The Challenge With Canada’s Proposed Oil and Gas Emissions Cap
On November 9th, 2024, the Canadian Government published a proposed policy to cap oil and gas sector emissions, known as Canada Gazette Part 1. While the final targets will not be set until 2026, the Government estimates that this policy, in conjunction with other policies, will reduce GHG emissions from the oil and gas sector by 35% in the early 2030s compared to 2019. When flexible compliance options are considered, actual emissions are targeted to decline by 19% from 2019 levels.
This week, Sander Duncanson, Partner at Osler and Co-Chair of Osler’s national Regulatory, Indigenous, and Environmental practice, joins the podcast. Osler is a leader in Canadian business law.
Peter, Jackie and Sander discuss their concerns with the proposed policy. Topics covered include:
- The low likelihood of the regulation becoming final law.
- The potential for the policy to create winners and losers, market distortions, and other unintended consequences.
- The complexity of Canada’s regulatory framework which reduces investment.
- Concerns that Canada and the United States are moving in opposite directions regarding carbon policy. Canada is increasing stringency, while the US is expected to reduce its carbon policy, thereby creating the threat of investment moving from Canada to the US (carbon leakage).
- The options to provide feedback on the proposed policy are available until January 8th, 2025.
Content referenced in this podcast:
- Canada Gazette, Part I, Volume 158, Number 45: Oil and Gas Sector Greenhouse Gas Emissions Cap Regulations (November 9th, 2024)
- Consultation feedback can be provided within a series of online forms in the Gazette, Part 1 link above, by January 8th, 2025. Another option for feedback is to submit a “Notice of Objection” by the same date. More information on this option can be found under the heading “PROPOSED REGULATORY TEXT” in the Gazette.
- Peter Tertzakian’s commentary in The Hub “DeepDive: It’s time for a carbon policy time-out” (November 2nd, 2024)
- Osler’s Blog “Federal government announces constitutionally questionable oil and gas sector emissions cap” (November 8th, 2024)
Please review our disclaimer at: https://www.arcenergyinstitute.com/disclaimer/
Check us out on social media:
X (Twitter): @arcenergyinst
LinkedIn: @ARC Energy Research Institute
Subscribe to ARC Energy Ideas Podcast
Apple Podcasts
Amazon Music
Spotify
Episode 261 transcript
Disclosure:
The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.
Announcer:
This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.
Jackie Forrest:
Welcome to the Arc Energy Ideas podcast. I’m Jackie Forrest.
Peter Tertzakian:
And I’m Peter Tertzakian, and welcome back. Jackie, the first snowfall here in Calgary as we record, predictably, all these people without snow tires slipping and sliding all over the place. Maybe we can do a session on snow tires so people change them out earlier. Minimum, all seasons, I don’t know, bald tires, it’s just ridiculous.
Jackie Forrest:
But it’s November 18th, so we’ve had a bit of a reprieve not having this until now.
Peter Tertzakian:
Some people are taking global warming too seriously. In that regard, thinking that we’re never going to get winter. And indeed it has been a very mild fall, but here we are, not only the first snowfall, but one week into the post-Trump election and all sorts of news coming at us from appointments to Attorney General, department of Energy, EPA. In the background, we’ve got COP going on, and so the news flow is just crazy in terms of trying to unravel everything. And to top it off, behind the scenes or in advance of the election day, we had, as we discussed in a previous podcast, the release of the first Gazette of the federal government’s emissions cap on the oil and gas industry.
And so, I can’t think of a time where the philosophy behind all sorts of energy policy in Canada was so divergent from that of the United States. The gap in approach of how to deal with energy, all the way from traditional oil and gas, to clean energy, from a policy perspective, is as wide as it ever is. So, we want to talk about that. We want, particularly, the emissions cap, which is top of mind because of the very short consultation period of 60 days. I think we got to talk about not only the emissions cap, but also the wider picture of how divergent the energy policy approaches are. And I think, because we’re so tied together, the United States and Canada, from a continental energy grid, from oil gas to electricity, that something’s going to have to change, I think, over the course of the next year.
