Over the last year, Canada has taken regulatory measures to reduce emissions to meet the global net-zero goals by 2050 under the Paris Agreement.
In March 2022, the Canadian government released its first Emissions Reduction Plan (ERP), a comprehensive sector-by-sector roadmap that outlines how Canada will cut emissions by 40-45% from 2005 levels by 2030. Sectors include infrastructure, vehicles, agriculture, and various industries.
In particular, the oil and gas sector must contribute by reducing emissions 31% below 2005 levels in 2030 (or to 42% below 2019 levels). With these aggressive targets at play, we can expect drastic regulatory changes leading into 2023, including the possible inclusion of an emissions cap for the oil and gas industry.
While questions still remain, this is a significant milestone for how the Canadian government plans to meet these targets.
What is Canada’s approach to carbon pricing?
The carbon pricing system provides a mechanism to calculate the cost of carbon pollution. This initiative was implemented in 2019 under the Greenhouse Gas Pollution Pricing Act (GGPPA), and it is a means to incentivize energy companies to:
- Reduce emissions, cost effectively
- Adopt clean technology
- Improve transparency into emissions and operations
How is Canada reducing greenhouse gas emissions (GHG)?
Over the last two decades, Canada has taken an active role in building a strong and resilient economy in hopes of creating a cleaner future. For example, Alberta was the first to standardize reporting for large emitters in 2003. Meanwhile, Quebec enacted the first carbon tax in 2007.
Provincial output-based pricing systems, such as Alberta’s Technology Innovation and Emissions Reduction (TIER) Regulation, have been at the forefront, a pricing system model common in North America.
The release of the Clean Fuel Regulations (CFR) in June of this year brought into force the Clean Fuel Standards (CFS). The CFS operates differently from a carbon tax model, but is nonetheless focused on incentivizing the reduction of GHG emissions by mandating decreased carbon content in liquid fuels between now and 2030.
How does the carbon pricing system vary across Canada?
The carbon pricing system in Canada was built to be flexible: a province or territory may design its own pricing system tailored to local needs or can defer to the federal pricing system, referred to as the Federal carbon pricing backstop. Carbon pricing can take various shapes and forms, including cap-and-trade, fuel charge levy, carbon tax, and output-based pricing.
Alberta’s TIER and Saskatchewan's Management and Reduction of Greenhouse Gases (MRGHG) regulations are two such provincial pricing programs that were given equivalency by the Federal Government until 2023. Proposed amendments to TIER and MRGHG are currently under review to extend the equivalency agreement and maintain administration of carbon pricing within these provinces.
What are the different types of carbon pricing?
Cap-and-trade system
A system where a limit on total emissions is imposed by the government on a group of emitters. Companies that reduce their emissions below the cap will generate allowances and are able to bank or trade them in the marketplace. Companies that exceed allowable emissions must purchase these allowances to offset their emissions.
Carbon tax or fuel charge
A fee imposed by the government on emitters using set, fixed rates on fuel use and/or associated GHG emissions.
Output-based pricing systems
Output-based pricing systems set a price on carbon and a limit on emissions allowed for facilities. This requires emitters to reduce emission intensity, or pay/apply credits towards excess emissions. The structure of an output-based pricing system may include either or both of a carbon tax or a cap-and-trade framework.
Under Canada’s carbon tax schemes, facilities that reduce emissions beyond their facility specific benchmark can generate emissions performance credits (EPC) and sell them to facilities that did not reach their benchmark.
Under the CFS, suppliers that reduce carbon content of liquid fuels below the established benchmark for the applicable class of fuel will receive Clean Fuel Regulations (CFR) credits. Unlike carbon tax, there are limited options to pay for excess emissions and the use of available CFR credits is a key part of compliance.
Both EPCs and CFR credits further incentivize emitters to reduce emissions beyond what they are required to do as part of regulatory requirements, as well as reducing compliance costs while working towards GHG abatement programs.
What can Canadian energy companies expect in 2023 and beyond?
Material changes to the current carbon pricing systems are on the horizon. With the current government in place until 2025 and proposed updates to regulations under review, there is evidence that pricing systems will evolve and become more strict.
Topics of discussion include expanding regulated emission coverage to include venting, flaring, and fugitives, as well as:
- Increased benchmark stringency and tightening rates
- Reducing emission offset credit expiry periods
- Increasing credit usage limits
- Creation of unique carbon capture, utilization and storage (CCUS) credits
- A new cap-and-trade system
While these items are still under consideration, the current focus areas highlight the government’s continued commitment to meeting its international targets and realizing the goals set in the Pan-Canadian Framework on Clean Growth and Climate Change. In this ever-evolving landscape of climate regulations, energy companies will need to ensure that they are not only keeping abreast of regulatory changes but recognizing opportunities to reduce associated costs and participate in offset markets.
How energy companies can get ahead
The latest regulatory developments are a call to action for companies to ensure their emissions data is organized and validated.
Having a centralized platform that automates data ingestion, validation, and reconciliation ensures an accurate emissions baseline for more confident and efficient regulatory reporting, as well as enables better planning for the future. Companies can identify clear pathways to reduce emissions, forecast and model tax obligations, and uncover potential opportunities in the voluntary market.
At Validere, we believe that a systemic approach — incorporating physical science, data science and engineering, and industry principles — is the foundation for building a credible emissions reduction plan and remaining agile during the evolving regulatory and voluntary landscape.
Watch our webinar, “What to expect: Canadian regulatory updates in 30 minutes,” for expert perspective into the potential regulatory changes.
