Emissions Cap or Economic Trap? Unpacking Canada’s New Oil & Gas Emissions Cap
In its most recent regulatory push, Canada's federal government unveiled draft regulations on November 4, 2024 aimed at capping greenhouse gas (“GHG”) emissions in the oil and gas sector. The proposed Oil and Gas Sector Greenhouse Gas Emissions Cap Regulations and Regulations Amending the Output-Based Pricing System Regulations (the “Regulations”) target a 35% emissions reduction below 2019 levels by 2030. This move marks a significant federal intervention into one of Canada’s most crucial industries, and it builds on an extensive federal framework that already includes a national carbon tax, clean fuel regulations, and methane emission reductions.
These measures come with substantial constitutional and operational questions, with Alberta positioned to lead challenges against federal encroachment into what it sees as a provincially governed domain of natural resource management.
The public consultation period is open from November 9, 2024, to January 8, 2025, allowing stakeholders to provide feedback before finalization.
OVERVIEW OF THE REGULATIONS
The proposed Regulations aim to cap emissions in the oil and gas sector by introducing strict GHG reporting and compliance thresholds. These Regulations outline a tiered compliance framework that introduces reporting, verification, and unit remittance requirements for facilities and operators meeting specific thresholds.
Classification of Covered Facilities and Covered Operators
Beginning in 2026, facilities emitting over 10,000 tonnes of CO₂ equivalent annually are required to register with the Department of Environment and Climate Change Canada (“ECCC”), submit comprehensive annual emissions reports, and undergo independent third-party verification of its emissions data. This reporting threshold applies broadly across the oil and gas sector, monitoring GHG emissions from facilities with significant outputs.
In addition to the emissions-based reporting thresholds, under the Regulations, any operator producing at or above an annual threshold of 365,000 barrels of oil equivalent is classified as a “covered operator.” Once classified, operators are subject to remittance obligations under the emissions cap framework. Once classified, a covered operator remains a covered operator until its production falls below half of this threshold for four consecutive years. Covered operators are subject to further compliance and remittance obligations under the cap framework, distinguishing them from facilities that only meet the reporting threshold.
Reporting, Verification and Remittance Obligations
The compliance structure follows a three-year cycle, beginning with the first compliance period in 2030. Covered operators must remit compliance units—which are a mix of emission allowances, Canadian offset credits, or decarbonization units— for every tonne of GHG emissions that exceed their designated cap.
By January 31 of the second year following each compliance period, covered operators must submit compliance units corresponding to their cumulative emissions. Interim remittance obligations also apply, requiring operators to remit compliance units for 30% of their GHG emissions by January 31 following each of the first two years within a compliance period.
Notably, a minimum of 80% of compliance units must come from government-issued emissions allowances, with the remaining 20% permissible through Canadian offset credits or contributions to a Decarbonization Fund. The ECCC will establish the infrastructure for the cap-and-trade system, from registration to remittance, in tandem with proposed provincial agreements for offset credit cross-recognition.
Offset Credits and Cross-Recognition
Covered operators may also remit Canadian offset credits that comply with the Federal Canadian Greenhouse Gas Offset Credit System Regulations. These credits are recognized as valid under the Regulations emissions cap framework, though their availability is limited to 20% of a covered operator’s total compliance units.
To support provincial alignment, the Regulations purport that the ECCC will work with provincial governments to explore cross-recognition of provincial offset credits. This involves establishing agreements that authorize the use of provincial carbon credits under the federal emissions cap and publishing a list of eligible provincial carbon pricing systems for cross-recognition.
Decarbonization Fund
In addition to emission allowances, covered operators will have the option to meet up to 20% of their compliance obligations by making contributions to a decarbonation program (“Decarbonization Fund”). This Decarbonization Fund allows regulated entities to contribute financially in lieu of direct emissions reductions. The price per fund unit is set to reflect the estimated cost of allowances needed for the sector to meet its emissions targets, projected to be approximately $50 per tonne of CO₂ equivalent by 2030. Proceeds from this Decarbonization Fund are earmarked to support decarbonization initiatives within the oil and gas sector, such as projects like carbon capture and storage.
The Regulations rely on the Canadian Environmental Protection Act (“CEPA”) to justify federal intervention in a traditionally provincial domain—natural resource management. Section 93 of CEPA provides the authority to make regulations with respect to substances that are specified on the list of toxic substances in Schedule 1 - the GHGs covered by the proposed Regulations.
Key Timelines and Compliance Requirements
2025: Initial registration for operators, with reporting requirements starting in 2026.
2026: Annual reporting and verification starts for facilities emitting over 10,000 tonnes of CO₂ equivalent.
