Advocacy

February 5, 2024

Official submission of the Business Council of Alberta in response to the Regulatory Framework for an Oil and Gas Sector Greenhouse Gas Emissions Cap

February 5, 2024

The Honourable Steven Guilbeault, P.C., M.P.
Minister of Environment and Climate Change
229 Wellington Street
Ottawa, Ontario, K1A 0A6

Dear Minister Guilbeault,

We are pleased to comment on the Ministry of Environment and Climate Change Canada’s (ECCC) recently released “Regulatory Framework for an Oil and Gas Sector Greenhouse Gas Emissions Cap” document.

The Business Council of Alberta (BCA) is a non-partisan, non-profit organization composed of the chief executives and leading entrepreneurs of Alberta’s largest enterprises. Our members represent the majority of Alberta’s private sector investment, job creation, exports, and research and development. We are dedicated to building a better and more prosperous Alberta within a strong Canada.

BCA is broadly supportive of the federal government’s goal to achieve net-zero emissions by 2050. However, we believe this is best accomplished through a robust and transparent price on carbon, whether through the federal Output-Based Pricing System (OBPS) or equivalent provincial instruments like Alberta’s Technology Innovation and Emissions Reduction Regulation (TIER) system. Bolstered by supplementary incentives to support investment in emissions reduction and the development and scaling of decarbonization technologies, this approach would be efficient, cost-effective, and sector- and technology-agnostic.

By contrast, the proposed Oil and Gas Sector Greenhouse Gas Emissions Cap (hereafter, “emissions cap”) represents another example of the federal government layering new climate policies on top of existing ones to accelerate progress on emissions reduction.  We fear that policies like this will be unnecessarily costly, harm economic growth, limit economic reconciliation opportunities for Indigenous Peoples, reduce tax revenues from all levels of government, eliminate jobs, stoke regional tensions, lead to years-long legal challenges and, ultimately, delay investment in decarbonization; exactly the opposite of our shared goal.

As such, the Business Council of Alberta strongly opposes the emissions cap in concept and cannot support it in any form.

In the spirit of providing suggestions for a course correction, the appendix to this letter contains a series of high-level policy concerns with the emissions cap as presently conceived; and offers several climate policy principles that ought to guide Canada’s return to a pragmatic approach to achieving net-zero by 2050.

BCA wishes to thank you and ECCC for the opportunity to submit comments during this consultation phase. We wish to work together collaboratively to find meaningful ways to reduce emissions while preserving sound climate policy principles, the well-being of our environment, and the prosperity of all Canadians. Our ask is that we continue to engage and find productive and pragmatic solutions.

Sincerely,

Adam Legge

President

Cc:  Hon. Jonathan Wilkinson, Minister of Energy and Natural Resources
Jamie Kippen, Chief of Staff, Environment and Climate Change
Claire Seaborn, Chief of Staff, Energy and Natural Resources
Kyle Harrietha, Deputy Chief of Staff, Energy and Natural Resources
Jean-Francois Tremblay, Deputy Minister of Environment and Climate Change
Michael Vandergrift, Deputy Minister of Energy and Natural Resources
Paul Halucha, Deputy Secretary to the Cabinet (Clean Growth)
Mollie Johnson, Deputy Secretary to the Cabinet (Plans and Consultations)

Appendix: Official submission of the Business Council of Alberta in response to the Regulatory Framework for an Oil and Gas Sector Greenhouse Gas Emissions Cap

High-level Policy Concerns

In response to ECCC’s discussion paper on the proposed oil and gas emissions cap, BCA has several high-level concerns, outlined below. The central theme of these concerns is that, ultimately, the evolution of federal climate policy has brought us to a point where it is acting counter to its intended goal: by repeatedly complicating the climate policy environment with new proposals like the emissions cap, it is deterring or delaying the very investment it is seeking to catalyze.