Jackie Forrest:
And we’ll get into it, but because we’re so integrated, having very different policy, in Canada, policy that’s very expensive and creates a lot of burden when the Americans don’t, puts us at a real competitive disadvantage. And there’s this term called carbon leakage where people will just put their money over on the US side of the border. So, definitely with the election of Trump, these types of policies like the oil and gas emissions cap, to me, are much more concerning.
Peter Tertzakian:
And who came up with this carbon leakage? I hate that term. Let’s call it what it is, what we used to call it. It’s called capital flight. In other words, money flies across the border. Let’s not talk one degree of separation from really the root of what’s going on, and that is that valuable dollars, and it’s not just millions, it’s billions of dollars are actually migrating to the United States from the production of Canadian resources and other industrial activity. And this is wholly unacceptable, from my perspective, as a Canadian. And this is what I’m talking about. When you get a policy disparity, it creates capital migration, and that’s what’s going on. So, well, who best to help talk us about all this? We have once again, a regular on our podcast, Sander Duncanson, partner at Osler, a leader in Canadian business law. So, Sander, you are also the co-chair of Regulatory, Indigenous and Environmental Affairs. Well welcome. Tell us all the things you’re involved in.
Sander Duncanson:
Thanks, Peter. Nice to be here in person for the first time in the podcast. My practice involves a number of things, including carbon policy. And I think the first time I was on the podcast was to talk about this exact same issue about more than two years ago. So, excited to be back.
Jackie Forrest:
Actually, you’re a new record holder, our first third time podcast guest. You talked to us about the oil and gas cap, also the Impact Assessment Act. Both of those are relevant for today’s conversation. And you also have written a blog with your partners, and we’ll put a link to that, about the oil and gas cap. So check that out in the show notes. But before we get into the details, let’s start just with the likelihood of this regulation becoming a final law. Because I think before we get into the details, we need to understand the do-ability, and there’s a lot of skepticism that this will actually see the light of day. It’s noteworthy when the policy came out that the oil and gas public equities were flat on the news, didn’t move at all. So either that price of it was already built in or people are very skeptical that it’s actually ever going to occur, because if it really will impact some oil and gas companies, and I think it should have had an impact on the equity markets.
Peter Tertzakian:
I think, actually, releasing it on the eve of the US election didn’t really help. The market was so focused on the Trump trade and other things. I just feel like, well, first of all, I think that was done on purpose is to release it in the fog of one of the biggest elections in history or modern history. And so, I’m not sure it has yet to be priced in. In other words, I think it will be, especially given all the talk about Canada-US trade, the potential imposition of tariffs on everything from oil and gas to maple syrup. So, I don’t think it’s right to say it hasn’t affected yet.
Jackie Forrest:
Maybe it’s so much change in so much uncertainty. Now, just for everyone’s background, the November 9th, the Gazette I came out. That’s really the first draft. There’s a consultation period, and then environment climate change in Canada will then issue the final law, which is called Gazette II. So this consultation period ends January 8th. It’s 60 days long. We are going to encourage people to participate in that.
But I just wanted to talk a little bit about the mechanism. The regulation is made directly by environment in Climate Change Canada using an order in council. So, therefore, it doesn’t have to go through Parliament. And so, if Parliament is a little slow and dysfunctional as it seems right now, it doesn’t necessarily impact this. The minister, Minister Guilbeault can sign this and bring this into law after the consultation.
Now, the consultation period is short and it’s quite limited. Actually, I want to complain, because in the past you’ve been able to write fulsome letters, here you have to fill out an online form, so-
Peter Tertzakian:
And it’s over Christmas.
Jackie Forrest:
And it’s over Christmas. So, my feeling is they’re going to try to push this through very quickly, because with the spring election coming up, there isn’t really a lot of time. If you look in the past, the time between this Gazette I and the final rule was over a year in a lot of other major policies. If we are going to have a spring election, that’s not a lot of time. So, my first question for you, Sander, is how fast can the Gazette I to go to Gazette II? Is there a requirement for a certain amount of time or could this happen very quickly?