2029: Distribution of emissions allowances starts for the 2030 compliance year.
2030: First compliance period begins, requiring covered operators to meet emissions cap requirements.
2032: January 31 marks the first remittance deadline for the 2030 compliance period.
The emissions cap itself is set at 73% of a facility’s reported GHG emissions for the year 2026, aiming for an industry-wide reduction target. Facilities surpassing this cap are mandated to purchase emissions allowances.
Considerations for Alberta and the Constitutionality of the Regulations
Alberta stands to be significantly affected by these proposed regulations mandates. The regulations represent a robust exercise of federal authority under CEPA. However, the extent to which federal powers can intrude into areas traditionally governed by provinces—such as resource management and emissions tied to production—raises questions of constitutional validity. Alberta, with its significant stake in the oil and gas industry, has already voiced concerns over this federal intrusion. Premier Danielle Smith said her government will seek to launch a legal challenge against the regulations “as soon as possible,” and use the Alberta Sovereignty within the United Canada Act to shield the province from the proposed rules. Legal challenges are likely to arise, particularly on whether the federal government has overstepped its bounds.
The regulations impose a high degree of compliance on operators, from strict reporting and verification requirements to penalties for excess emissions. Many smaller operators may find these financial and operational burdens challenging, potentially leading to a competitive disadvantage relative to larger firms. Alberta’s response, likely to include formal opposition and potential legal action, underscores the broader and continuing debate around federal-provincial power dynamics.
The federal government’s own analysis acknowledges that the proposed Regulations may have noticeable impacts on employment and wages in oil and gas-producing regions. In a baseline scenario—where the regulations are not enacted—labour expenditure in sectors affected by the cap is projected to grow by 55% between 2019 and 2030-2032. Under the regulatory scenario, however, this growth is estimated to be slightly lower, at 53%. This 1.6% reduction in labor expenditure equates to a decrease in expected employment income and potentially reduced wages or job availability as a result of decreased production demand. While the government suggests that new employment opportunities could emerge from investments in decarbonization projects, such as carbon capture, utilization, and storage (CCUS), these projected jobs are speculative.
Déjà vu?
The Regulations represent another part of a broader suite of federal policies aimed at reducing GHG emissions across multiple sectors. In addition to the proposed emissions cap under the Regulations, other significant measures include a (i) mandatory reduction in methane emissions, (ii) a national carbon pricing mechanism, and (iii) clean fuel standards.
Mandatory 75% Reduction in Methane Emissions by 2030: In December 2023, ECCC released draft regulations aimed at achieving a 75% reduction in methane emissions from the oil and gas sector by 2030, relative to 2012 levels. These regulations were open for public consultation until February 14, 2024, with final regulations expected to be published in late 2024.
National Carbon Pricing Mechanism: The Greenhouse Gas Pollution Pricing Act, (“GGPPA”) implemented in 2019, mandated a national carbon pricing system. The GGPPA requires provinces and territories to establish carbon pricing schemes that meet federal standards. Where these standards are unmet, the federal backstop applies, setting a carbon price currently at CAD $65 per tonne in 2023 and rising to $170 per tonne by 2030. In References re Greenhouse Gas Pollution Pricing Act (2021 SCC 11), the Supreme Court of Canada upheld the GGPPA’s constitutionality.
Clean Fuel Regulations: The Clean Fuel Regulations, enacted in 2022 under CEPA, require fuel suppliers to gradually reduce the carbon intensity of fuels used in transportation, buildings, and industry. This is achieved by mandating lower-emission fuels, encouraging biofuel production, and supporting technologies to reduce carbon intensity across sectors.
Closing Thoughts
The proposed Regulations are yet another chapter in the ongoing clash between Ottawa and Alberta, and opens another door to legal, economic, and constitutional questions. The overlapping federal measures—carbon pricing, methane reduction mandates, and clean fuel standards—already create a challenging regulatory landscape for the oil and gas industry. The proposed Regulations are likely to face constitutional challenges as they appear to interfere with provincial authority over primary production, despite claims that they do not cap production.
With Alberta and other energy-rich provinces facing a disproportionate impact, the Regulations introduce another debate over federal-provincial jurisdiction and the role of government in economic intervention. Alberta’s intent to challenge these regulations signals that the legal landscape surrounding environmental policy is far from settled. As stakeholders await the outcomes of these challenges and with a 2025 federal election on the horizon, the uncertainty may pose challenges for long-term planning and investment in the oil and gas sector.
For inquiries regarding the Regulations and their implications, please reach out to Blue Rock Law. If you need guidance on ESG-related issues, contact Equipois:ability advisory (dgaryk@equipoisability.com).