Canada Does Not Need an Upstream Oil and Gas Emissions Cap

From: Kate Koplovich
To: Energy and Natural Resources Minister Tim Hodgson
Date: November 26, 2025
Re: Canada Does Not Need an Upstream Oil and Gas Emissions Cap

The federal government released a Climate Competitiveness Strategy as part of Budget 2025 that clings to an upstream oil and gas emissions cap whose costs outweigh its relatively small and uncertain environmental benefits.

The proposed cap regulation is based on scenario modelling from the Canada Energy Regulator (CER) Energy Futures 2023 report. And a closer look at the modelling shows the emissions cap is not even required to achieve significant emissions reductions in the oil and gas sector.

Beyond this, the emissions cap singles out one of Canada’s most prosperous industries at a time when growing the economy has never been more important. It also duplicates existing federal and provincial emissions cap and trade systems.

The draft regulation presents impacts between years 2030 and 2032, which is only part of the story. The regulation and its modelling aim to reach net-zero by 2050, and the data shows existing policies are already driving emissions down. How important then is the cap relative to the economic damage it could cause?

Environment and Climate Change Canada’s used the 2023 energy future report’s Canada Net-Zero (CNZ) scenario to set the emissions cap level – the total emissions allowances provided by the government annually – and the legal upper bound, which sets the total allowable emissions plus allowable compliance credits. The CER report contains three scenarios, but the two most relevant for this analysis are the Current Policy Measures (CPM) and the Canada Net-Zero (CNZ).

The CPM scenario does not include the emissions cap, the Clean Electricity Regulations, or other unimplemented climate policies like the controversial zero-emissions vehicle mandate. The CNZ scenario does include all those policies and forces the model to achieve net-zero by 2050. Because the CPM scenario shows what happens without the cap, it provides a baseline to judge its effects and other unimplemented policies.

The CPM scenario shows the oil and gas sector's emissions decline by 30 metric tonnes by 2035 and 40MT by 2050 from 2021. These reductions bring emissions 20MT below the sector's 2005 levels.

Crucially, this decline occurs even as oil and natural gas production increases from 2021 levels to almost 6.5 million barrels of oil and 511 million cubic metres of natural gas per day by 2035 and 6.3 million barrels and 607 million cubic metres per day by 2050. The CER's model proves that decoupling emissions from production is already happening under the current policy framework.

The CNZ scenario, which includes the cap, forces oil and natural gas production down to 4.1 million barrels and 310 million cubic metres per day by 2050. In 2050, this is a loss of 2.2 million barrels and 297 million cubic metres per day compared to the no-cap CPM scenario.

The trade-off is an additional 117MT of GHG reductions in the sector by 2050 (the difference between the CPM's and the CNZ’s oil and gas emissions in 2050). The government is asking Canadians to accept a significant economic cost for a relatively small gain, especially when the no-cap scenario is already delivering results on its own.

The foregone production represents a staggering economic cost. For only oil, using the assumed price of Brent crude oil in the CER’s CNZ scenario of $60 per barrel by 2050, with the average differential of $16USD between Brent and Western Canadian Select (WCS), this equates to around 2022 $US35 billion in lost revenues. Canada’s real gross national income has barely grown since 2015. Canada urgently needs investment and economic growth and is in no position to turn away easily achievable gains.

Our federal and provincial fiscal situation is also riddled with growing debt and deficits. Using 2021/2022 oil royalty data, which averaged around $7.50 per barrel, the lost Alberta provincial government revenues amounts to roughly $6 billion in a single year, not including the federal loss of personal and corporate income tax revenues.

Basing a permanent, restrictive cap on a single model is not good policy. The CER model is but one model with assumptions that may or may not come to fruition in the future. It cannot accurately predict global geopolitical shifts, future technology breakthroughs, company-level investment decisions or the true abatement costs for specific assets.

Models rely on assumptions based on today’s realities. By treating those assumptions as firm enough to base the emissions cap regulations, the policy locks Canada into one hypothetical future.

In a world of rising geopolitical and economic pressures, Ottawa must rebalance its priorities to maintain the country’s competitiveness. The CER’s own modelling provides the evidence. The emissions cap is duplicative and redundant. It targets one of many other heavy-emitting industries.

Ottawa should reform existing climate policies to reward desired behaviours rather than weaken key sectors at a time of major energy, infrastructure, and expensive defence commitments.

Kate Koplovich is the Calgary-based senior policy analyst at the C.D. Howe Institute.

To send a comment or leave feedback, email us at blog@cdhowe.org.

The views expressed here are those of the author. The C.D. Howe Institute does not take corporate positions on policy matters.

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