The government will freely allocate emissions allowances to facilities covered by the system. The number of these will be capped. Companies will need to hold enough allowances for every tonne of GHG they emit. If an operator does not have enough allowances to cover their emissions, they will be able to buy allowances from other operators that have invested in pollution reduction.

The oil and gas GHG pollution cap for the first compliance period, 2030–2032, would be set at 27% below emissions reported for 2026, which is estimated to be equivalent to 35% below 2019 emissions.

The oil and gas sector was responsible for 31% of Canada’s national emissions in 2022, according to the latest National Inventory Report. It plays a crucial role in the country’s economy, supporting approximately 400,000 jobs.

According to Statistics Canada, the sector’s operating profits skyrocketed from $6.6bn in 2019 to $66.6bn in 2022, highlighting the potential for significant investment in decarbonisation. The Canadian Climate Institute estimates a potential economic loss of $25bn annually by 2025 due to climate change if urgent action is not taken, further emphasising the necessity of these new regulations, reports the Canadian government.

‘Every sector of the economy in Canada should be doing its fair share when it comes to limiting our country’s greenhouse gas pollution, and that includes the oil and gas sector,’ says Minister of Environment and Climate Change Steven Guilbeault.

Canada is the world’s fourth-largest oil producer and fifth-largest gas producer. According to the Energy Institute’s 2024 Statistical Review of World Energy, Canada produced 5.7mn b/d of oil in 2023, behind the US (19.4mn b/d), Saudi Arabia (11.4mn b/d) and Russia (11mn b/d). It produced 190.3bn m³ of gas, after the US (1,035.3bn m³), Russia (586.4bn m³), Iran (251.7bn m³) and China (234.3bn m³). 

Canada is positioning itself to remain competitive in a decarbonising global economy. The proposed cap is part of a suite of measures from the Canadian government, including significant financial support for carbon capture and storage (CCS) technologies via the federal Canada Growth Fund and new investment tax credits.

The government plans to finalise the regulations by 2025, following a period of public consultation open until 8 January 2025. ‘This timeline will allow for further stakeholder input to refine and strengthen the regulatory framework,’ it says.

The draft emissions cap regulations have received mixed reactions.

Lisa Baiton, President and CEO of the Canadian Association of Petroleum Producers (CAPP) called them ‘an unnecessarily complex layer on top of an already overly complex web of energy and climate regulations across the country'.

Kendall Dilling, President of the Pathways Alliance (which includes Canada’s six largest oil sands producers) agrees: ‘The emissions cap is a misguided proposal that will drive cuts in oil and gas production and have a significant, negative impact on Canada’s economy as shown by several independent analyses.’

He continues: ‘A decrease in Canadian production has no impact on global demand – meaning another country’s oil will simply fill the void and the intended impact of the emissions cap is negated at a global level. An emissions cap gives industry less – not more – of the certainty needed to make long-term investments that create jobs, economic growth and tax revenues for all levels of government. It simply makes Canada less competitive.’

Conversely, environmental groups, which have long criticised the Canadian government for allowing oil sands operations to continue, have welcomed the draft regulations. Aly Hyder Ali, Oil and Gas Program Manager, Environmental Defence, believes they represent ‘a historic step towards holding the [oil and gas] industry accountable for its outsized role in driving climate change’.

Moreover, he advocates for further action: ‘For the cap to be truly effective, the draft regulations must be strengthened. The rules must take effect sooner than the proposed 2030 timeline, and align with Canada’s climate goal of a 40–45% emissions reduction by 2030.’ He adds: ‘Loopholes which allow companies to avoid having to reduce their own pollution, like offsets and a decarbonisation fund, must also be closed.’

Absolute GHG emissions from Canadian oil sands production registered a nominal increase of less than 1% in 2023 even as total production grew, according to new analysis by S&P Global Commodity Insights. Absolute emissions were 3% higher (3mn tCO₂) in 2023 than 2019. Meanwhile, oil sands production grew by 9% (250,000 b/d) over the same period. By contrast, in the preceding decade (2010–2019), absolute emissions increased, on average, by nearly 3mn tCO₂/y while production grew at an annual average of 200,000 b/d.

S&P has previously noted that the lower pace of absolute emissions growth may indicate oil sands emissions could peak sooner, and at a lower level than previously expected. The latest analysis, based on 2023 operations, continues to suggest this could be the case. Nevertheless, the analyst says that absolute emissions are still expected to rise in the near term due to production additions expected in the next few years.