Sander Duncanson:
There’s no minimum timeframe in the act. There’s a maximum timeframe, 18 months, although that can be extended, and we’ve seen that happen before. That said, we did some digging. The fastest that we’ve seen a regulation under this act passed in recent years was nine months. More often, like you said, it’s over a year. The Clean Fuel Regulations were about 18 months. There’s some regulations that have taken more than two years. So, it seems quite unlikely that this could get put in place as soon as the spring. Feels more likely that it would be next fall, and I think that that’s what the federal government has communicated their expectation is. That this would line up with next fall, coincidentally election time.
Peter Tertzakian:
Well, and some people say the election is going to be in the spring. Actually, quite a few people increasingly are suggesting that. What happens if an election is called to the CG-I, Gazette I thing?
Sander Duncanson:
I think practically, this just will die. I think, mechanically, there’s a few things that have to happen after the public consultation period. Ultimately, the minister has to provide a recommendation to the federal cabinet, referred to as Governor and council, and that’s who ultimately has to pass this. One other mechanism that exists, that’s interesting. So this is a regulation under a piece of legislation called the Canadian Environmental Protection Act or CEPA. And under CEPA, when a regulation is proposed in Gazette I, which is what’s happened here, any member of the public can file a notice of objection with the minister’s office. And this is a different mechanism than the letter of comment that Jackie was speaking to. Although the timing is the same, it’s 60 days.
Once a notice of objection is filed, the minister has discretion to then refer the regulation to a Board of Review, which essentially conducts a public inquiry, has to submit a report to the minister. It’s all public and practically takes a lot of extra time. So, it’s highly discretionary whether the minister would actually exercise that power if one or more people filed a notice of objection. But for folks who are listening to this and are interested in-
Peter Tertzakian:
Doing so.
Sander Duncanson:
Yeah.
Peter Tertzakian:
So what does it look like? Is it that there’s a template or can you just write a letter saying, “Dear minister, I object.” Give two or three bullets and it’s done?
Sander Duncanson:
That’s exactly right. The act is very light in terms of details, but it is a mechanism where, essentially, if somebody is complaining, the minister has to consider whether it’s appropriate to conduct this broader-
Peter Tertzakian:
And what is the accountability for ignoring say, a hundred letters of objection?
Sander Duncanson:
I don’t think that there is much accountability there. So, the skeptics might suggest that the minister will just disregard it, but it’s certainly, I think it’s a relatively easy thing for people to do if they’re concerned about this regulation and want to look for opportunities to try to frustrate it a bit.
Jackie Forrest:
Right. Well, and up until now, I have to say that, so there’s been a lot of ignoring of the feedback, but let’s hope that they take that seriously. Now, the Alberta government has already put in, maybe not a formal notice of objection, but they’re not happy about this. They plan to challenge this regulation in the courts. Also, the conservative party of Canada came out quite opposed to the regulation after the announcement, just a quote from Poilievre’s party saying, “Trudeau wants to suffocate Canada’s energy industry with an arbitrary emissions cap that will devastate Canada’s already broken economy.” And for those that listen to C-SPAN, or at least in bits of it, there’s been some pretty active question period debates where the CPC is really hammering the liberals on this. So-
Peter Tertzakian:
Is that on your iPhone, is there an app, a C-SPAN app that you’re listening to?
Jackie Forrest:
Well, mainly I just get the clips on social media, I have to say, but some of them have been quite good. So, a couple of questions on that. If it becomes a Gazette II, which maybe is unlikely with the timing, but who knows, with the election and the timing of the election. We learned last week actually from Shachi Kurl, there’s the potential for them to push this election out even beyond fall of 2025. So, if it becomes a Gazette II and the Alberta government decides to fight it in the Supreme Court, what do you think the chances are of their success?
Sander Duncanson:
Well, that’s the big legal question. Is this thing constitutional? I think it’s fair to say at a minimum, it’s highly questionable. But there’s some important differences between this proposed regulation and the Impact Assessment Act. The Impact Assessment Act, which as folks will likely recall, the majority of the Supreme Court found was unconstitutional.