1. A sector-specific cap is inefficient, market-distorting, and reduces competitiveness

A tonne of carbon is a tonne of carbon. It doesn’t matter where emissions are reduced, just that they are. And yet, a sector-specific cap inherently treats those tonnes differently. In effect, it states that it’s more important to reduce emissions in the oil and gas sector than in other industries, even if the overall cost is higher. This distorts carbon markets, creates market inefficiencies, and reduces competitiveness in the following ways:

First, Canada already has a net zero 2050 target and a carbon pricing system that BCA and its members broadly support. All sectors will have to reduce their emissions to reach this economy-wide target. But the timing and pace of those reductions will necessarily vary across industries depending on how easily achievable and costly they are. That pace should be determined by the economics that come from an equally-applied carbon price within the widest carbon market possible. It should not be for governments to determine or enforce. As prominent economists Chris Ragan, Paul Rochon, Mark Jaccard and Trevor Tombe argue, carving out a sector-specific regulatory framework distorts carbon pricing and carbon markets and makes reducing emissions unnecessarily expensive. It does not result in any climate gains that couldn’t otherwise be achieved on the same timeframe through policy adjustments to existing carbon pricing frameworks.

Second, cap and trade systems only operate effectively when the markets they create are sufficiently large and have diverse participants. In the case of the oil and gas sector cap, too many participants within the market would be competing for credits trying to adopt similar technologies at similar costs. This reduces sector-wide cooperation on installing shared infrastructure like carbon capture and storage systems.

Furthermore, a cap and trade system limited to the oil and sector would be too small to work. Quebec’s cap and trade system, with its diverse industrial base, is only workable because its market includes the entire economy of California. That makes it highly unlikely that the proposed oil and gas emissions cap will create a robust, efficient trading market with such a small number of players. The result will be an increased probability of compliance being met by production cuts; and an erosion of industry-wide decarbonization collaborations.

Third, policies that divert resources inefficiently only serve to further magnify Canada’s significant productivity and competitiveness challenges—especially when an industrial carbon price backstop already exists and can be adjusted. Considering those challenges, actively choosing to target an industry that has significantly and consistently contributed the most to government taxes, GDP, and exports, not to mention outperformed the nation’s average labour productivity, will only further magnify these challenges. We can’t afford for the sector to become uncompetitive—especially with our closest competitors in the United States.

And what’s more, these concerns extend well beyond the oil and gas sector. An uncompetitive oil and gas sector will have significant spillover effects for businesses and workers across the entire economy. Our members in a broad range of sectors have been clear that an impacted oil and gas sector will limit their investment and economic activity in the country. Impaired oil and gas investment will negatively impact the construction and homebuilding; telecommunications; transportation and logistics; financial services; retail; and hospitality sectors across the country, but particularly in Alberta.

2. An emission cap undermines existing carbon pricing systems and carbon markets

Introducing a sector-specific emissions cap creates complicated interactions with existing climate policy, resulting in unpredictable, and often unintended or counterproductive, consequences.

Alberta’s TIER already establishes a carbon pricing framework that, with the right stringency and accompanying policy supports, will help to reduce emissions to net zero. By layering a sector-specific cap on top of TIER, the oil and gas sector loses the ability to know which policy will create the impetus for reducing emissions. If TIER is stringent enough to reduce emissions in the sector faster than the proposed emissions cap, then its predictable price signals and carbon market will drive emission reductions. If, however, the emissions cap is more stringent, then any emission reduction investment decisions predicated on the headline carbon price or the modeled resale price of TIER credits are put at risk; and the delivery of TIER-funded programs like the Alberta government’s proposed Alberta Carbon Capture Incentive Program and programs delivered by Emissions Reduction Alberta could be jeopardized.

Furthermore, Alberta’s TIER carbon market encourages investment in emissions reduction even outside the oil and gas sector. By reducing their own emissions, non-energy companies are able to generate credits under TIER that can then be sold to energy companies. That provides them with a revenue source to offset their own decarbonization investment costs. Layering a sector-specific emissions cap on top of this will impact the price signals in TIER’s carbon market by either: a) reducing or eliminating oil and gas sector participation in the TIER market; or b) siphoning carbon credits away from the lowest-cost abatement opportunities. In either case, the cap would deter investment in emissions reduction, creating the opposite result of what it is intended to accomplish.

Finally, TIER ensures that financial compliance contributions remain within Alberta where the money can be reinvested in local industrial carbon reductions. The federal emissions cap also proposes a similar decarbonization fund, but without guarantees that the contributed funds will stay within the originating province.

