Ottawa mulls new carbon tax system for oil and gas sector

The current system has received criticism for not charging some of Canada’s biggest emitters the full price of their carbon emissions

carbon tax oil and gas emissions pollution output-based pricing system

The federal government is pursuing two avenues that would increase the cost to oil and gas producers of their carbon emissions. 

In July, Environment Minister Steven Guilbeault released a discussion paper that proposes an industry-specific pricing regime to be layered on top of the output-based pricing system. The Liberal government argues that an additional price signal is needed to achieve its emissions cap for the sector. 

The current carbon tax system has received some criticism for failing to charge oil and gas producers their fair share for their emissions. Earlier this year, Corporate Knights reported that some of Canadas largest emitters were paying only a small fraction of the price on carbon emissions. The output-based pricing system (OBPS) is currently either levied directly on large industrial emitters or sets the standard for provinces that opt to have their own carbon price for industry. 

Even as it consults on an additional pricing model for the oil sector, Environment and Climate Change Canada is also reviewing the existing OBPS to determine whether greater stringency is required in terms of the percentage of a companys emissions that it covers. 

Ottawa has pledged to cap oil and gas emissions at current levels and then see them reduced by 42% below 2019 levels by 2030. The industry accounted for more than a quarter of Canada's greenhouse gas emissions in 2020 and has been the fastest-growing source since 2005. 

As many regions around the world face extreme heat and droughts this summer, Guilbeault argues that Canada must redouble its efforts to deal with the growing climate emergency.  

Last month, the government announced a plan to introduce either an oil-and-gas-specific carbon price or establish a cap-and-trade system for the industry that would provide more opportunity for trading emission rights. 

However, the Liberal government faces a determined opposition from the industry and its political supporters. Alex Pourbaix, CEO of Cenovus Energy Inc., warned that the proposed cap would force future production cuts in Canada at a time when the world is literally crying out for more oil and gas production. 

The oil industry executive made the comments on July 27 after his company – one of Canadas largest oilsands producers – reported record cash flow and net earnings of $2.4 billion in the second quarter. 

Pourbaix and other industry leaders are leveraging the current energy crisis resulting from Russias invasion of Ukraine to undermine Canadas long-term effort at meeting its international climate commitments. 

Guilbeault and his Liberal colleagues will have to maintain a disciplined approach, encouraging additional production to meet a short-term global supply crunch while pursuing longer-term policies to dramatically reduce emissions from the sector.  

The OBPS is one tool that is already in place and has been upheld by the Supreme Court of Canada. It levies a price on only a small percentage of greenhouse gases from large industrial facilities on the rationale that such a price provides an incentive for companies to reduce their GHGs while protecting their competitiveness. 

However, the Canadian Climate Institute concluded in an assessment last year that the current system produces a perverse long-term incentive.”  

They are explicitly rewarding the most emissions-intensive facilities in the country to not make the major investments needed to be prepared to compete in a carbon-constrained market, the institute said in its report.  

There is no way a new cap-and-trade system [for oil and gas] emerges.

-David Sawyer, Canadian Climate Institute economist 

The carbon price is already scheduled to increase each year to $170 in 2030 from $50 per tonne in 2022. The institutes report recommended that the government should gradually increase the stringency by imposing the levy on a greater proportion of an industrial polluters emissions over time.  

Canadian Climate Institute economist David Sawyer said a strengthened OBPS can provide much of the policy push needed for the industry to meet federal targets.  

He predicted that Ottawa would ratchet up the stringency of its benchmark in order to raise the actual cost of the levy and create greater incentives for deep reductions.  

There is no way a new cap-and-trade system [for oil and gas] emerges,Sawyer said in an email, arguing that such an approach would be far too cumbersome. 

The oil sands industry itself has issued a pathways to net zeroplan that pledges to cut emissions by 22 megatonnes a year by 2030 and then virtually eliminate emissions from direct operations by 2050. The plan relies heavily on industry efforts to capture CO2 from emission streams and store it underground – a hugely expensive and technically challenging undertaking. 

Alberta politicians and industry leaders argue that the Liberal governments climate goals are punishing the oil and gas sector and will force industry to curtail production.  

However, the federal government is expecting less emission reduction from oil and gas than from some other sectors. Its plan aims to reduce GHGs by 40% to 45% below 2005 levels nationally by 2030, with a 31% cut from the oil and gas industry. 

In its emission reduction plan released in March, Environment and Climate Change Canada projected that, even before the new pricing measures, the sector could be expected to cut emissions by 26% from 2005 levels by 2030.  

Those projections assume that Ottawa would have indeed tightened its output-based pricing system to cover an additional 2% of firmsemissions each year, and it would require provinces to meet that added stringency.  

The outlook also assumes that Canadas oil and gas production would increase by nearly 1.4 million barrels a day to 5.6 million – a generous assumption that many private forecasters do not share. And it assumes that industry will make significant investments in carbon capture technology, spurred by a federal tax credit and the companiesown net-zero plan. 

Guilbeault and his officials are now consulting with provinces, industry and other experts with regards to the best mix of policies that would yield the most economically efficient emissions reduction path. 

Contrary to the critics complaints, the Liberals have not singled out oil and gas for punitive treatment. The government has moved on a series of regulatory fronts – from carbon taxes to emissions standards for electricity generation to vehicle fuel efficiency standards – in order to meet its commitments under the Paris climate treaty. 

If the Liberals remain in office long enough, the next steps would be to make good on standards for electric vehicle sales, including a requirement for new car sales to be 100% zero-emissions by 2035. The Trudeau government has also pledged to set standards for a net-zero electricity system by 2035. 

Those goals are a long time away, but the government will have to introduce measures to get there over the next several years. 

The impacts of climate change are here and will only worsen. We still have time to avert catastrophic effects, but all countries and all industries must work to urgently speed the pace of emissions reductions and the transition off fossil fuels.

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