Peter Tertzakian:
That’s the old Bill C-69.
Sander Duncanson:
Exactly. That was passed under the federal government’s power to enact environmental legislation and things like fisheries and navigable waters and migratory birds. CEPA, which is the act that this proposed regulation falls under is criminal law legislation. And the federal government has jurisdiction in Canada to make criminal legislation, but courts have held that valid criminal legislation requires a public harm or evil backed by a prohibition and a penalty for committing that harm or evil. So, in the case of oil and gas emissions, there’s no evidence certainly that I’m aware of that CO2 from oil and gas affects the environment any differently from any other source of CO2. So, I think there is a real question about whether oil and gas emissions constitute a public harm or evil that can be the subject of a criminal law, when the same emissions from other sources are not treated the same.
Peter Tertzakian:
So, in other words, if you deem this to be harm and evil in oil and gas, then you have to treat emissions from agriculture, aviation, fertilizers, every industrial sector and beyond as harm and evil. And I think that’s one of the issues with this. It seems very targeted and layered on top of already other layers of carbon policy on the oil and gas industry. It’s just like, “Let’s pile it on.” Meantime, there are other sectors of the economy where emissions continue to grow and they seem to be unaffected.
Sander Duncanson:
That’s exactly right. And obviously, the layering of regulations creates other issues talking about capital flight earlier. But this idea that a single industry can be singled out under criminal law when there is no evidence that industry’s actions affect the environment any differently than other industries, in my view, that creates a real legal issue with this regulation.
Jackie Forrest:
Okay. Well, and just to your point, Peter, a little fact that was in the document that the government predicts that this policy will only add 13 million tons of reductions in the early 2030s over a case without, and that’s because they admit it’s redundant with other policies like the large emitters policy, the carbon tax TIER here in Alberta, and methane reduction rules. When you think about that, that’s about 5% of emissions from the sector. Seems like a lot of hassle for five additional percent of emissions. Just to point.
But I wanted to come to one more question on the do ability here, because there’s another scenario, which to me seems like the more likely scenario if the Gazette II were to be record fast and get put in place before the next election. As everyone knows, and our listeners, the conservative party of Canada looks to very likely to get a majority in the next election, and they’re already publicly opposed to this policy. So how hard would it be for them to repeal something once it’s already become a law under Gazette II?
Sander Duncanson:
So, legally, it’s really not hard to do. Politically, I expect it also wouldn’t be very difficult, but I think that that would be the bigger consideration. Legally, all that would need to be done is essentially the same mechanism that’s required to create the regulation in the first place. So, the Minister of Environment makes a recommendation to Federal Cabinet. Federal Cabinet makes an order in council. That order in council gets published in the Gazette and it’s done. It can happen very quickly. No public consultation required. So this is something if the conservatives get elected and this is something that is in place and they want to kill it, that could happen in a matter of weeks quite easily.
Peter Tertzakian:
So let’s talk about the Alberta government and their response. They have threatened lawsuits and so on. And for those of us that are not steeped in legal theories such as you are, can the Alberta government jump on this criminal element of the EPA that you just described, or what are their options legally?
Sander Duncanson:
I think they were obviously quite successful in challenging the Impact Assessment Act. That was through bringing a reference case to the Alberta Court of Appeal, and then ultimately that went to the Supreme Court of Canada. That’s the same process that would need to be followed again. Now, as good as that might be for lawyers, taking things through years of litigation, it does take a lot of time. It creates uncertainty for everybody in the meantime. So, I would hope that with some political pressure and reading the political tea leaves, this policy never gets that far. But if it does, that’s the way that the Alberta government would need to challenge it. And I do think that there are some very reasonable constitutional law arguments available, more so even I think than with the impact-
Peter Tertzakian:
It just seems like such an exhausting waste of resources and efforts at a time when, as I said in my opening monologue, the gap between competitiveness between the US and Canada just continues to widen. Not just oil and gas, across all energy, including clean energy. But let’s just say it does get to the CG-II. Jackie, how does it work?
