The Challenge with Canada's Proposed Oil and Gas Emissions Cap
Nov 19, 2024
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Sander Duncanson, a Partner at Osler and an expert in Canadian business law and carbon policy, dives into Canada's proposed oil and gas emissions cap. He discusses the potential for market distortions and unintended consequences of the regulation. The duo addresses concerns about Canada's more stringent policies compared to the U.S., which may lead to investment flight. Lastly, the complexities of the regulatory framework and its impact on investment and competitiveness within the sector are also explored.
The proposed emissions cap for Canada's oil and gas sector could lead to market distortions and economic implications due to regulatory complexity.
Concerns about the likelihood of the emissions cap becoming law underscore fears of potential capital flight to less regulated jurisdictions like the U.S.
Deep dives
Snow Tires and Climate Perception
The discussion opens with a lighthearted reference to the recent snowfall in Calgary, highlighting the frequent issues of drivers lacking proper snow tires. This leads to a broader commentary on how misconceptions about climate change may lead individuals to underestimate the need for season-appropriate preparations. Despite a mild fall that led some to believe winter might be disappearing, the first snowfall serves as a reminder of seasonal changes still taking place. This illustrates the group’s concern over varying public perceptions regarding climate patterns and the importance of addressing the realities of changing weather.
Emissions Cap and Policy Disparity
A key focus is on the Canadian government's newly proposed emissions cap for the oil and gas industry, which contrasts sharply with energy policies in the United States. This divergence not only presents challenges for Canada’s energy competitiveness but raises the risk of capital flight—a phenomenon where businesses relocate to jurisdictions with less stringent regulations. The emissions cap’s 60-day consultation period is also scrutinized for its brevity, suggesting a need for more thorough public engagement. With the intertwined nature of the Canadian and U.S. energy markets, such policy disparities could have significant economic implications.
Regulatory Process and Market Skepticism
Concerns are raised regarding the process for the emissions cap to become a final law, particularly the skepticism around its potential implementation. The regulation's release coinciding with significant political events, like the U.S. election, might have overshadowed its market impact, as evidenced by the flat response in oil and gas equities. Additionally, the regulation's approval process bypassing Parliament could lead to faster implementation but also increases uncertainty. Critics question whether the government’s proposed limitations account for the far-reaching economic consequences this could have on Canada’s energy sector.
Investment Climate and Competitive Concerns
The complex landscape of Canadian carbon regulations is viewed as a barrier to attracting new investments, complicating decisions for energy producers amidst strict policies. The layering of emissions regulations creates confusion among investors who are wary of unpredictable costs associated with compliance. With projections indicating that existing policies are already achieving emissions reductions, there’s concern that new regulations may simply add bureaucracy without substantial environmental benefits. Experts advocate for a comprehensive review of current policies to streamline regulations and enhance Canada’s appeal as an investment destination.
On November 9th, 2024, the Canadian Government published a proposed policy to cap oil and gas sector emissions, known as Canada Gazette Part 1. While the final targets will not be set until 2026, the Government estimates that this policy, in conjunction with other policies, will reduce GHG emissions from the oil and gas sector by 35% in the early 2030s compared to 2019. When flexible compliance options are considered, actual emissions are targeted to decline by 19% from 2019 levels.
Peter, Jackie and Sander discuss their concerns with the proposed policy. Topics covered include:
The low likelihood of the regulation becoming final law.
The potential for the policy to create winners and losers, market distortions, and other unintended consequences.
The complexity of Canada’s regulatory framework which reduces investment.
Concerns that Canada and the United States are moving in opposite directions regarding carbon policy. Canada is increasing stringency, while the US is expected to reduce its carbon policy, thereby creating the threat of investment moving from Canada to the US (carbon leakage).
The options to provide feedback on the proposed policy are available until January 8th, 2025.
Consultation feedback can be provided within a series of online forms in the Gazette, Part 1 link above, by January 8th, 2025. Another option for feedback is to submit a “Notice of Objection” by the same date. More information on this option can be found under the heading “PROPOSED REGULATORY TEXT” in the Gazette.