3. The 2030 reduction target will likely lead to production cuts

The intention behind the proposed emissions cap is to cap greenhouse gas (GHG) emissions, not production. However, meeting the 2030 emissions cap target of 35% to 38% below 2019 levels will, in all likelihood, lead to de facto production cuts.

The proposed cap allocates emissions allowances based on 2019 production levels. But as of 2022, production levels for natural gas and crude oil have increased by 10% and 4%, respectively. This increase is already left unaccounted for through the credit allocation proposed in the government’s discussion paper, never mind crude oil production that’s ramping up with the completion of the Trans Mountain Pipeline expansion and supply for future proposed LNG export projects.

When the cap takes effect, therefore, any emissions associated with marginal production increases since 2019 have to fit within a cap that’s predicated on those increases not having taken place. In other words, in order to be compliant with the proposed 2030 target, the sector is expected to run a personal best time in the 100-metre dash while starting the race an additional 10 meters behind the starting line.

On top of this, the cap will impact future Canadian production growth. Global demand for oil and gas may peak in the future, but it’s not going away. If the world wants to buy Canadian oil and gas, we should work to meet that demand, producing it at the lowest carbon intensity technically possible while remaining globally competitive. An emissions cap greatly reduces the possibility of Canada expanding, or even maintaining, its share of the global market. That demand will instead be met by suppliers outside of Canada who are very likely far less concerned about reducing emissions than Canadian producers, leading to no net positive impact on global GHG emissions. 

If those countries do not have the same degree of environmental stringency, the result would be the worst of both worlds: lost economic activity in Canada and higher global emissions. ECCC’s discussion paper does touch on the possibility of using internationally transferred mitigation outcomes (ITMOs) under Article 6 of the Paris Agreement, but these are not only insufficient to alleviate carbon leakage on their own, they are also highly unlikely to come into effect in the foreseeable future.

Furthermore, the notion that the proposed cap will affect emissions and not production becomes tenuous when it is considered alongside other policies that hinder the development of projects to reduce emissions in the oil and gas sector. In particular, major project review and permitting processes in this country are slow. This could potentially create a situation where a company will have to shut in production as their lowest-cost option to comply with the cap, rather than making a multi-year decarbonization investment decision that could pay dividends further down the road.

4. The cap has a disproportionate impact on Alberta and will contribute to a deterioration of cooperative federalism

While several provinces produce oil and natural gas in some quantity, a disproportionate amount of that production is located in Alberta. In fact, as of September, 86% of Canada’s crude oil production and 66% of its natural gas production came from Alberta.

Singling out a sector so concentrated in one province means that Alberta will face a disproportionate share of the proposed cap’s impact. The introduction of policy that disproportionately and negatively targets one region of the country is divisive and inconsistent, considering the federal government’s recent choice to exempt home heating oil from the carbon tax—a decision clearly made with Atlantic Canada in mind. Whereas one region is receiving a carrot, another is receiving the stick. These hyper-regionalized policy inconsistencies create political tensions that can easily be avoided with a more sector-agnostic approach to climate policy.

Moreover, the Supreme Court of Canada’s recent decision on the Impact Assessment Act suggests that such a specific sectoral and regionally focused policy may not be within the federal government’s constitutional authority, which will no doubt lead to a lengthy constitutional challenge between Alberta and the federal government. Regardless of the outcome, the interim uncertainty will grind any major decarbonization investment decisions in the sector to a halta result completely at odds with the objective of the cap in the first place. For the sake of timely decarbonization investment decisions in the oil and gas sector, and for ongoing legal clarity, the federal cabinet should submit a reference question on the regulation’s constitutionality to the Supreme Court at the earliest opportunity.

5. Indigenous reconciliation efforts will be compromised

Reconciliation has been, and will continue to be, an ongoing process. For many Indigenous Peoples, the positive relationships forged between the oil and gas industry and their communities have helped enhance local economic opportunities—often where they may not have otherwise existed. And, increasingly, Indigenous Peoples are becoming owners of oil and gas facilities.

The proposed emissions cap threatens these opportunities. Specifically, it runs counter to Article 3 of the United Nations Declaration on the Rights of Indigenous Peoples, which states that:

Indigenous peoples have the right to self-determination. By virtue of that right they freely determine their political status and freely pursue their economic, social and cultural development.