Jackie Forrest:
I thought we’d just quickly talk about the mechanism at a high level for those that still want to listen. If we convince you it’s not actually going to see the light of day, which we all hope it won’t, but how does it work? First of all, in terms of the goals, the headline is that it’s going to be a 35% reduction versus 2019 with some flexibility. So, other mechanisms that are not just absolute emissions reductions. So when you look at actual reductions, if everyone uses these flexibility options, it’s probably going to be something like a 20% or 19% reduction versus 2019. Of course, this is not certain. This will be all set in 2026, but they’ve put out what their goals may be and they’ll finalize those in 2026 when they actually start implementing the policy.
It’s a cap and trade that sits on top of our existing policies. So for the oil and gas sector, they still have a carbon pricing policy, that doesn’t go away. But now this sits on top. Minister Guilbeault when he announced this was proudly saying that no other jurisdiction in the world has anything like this. And it makes sense, because it seems very redundant to have.
Peter Tertzakian:
No other jurisdiction in the world has 11 carbon markets, none of which work and are introducing a 12th. Meanwhile, they’re talking about a global carbon market at COP on the other side of the world. I don’t see how all this fits.
Jackie Forrest:
Well, and you usually pick between one of, a cap and trade, or a carbon pricing policy. Having both is nobody else has done that because they’re quite redundant. Let’s talk a little bit about scenarios of producers who will suffer, I think, the most under this type of policy.
Number one is producers with high carbon intensities. Because what the government’s going to do is based on your production, and it’s going to be your average production over three years leading up to the policy. You’ll be given out allocations based on their target intensity, greenhouse gas intensity. So, if you’re a higher carbon producer, they’re going to look at your production level and you’re going to get less allocations than you really need. And so, you’re going to have to go buy those, and it could be quite expensive. So, the other thing to point out, this one really I didn’t enjoy, is that they announced it’s going to be for every producer over a thousand BOE per day, which they call large producers. Well, I think for anyone in the industry, a thousand barrel of day equivalent producer is a very tiny producer, not a large producer. And so, it’s going to impact virtually the entire industry.
Now, the second group that I think will be disadvantaged is producers with growing production. Because even if you’re a low carbon producer, if your average production level in the earlier period, where your production is set between 2026 and 2028, is let’s say a thousand BOE per day, but by 2030, when they start to implement this, you’ve doubled to 2000 BOE per day. You’re only going to get allocations based on your a thousand barrels a day. So, even though you may be actually on target for where they want to be for carbon intensity, because you’ve grown, you’re only going to get about half the allocations you need and you’re going to have to go buy them. So, that’s the other group that’s disadvantaged.
Peter Tertzakian:
But if you don’t grow, you keep it flat. And actually many conventional producers are now like that, but conventional production is not really growing net. And some of the producers, because their investors have said across the border in the United States like, “Don’t grow your production, just produce your oil and gas. Focus on profitability, and give us a dividend that we can put in a portfolio of all sorts of other dividends.” And so, for conventional companies that are not growing and actually have a pretty good carbon intensity, in other words, relatively low, they’re going to get all these free allowances and they’re going to become even more profitable if they don’t use the proceeds from the allowances to invest in carbon mitigation. Is that true?
Jackie Forrest:
This is the thing. It creates winners and losers. So, we’ve been talking about the losers, the people that actually need to reduce their emissions. Instead of spending money on that, they’ll be buying allocations or curtailing their production, which will result in them having less money to reduce their emissions. Meanwhile, those, like you say, that are flat and lower carbon will be having too many allocations, they’ll be selling those. Do you think that they’re going to use that money to become even lower carbon? Probably not. They’re already under the benchmark. So, I actually think it creates a lot of distortions where the people that need to spend money don’t have it and the people that are already low carbon aren’t going to reduce much more. So, I think it’s problematic that way too.
Peter Tertzakian:
As we’re saying again, it’s layered on top of existing policy, notably the Greenhouse Gas Pollution Pricing Act, which is the federal carbon tax, and the industrial side of that carbon tax and the provincial equivalent in Alberta, which is called the TEIR system. So, it’s just creating a complicated carbon policy where investors are just saying, “I don’t understand this. I don’t know who exactly winners and losers are going to be.” These are investors that don’t necessarily want to get into the weeds with all this stuff. And then you just say, “Oh, look, across the border, they’re open for business. I’m going to put my money there.”
