and-trade system would generate incremental environmental benefits. The analysis should also include a comprehensive review of how existing provincial and federal policies would interact with the proposed emissions cap. This analysis must include industry participants and provide clear evidence that the current landscape is incapable or insufficient to achieve similar emissions reductions at a lower cost of abatement.

Undermining collaboration

The emissions cap creates undue and counterproductive competition between companies, rather than promoting collaboration to innovate and decarbonize.

Canada’s oil and natural gas sector is in a period of unprecedented collaboration. Decarbonization project and initiatives, including the Pathways Alliance, Avatar Innovations, CDL-Rockies and countless others, have the collective potential to decarbonize Canada’s energy sector and the broader economy at an unmatched scale as they share research and pool resources. The capital-intensive nature of innovation means companies pooling resources allows for accelerated investments in innovation.

The sector specific cap-and-trade system, as proposed, would run counter to these initiatives by undermining existing collaboration. Instead, covered facilities would be required to focus on individual, rather than collective, operations to ensure they receive adequate allowances to remain in compliance. As such, the emissions cap may fracture existing collaboration in favour of competition, slowing decarbonization efforts given companies would be disincentivized to share technology if they are competing for space under the emissions cap.

The government should focus on policies that provide incentives for collaboration and promote collective research solutions in hard to abate sectors – including the proposed Investment Tax Credit and increasing funding in the Canada Growth Fund. The solutions to decreasing emissions will only be found through companies working together. It therefore behooves the government to ensure policies put forward support collaboration, not competition.

Disruption of carbon markets

Sector-specific carbon markets are ineffective and undermine existing carbon policy.

Carbon markets drive down emissions while spurring innovative economic opportunities. To be successful, carbon markets must have strong liquidity with participants actively trading in the market. However, targeting emissions from one sector – and limiting the ability to trade credits outside the sector – means there would be very few participants in the market, and therefore very little opportunities to trade. As such, to remain in compliance, companies would be required to cap production given there would be limited opportunities to trade or purchase credits. The importance of a liquid market is evident in Quebec, where their cap-and-trade system, despite being economy-wide, still requires the participation of California in order to be a large enough carbon market to effectively drive down emissions.

Consultation with businesses not covered by the proposed emissions cap clearly indicated the negative implications would be far-reaching, as it would create misalignment between carbon markets and uncertainty between industries on carbon credits disincentivize further investments in innovation economy wide. For example, the telecommunications sector is working jointly with energy, mining, agriculture and forestry to reduce global emissions by advancing technology that increases efficiency, generates clean energy and utilizes carbon sinks. These projects lower emissions directly and generate credits for businesses to sell and trade. Isolating the oil and gas sector would decrease the incentive to establish strategic partnerships by incentivizing competition rather than collaboration to reduce emissions, inhibiting the sharing of decarbonizing technologies.

As such, the proposed cap-and-trade system generates significant offset price uncertainty given the price set under a closed system would minimize the number of buyers leading to price volatility and uncertainty. This directly contradicts the federal Greenhouse Gas Offset Credit System, and would render existing provincial credit systems, including Alberta’s Technology Innovation and Emissions Reduction (TIER) Regulation, which together with other Alberta industrial pricing programs, has reinvested billions since 2009 in decarbonization projects, null and void. Rather, having an economy-wide system ensures total emissions reduction is prioritized, and allows the most immediate and economic reductions to take place first while ensuring the more expensive and long-term reductions be resolved prior to 2050.

Rising costs for Canadians

Rising costs of energy will increase the prices of food, fuel and transportation, ultimately making life less affordable for Canadians.

Additional compliance costs and possible production cuts as a result of the emissions cap would increase the price to produce and consume energy, at a time when the country – and the world – is grappling with high inflation and record energy costs. Higher energy costs impact sectors beyond oil and gas, including feedstock for petrochemical products, aviation fuel and agriculture and agri-food production, which require low-cost energy to produce essential goods and services. For example, natural gas accounts for approximately 80 per cent of the cost to produce fertilizer. Raising input costs would limit competitiveness, but also increase costs for Canadians. Ensuring Canadians have continued access to affordable, sustainably sourced energy must be a priority as we move forward with decarbonization policies.

