Published in the Financial Post.
Ottawa’s latest climate initiative – a hard cap on oil and gas emissions – is like using an excavator to plant flowers. It’s unnecessary, expensive and likely to do more harm than good. With more than 70 federal climate policies already in place, adding yet another layer of regulation is clearly unnecessary. And this one poses serious risks to Canada’s economy.
Despite having already imposed several climate policies on the oil and gas sector, the government doggedly plans to implement yet another: a sector-specific cap-and-trade system in which a fixed maximum number of emissions will be traded. The goal is to reduce 2030 emissions down to 35 percent below 2019 levels and then align the sector with economy-wide net-zero emissions by 2050.
Such a cap is redundant, inefficient, expensive and bad for productivity. It ought to be dropped. Instead of piling on “just one more plan,” the federal government should 1) calculate the full cost of Canada’s climate commitments, 2) evaluate which of the many existing policies work and which don’t, and 3) focus on broad-based, cross-sector solutions that actually reduce emissions and do so at lowest economic cost.
Canadian energy producers are not getting a free pass on emissions. Every province already has restrictions in place, including tough rules on methane and emissions from major facilities, particularly in the oilsands. Large-emitter plans have been in place for several years and provide a strong incentive to reduce emissions where possible while maintaining export competitiveness by giving emitters a balance of “free” allowances.
Why are oil and gas emissions still rising? Simple physics and economics. Production has increased to meet global demand, and while emissions per barrel have dropped significantly producing oil and gas does require energy. Companies need diesel fuel for remote operations and natural gas to generate heat and steam in the oil sands. Despite every incentive to cut emissions — from investor pressure to government mandates — scalable, cost-effective, non-emitting alternatives simply do not exist yet.
What to do about it? Economists prefer broad-based, market-oriented emissions solutions that provide incentives to cut emissions at the least economic cost. Treating some sectors differently than others undermines that principle. If it’s cheaper to cut elsewhere, the environment and the economy both win. A national “cap-and-trade” system might accomplish this, but jurisdictional realities and regional economic differences, among other things, have made that hard to implement. Many provincial systems do allow trading of emissions credits between economic sectors, however.
The lack of immediately implementable technologies to reduce emissions for oil and gas producers at scale means an emissions cap will essentially act as a production cap. If the federal government continues its fixation on short-term, sector-specific reductions, either less oil and gas will have to be produced or emissions will have to be captured and stored (using carbon capture, utilization, and storage, or CCUS).
The industry’s main CCUS solution — a $16.5-billion project operated by the six-firm Pathways Alliance — could reduce emissions by 22 megatonnes annually by 2030 without production falling. But competing producers in other countries don’t face similar requirements, so Canadian taxpayers would need to shoulder much of this burden through tax credits and other incentives. If the government grits its teeth and persists with its narrow focus on oil and gas, it will have to come up with taxpayer dollars to help CCUS get done.
Lower oil and gas production would be bad for Canada. We desperately need productivity-boosting investment. As my C.D. Howe Institute colleagues Bill Robson and Mawakina Bafale have explained, Canadian workers currently receive only 66 cents of new capital for every dollar received by the average OECD worker, and just 55 cents per dollar received by their US counterparts. Greater investment means more Canadian jobs and higher incomes. Viewed from that perspective, oil and gas is a jewel — one of our most productive sectors, as well as our greatest export by value. We need to export more oil and gas, not less, as Ottawa has in fact tacitly recognized with its backing of the fully operational Trans Mountain Pipeline expansion.
Climate policy should not be a game of Whac-A-Mole, targeting individual sectors with overlapping regulations. If we’re serious about both environmental protection and economic prosperity, we need to stop digging ourselves deeper into a regulatory hole. A better approach looks across all economic sectors to see where mitigation is cheapest at the margin and can be achieved without direct intervention by Ottawa. The federal government needs to understand that when it comes to climate policy, fewer but better policies could do more.
Charles DeLand is the Calgary-based associate director of research at the C.D. Howe Institute.