Jackie Forrest:
Well, this comes to your commentary, Peter. So Peter wrote a commentary in the Hub, and we’ll also put a copy of it on our own website. Peter, you talked about some of these issues, so maybe tell us a little bit about your commentary.
Peter Tertzakian:
My commentary is we have so much carbon policy now that is unharmonious, is that the right word? It’s not disharmonious. It’s unharmonious across the country, because each provincial jurisdiction treats it differently. The federal government is layering on its own policies, and it just creates this policy cocktail which nobody can unravel. And we’ve got more policy coming. We’ve got the methane regulations, we’ve got the clean electricity regulations, which are downstream from oil and gas, but they’re chained in with the energy system supply chain. The bottom line is that there’s too much policy.
And for me, I’m not saying let’s go shred any one policy. I’m saying let’s take stock. It’s time to take stock, particularly in light of what’s happened across the border. We need to assess what we have. And then my view is we need to try and harmonize the policies. We need to try and make them simpler. In other words, reduce the policy density and also reduce the policy complexity. And in doing so, we will hopefully bring capital back, not only for decarbonization, but just for general energy, security, affordability and broader prosperity. Because right now, I don’t see that any of this is working, and we’re just throwing more policy complexity and density into the system at a time when investors are just seeking clarity.
Jackie Forrest:
And Sander, you’re dealing with clients that are trying to navigate all of this, and even the administration costs of managing all these things. Is that a real concern for your clients?
Sander Duncanson:
Yeah. And when you’re talking about winners and losers, my concern is we’re all going to be losers here even if there’s some companies who might be okay with this policy. Big part of my practice is advising companies who are looking to invest in Alberta. Either companies that are already here looking to expand, or companies that are not in Alberta that are looking to potentially invest in new or existing energy projects. And helping those companies understand the regulatory framework is a big undertaking because it is very complicated here. And most companies have investment opportunities elsewhere, and they’re comparing those opportunities to investments here, and the regulatory framework is a big one. In my view, that is one of the biggest considerations here is, we have an incredibly complicated regulatory framework today. It is scaring away investment, and this is going to layer a completely different framework on top of what we already have. And I really do worry about how that will affect our competitors.
Peter Tertzakian:
Layering complexity on top of complexity is just not conducive to getting anything done at a time when we need to get things done. And by the way, this is not an argument that’s focused on oil and gas. I’ve already alluded to that, because oil and gas companies and other industrial emitters, whether they’re in the steel business, fertilizers or whatever, buy credits, carbon credits that are created by clean energy companies. And if the buyers, in other words, the emitters, are unduly burdened with these sorts of complexities and policies, they’re not going to spend and they’re not going to buy and their investors won’t let them buy. And so it actually ripples through the whole energy complex, clean, not clean, but it ultimately is on track to affect our reliability of our energy systems and the affordability.
Jackie Forrest:
Well, and one of the points you talked about is it could actually result in unintended consequences, like less investing in clean energy. So, I want to give some specific examples. We’ll talk about the Alberta carbon market, which actually is the most transparent and easy to trade. But one of the things this policy can do is allow people to use some amount of their credits from that system to meet this compliance, that’s the flexibility option. But here’s some examples of how it could affect the broader economy in terms of the carbon markets here in Alberta.
If the oil and gas industry rapidly reduces their emissions in order to comply with this, it may actually cause an oversupply of credits into that market, which may mean that clean tech companies or other decarbonization projects, the credits are worth less than they expected. We’re actually already facing that in Alberta, where TIER credits are trading quite a bit lower than the headline price right now, because of an oversupply. So that could make less investment in CCS, for example.
Alternatively, if credits are tight and people use these in the other system, it may create a tightness of credits and high prices for credits. So, overall, it creates this ability to not be able to predict what the TIER credits are going to trade at, and then it makes it harder for people to actually invest in any kind of decarbonization.