Impact to government revenues

Governments rely on revenue from energy resources to fund public services.

The economic impact of the proposed emissions cap would not only affect Canadians directly through higher energy and input costs but would also greatly impact government revenues. For instance, in some provinces, a $1.00 change in oil prices has the potential to impact revenue by approximately $630 million. Therefore, lower prices for Canadian products as a result of higher production costs would lead to a loss of revenue that is used to fund education, health care, infrastructure and social services. It would also impact the valuation of the Trans Mountain Pipeline, as buyers of the asset need assurances the volumes will be produced to fill the pipe. Any risk that it will not be full will be reflected in the purchase price when the government goes to the market to sell the asset. At a time when government funding is necessary to support a growing population and those most impacted by inflation, essential services are necessary to maintain the high standard of Canadian living.

Stifling innovation increases emissions

Uncertain carbon policy makes it harder for industry to invest in emissions reduction technology.

The emissions cap, as proposed, would negatively impact the industry’s ability to reach net-zero by 2050 by discouraging investment in decarbonization technologies in Canada that need to happen today. With limited certainty on whether facilities will be permitted allowances under the emissions cap, companies will not be able to invest in decarbonization of those facilities. For instance, no investments will be made in CCUS until companies have complete certainty that their facilities will be allowed to operate under the cap, delaying the allocation of capital to innovation for several years. Initiatives that will be put on hold include investments in CCUS projects, leak detection technologies, and renewable power generation opportunities, among others, that are reducing the emissions profile of the industry.

Taken more broadly, diverting investments away from Canada’s oil and gas industry would also impact other sectors’ ability to decarbonize, as many are reliant on the technologies and projects developed and stewarded by oil and gas companies. This would pose a significant threat to Canada’s progress, as Canada’s energy sector remains the largest investor in clean technology in the country.

Further, the proposed emissions cap may significantly change the economic modelling and regulatory landscape which may divert investments elsewhere. Many companies use existing carbon pricing to forecast the economics of future emissions reduction projects, which, in turn, supports capital attraction and investment. These projects may be left stranded should the regulatory landscape change with the adoption of the emissions cap, leading to delays in further emissions reductions.

Carbon leakage

Other jurisdictions with higher emissions would displace Canadian energy.

The layering of Canadian emissions policies, including the proposed emissions cap and Clean Electricity Regulations, is causing capital flight to other jurisdictions, and as a result, carbon leakage. This is evident in jurisdictions such as the United States where they have sought to incent, rather than penalize, emissions reductions through the Inflation Reduction Act. As a result, 713 projects worth over $101 billion announced since the IRA was enacted. Many of these projects would be well-suited to reduce Canadian emissions if provided with the right policy environment and financial incentives.

Given the importance of environmental stewardship and leading emissions standards of Canadian energy production, the carbon leakage generated by investments going elsewhere is concerning. According to the Canada Energy Regulator, Canadian energy investment is increasingly impacted by environmental considerations – including net-zero emissions policies. Therefore, in addition to more competitive tax incentives in other regions, non-price factors including public policy are becoming more important in determining future investment and production trends in Canada’s energy sector. According to a 2021 survey, no Canadian jurisdictions were seen as top 10 investment locations for oil and gas exploration as a result of uncertainty over environmental regulations. This does not signal that a demand for oil and gas is diminished, rather other jurisdictions, including those with higher emissions profiles, are attracting the capital to produce and supply the world with energy products. It would also cede greater market share to the U.S., which is currently producing over 13 million barrels of oil per day.

Further, the criminal nature of the emissions cap under the cap-and-trade system undermines the risk tolerance required to invest innovative emissions reductions technology and adds an untenable layer of risk for new projects. Having prosecutorial enforcement under the Canadian Environmental Protection Act, 1999 (CEPA) proposes unfair liability on companies as they strive to reduce emissions under unclear assumptions outlined by the federal government. Using blunt tools discourages innovation where nascent technologies are unable to predict exact reduction outcomes. Ultimately, proponents may choose to invest in other jurisdictions, particularly as this raises extreme concerns about the precedent of using criminal penalties for future federal policies in Canada.