Indigenous peoples have the right to self-determination. By virtue of that right they freely determine their political status and freely pursue their economic, social and cultural development.

Canada has adopted legislation that puts UNDRIP into effect in this country. Having done so, it cannot then put conditions on the kind of development Indigenous communities pursue. The emissions cap does precisely that. Even as the federal and provincial governments are delivering, or planning to deliver, loan guarantee programs to help Indigenous Peoples to participate in and benefit from resource development, this proposed emissions cap threatens that development potential and limits where and how Indigenous communities can pursue their own economic development. 

Sound Climate Policy Principles

BCA is committed to promoting climate policy that can achieve net zero emissions economy-wide while promoting a competitive, prosperous Alberta within a united Canada. The last several years have seen governments introduce multiple climate policy tools that, through their layering, are undermining the integrity and simplicity of one of the federal government’s crowning achievements—the establishment of a national carbon price benchmark. The sector-specific emissions cap proposal is the latest example of this unnecessary and counterproductive layering.

To return to a sound climate policy framework nationwide, industrial climate policy should conform to the following principles:

  1. Lowest Possible Cost: Climate policy should seek to reduce emissions at the lowest cost possible. This requires an economy-wide, market-based approach (when possible) that applies price signals to all sources of emissions evenly with the requisite stringency to meet Canada’s 2050 net zero commitment. This will allow Canadian industry to reduce the lowest cost emissions first, while also providing time to develop decarbonization solutions for more expensive sources of emissions.

  2. Simplicity and Clarity: The oil and gas emissions cap adds another layer of policy on top of several recent major climate policy changes since the federal carbon pricing backstop was first introduced. Governments and businesses are both struggling to understand how these various policies interact, and the constantly shifting policy environment is slowing down decarbonization investment decisions. The government should trust the industrial carbon price backstop to work as intended—and adjust its levers as needed—rather than pancake several new climate policies on top of the original.

  3. Sector-Agnostic: GHG emissions contribute the exact same to climate change regardless of where they come from. A tonne produced by an oil and gas production facility is no different than a tonne produced by an auto manufacturing plant. As such, policymakers should refrain from picking sectoral winners and losers when it comes to reducing emissions. After all, every sector will have to contribute to a net zero economy by 2050 regardless of the pace of reductions in each one.

  4. Regional Fairness: Canada’s climate policy, like many other national policies, works best with cooperative federalism at its heart. To avoid stoking regional animosity and the unfair targeting of highly regionally concentrated sectors, industrial climate policy must apply equally across the entire country, no matter the source of emissions. While a disproportionate burden of emissions reduction will unavoidably fall on higher emitting provinces regardless of the path to net zero, this will reduce the cost relative to those imposed by a patchwork of policies that target heavily concentrated sectors at a higher cost than is necessary.

  5. Globally Competitive: Emissions from a given industry track closely with its ability to scale up to meet global demand for products. Rather than hindering this scale up, climate policy must account for global demand for Canadian industrial output. If it doesn’t, competitors will gladly fill the production—often without the same level of consideration for reducing production emissions exhibited in Canada. The result would be no net global emissions reductions, but a lot of wasted economic potential in Canada.

Concluding Remarks

In an ideal world, an emissions reduction strategy would achieve several goals simultaneously: reducing emissions, avoiding production cuts, enhancing competitiveness, growing prosperity, maintaining energy affordability, avoiding carbon leakage, and preventing spillover impacts on other industries. With a sector-specific emissions cap in place, however, there will be tradeoffs within that list, to the detriment of the Canadian economy, Canadian residents, and our global climate ambitions.

The Business Council of Alberta believes that introducing an oil and gas sector emissions cap is a misdirected turn away from the principles that ought to guide our industrial climate policy. The BCA strongly opposes the emissions cap and cannot support public policy such as this in any form. In our view, the OBPS or equivalent systems like TIER are sufficient to meet Canada’s climate objectives, provided they are sufficiently stringent and are supplemented with investment tax credits and other incentives.

BCA appreciates the chance to contribute to this consultation process with ECCC. We aim to work together collaboratively with ECCC and Alberta’s business community to simultaneously reduce emissions, foster environmental well-being, and advance Canadian prosperity. We ask for ongoing engagement to advance practical solutions.

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