Canada has ambitious greenhouse gas (GHG) emissions reduction targets for 2030 (40-45% below 2005 levels) and net-zero by 2050. To meet these national goals, our oil and gas sector, which produces 27% of Canada’s national emissions, recognizes it must make significant GHG cuts.
But we also want Canada’s sector to continue creating value and competing in world markets, otherwise production will move to less environmentally friendly countries and global emissions will go up—this is called carbon leakage.
Accomplishing these goals simultaneously is no easy task. Public policy must play a role in unlocking the tens of billions of dollars needed to build the decarbonization infrastructure necessary. Since signing the Paris Accord in 2015, Canada has introduced meaningful policies to help encourage these major investments—and yet, private decarbonization investment isn’t keeping pace with Canada’s ambitious targets.
Long-term policy uncertainty is partially to blame.
Conditions required to encourage investment in oil and gas sector decarbonization
Before diving into Canada’s policy environment, let’s look at the necessary conditions to encourage private investment in energy sector decarbonization.
First, there needs to be a solid business case in place. Businesses must show their shareholders that major investments in emissions reduction justify the billions of dollars they can cost. There must be a return-on-investment (ROI).
Second, they must show that the ROI on one decarbonization pathway is better than the ROI from another pathway—or, alternatively, why investing to cut GHGs generates better returns than investing in more production or not investing at all.
Finally, the business case must be proven over the long term. Existing oil sands assets, for example, will continue producing for decades; solutions to decarbonize these assets must also last for decades, and the operational costs of decarbonization infrastructure must be economically justified.
Businesses making multi billion-dollar investment plans require time and a clear investment horizon to model how they should spend their money. They need the right policies in place for enough time to know how to invest for the future.
Has policy been stable?
In short, no—especially in the last couple years. Several policy changes have undermined the sector’s ability to model long-term capital investment decisions, grouped here into two categories:
1. GHG reduction targets, and to whom they apply, have changed significantly.
In 2015, Canada had an economy-wide 30% emissions reduction target below 2005 levels for 2030. However, between December 2020 and April 2021, a new climate plan strengthened 2030 targets (32-40%), a federal budget operationalized 36% cuts, and yet another new target established 40-45% reduction ambitions. And less than a year after that, economy-wide GHG reduction targets transformed into a sector-specific emissions cap.
These changes complicate the modeling assumptions businesses use to determine how to decarbonize. With each target change—even if intended to speed up investments—businesses have to go back to the drawing board and remodel their long-term investment decisions, delaying meaningful climate action.
2. Several targeted regulatory measures have been introduced and/or changed with little warning.
Departing from their original preference for economy-wide carbon pricing mechanisms, several federal measures such as the Clean Fuel Regulations, the Clean Electricity Standard (CES), and the Oil and Gas Sector Emissions Cap have either come into force or are under development. And what’s more, the final version of the Clean Fuel Regulations eliminated an important source of sector-anticipated revenue generation without warning, and significant questions remain about how the sector cap and CES will impact the sector.
While these policies do incentivize decarbonization, their complexity and targeted nature impact the modeling used to inform which decarbonization pathways are most efficient and best suited. This in turn changes investment timelines and can lead to companies pursuing short-term actions like buying compliance offsets to meet federal targets rather than investing in the long-term, transformational decarbonization of the sector itself.
Conclusion
When policies change, fundamental economic assumptions change as well; and businesses must reassess their investment options. Net-zero modeling such as that conducted by the Pathways Alliance can take years to complete—especially when plans involve projects costing multiple billions of dollars and spanning multiple decades. Policy instability can send these kinds of plans back to the drawing board.
To their credit, the federal government and the energy sector have worked collaboratively to craft several policies that deliver the long-term, efficient, economy-wide price signals and targeted supports necessary to create investment certainty. These include a predictable carbon price with competitiveness protections, a carbon capture investment tax credit, and a net zero accelerator initiative.
With some adjustment to improve long-term certainty, these policies can provide a solid foundation for unlocking decarbonization investment. Muddying the waters by continually changing targets and layering new regulations on top of existing ones is counterproductive to the overarching goal of significantly reducing economy-wide emissions.
It is time for the federal government to trust their own policy creation processes and give the carbon pricing and targeted investment support policies the breathing room necessary to do their job.
Dylan Kelso, Policy Analyst