Detrimental impacts to energy security

Canada is the largest supplier of energy to the U.S., supplying 61% of crude oil imports in 2021 and 98% of natural gas imports. Despite the communicated intent, imposing a sector-specific cap-and-trade policy, the government has proposed a system that, by its very nature, sets a limit on production, undermining the ability of the provinces to regulate and develop their resources. This would directly inhibit the ability of Canadian oil and gas producers to safeguard national and continental energy security, including the supply of oil sands crude into the U.S. Gulf Coast refining complex.

Refineries in Ontario, Quebec, Western Canada and the U.S. rely on Canadian resources.

According to federal data, refineries in Western Canada, Ontario, Quebec and the U.S. Midwest depend on the supply of approximately 2.9 MMB/d. A disruption in supply due to production curtailments as a result of the emissions cap would create a refined product shortage in these regions. This shortage would be filled by other jurisdictions with less environmental stewardship, resulting in not only a financial loss to Canada, but also increased global emissions. Moreover, given most natural gas in Eastern Canada is supplied by Western producers, the supply of natural gas to Eastern provinces would be heavily impacted should production be curtailed as a result of the proposed emissions cap, leaving Eastern Canadian consumers vulnerable to supply shortages. This may result in higher energy prices or limited product altogether. In addition to higher energy costs, overseas markets have a strong interest in Canadian LNG to displace higher emitting fuels such as coal. Canada has an obligation to support the energy security of our allies and reduce global emissions where able.

Feasibility

Government has not provided timely and adequate support to advance decarbonization projects.

Within the proposed framework, technically feasible emissions reductions are outlined by Environment and Climate Change Canada. After consultation with members, it is clear there are flawed assumptions within this scenario that must be addressed. The assumption that all proposed or contemplated decarbonization projects move forward is unrealistic; many projects will only move forward if they can attract capital investment, backed by sufficient financial support and a clear regulatory pathway. It’s also important to note that at least 50 per cent of the technologies needed to achieve the climate targets have yet to be proven as commercially viable. To date, the government has been unable to provide adequate support and certainty in a timely manner to accommodate the needs of industry.

Impact to Indigenous communities

The energy sector is the largest employer of Indigenous peoples in Canada. Currently, 7.4 per cent of the sector’s workforce identify as Indigenous, more than twice the national average. Moving forward with the emissions cap and leading to a drop in production would have a direct impact on the employment opportunities currently available to Indigenous peoples, as the emissions cap would greatly inhibit Indigenous communities’ ability to participate in energy projects, such as oil and gas production, LNG or CCUS.

This is particularly concerning when the oil and gas sector is actively investing in partnership opportunities with communities and the federal government is looking to advance meaningful reconciliation. In fact, in many cases, equity partnerships have been struck between communities and industry – a recent example being the purchase by Athabasca Indigenous Investments to purchase a 12 per cent stake in seven different pipelines owned by Enbridge. Should the emissions cap render those projects uneconomical, those communities’ opportunities for economic reconciliation would be stymied. Moreover, jobs, including both existing jobs and future jobs associated with decarbonization projects, are at stake – particularly given few, if any, other industries would be able to displace these lost employment opportunities.

Recommendations

Withdraw the proposed emissions cap to allow the broad-based commercial carbon pricing and the provincial Output-based Pricing Systems and equivalents to effectively reduce emissions.
Advance and bolster further investment in decarbonization technologies, including Carbon Capture, Utilization and Storage through legislating the proposed Investment Tax Credits and increasing funding to the Canada Growth Fund to support the development of Carbon Contracts for Differences.
Engage in further consultation with all sectors of the Canadian economy to understand the social, financial and regulatory impacts of the proposed emissions cap on offset credit markets and determine alternative ways to efficiently lower emissions.

By actioning the recommendations outlined in this submission, the intent and environmental benefits of the emissions cap can be sustained, while minimizing the economic impact to business and consumers. Ensuring regulations are efficient and effective by balancing emissions reduction with supporting the success of Alberta businesses is critical to decarbonizing our economy.

Thank you for considering our submission. The Calgary Chamber looks forward to continuing to work collaboratively with you and your team.

February 6 2024