Peter Tertzakian:
So let’s explore that just a minute because it’s really important is that there is the headline federal government carbon price that escalates by $15 per ton per year. What are we at? 80 bucks this year?
Jackie Forrest:
Yes.
Peter Tertzakian:
As the calendar flips, it’s going to go to 95, but that’s not necessarily what the credits are going to trade at. And layering another complex system like this, we don’t know what it will do to the price. You could either make those price go way higher than that $95, or if there’s a flooding of the market as a consequence of this, or distortions, Jackie, as you correctly call it, it could go to 50 bucks, it could go to 30 bucks. And so, the $30, $50 scenario is really unhealthy for clean energy companies, because in their business plans, they’re relying on a much higher price.
Jackie Forrest:
Exactly. And so, now the fact that you can’t predict it makes it harder for people to make these. And I have to tell you, we’ve talked about this before. There’s no transparency to what these offsets are actually trading for in Alberta right now, but my sources tell me that they’re already discounting it at 40%. We have an oversupply in the market right now.
Peter Tertzakian:
So we’re saying instead of $80, they’re trading at 50?
Jackie Forrest:
Yeah. But again, I don’t know that for sure because we don’t have this transparent market.
Peter Tertzakian:
A market where you don’t know the price is absurd.
Jackie Forrest:
So, Sander, what are some other unintended consequences, do you think?
Sander Duncanson:
Well, just actually to build on that, one of the things that’s interesting, the challenge with a regulation like this is it’s a lot to unpack, and there’s a lot of details in there that you don’t necessarily catch at first glance. The mechanism, Jackie, that you mentioned about the using offset credits that are generated under a provincial framework, if you follow through how the regulation actually works, it’s only certain types of offset credits. So, the federal government gets to pick and choose what types of provincial offset credits can get recognition under this regulation and which ones can’t.
Peter Tertzakian:
So if you’re in a market like the farmer’s market, it can choose, you can buy strawberries but not green beans?
Sander Duncanson:
Right. So, the federal government will get to say, “For the purposes of the oil and gas cap, strawberries count, but green beans don’t.”
Peter Tertzakian:
Right.
Sander Duncanson:
And to Jackie’s point about how this impacts the provincial carbon markets, that creates yet another reason for different credits to trade at different values, and it just complicates things even more.
Jackie Forrest:
Well, and here’s the other issue, provinces like Saskatchewan and Ontario, they don’t have credit markets like we do, even though ours aren’t great, they don’t even have that ability. So, there’s also disadvantages in certain provinces where that flexibility option may not be as available because they don’t have a tradable credits to the same extent. Lots of problems.
I did want to point out one other interesting thing in your article, Peter, that people should know. This is a quote, “Using national inventory data, our greenhouse gas emissions inventory data. That actually we don’t need this because the current policies are actually already working.” A lot of people may not realize that absolute emissions, this is an intensity, for natural gas production have fallen by 17% in the last decade. And for conventional oil have declined 27&. Now, the oil sands has been growing in terms of their production, but they’ve actually flat lined in terms of their absolute emissions the last couple of years.
Again, it’s ignoring the fact that the policies we have today, although not perfect, are actually driving emissions reductions.
Peter Tertzakian:
So the Greenhouse Gas Pollution Pricing Act, which is our industrial carbon tax, has not really been allowed the time to prove itself. What do you think, Sander? Is that fair?
Sander Duncanson:
Absolutely. These policies take time for them to actually translate into meaningful differences in how businesses behave.
Peter Tertzakian:
So, there’s a sense of restlessness, “Hey, it’s not working. What do we do?” Let’s add more policy to make it work better. But an actual fact, it’s creating capital flight which creates paralysis and nothing happens. And so, I want to repeat in the article what I’m calling for. I’m not calling for the shredding of policies. I’m saying before we can do get rid of, modify or retool the policies. I’m just saying, “Time out kids, let’s just see what all the policies are, see how well they’re working or not, and take it from there.” I call it the Great Canadian Policy Review. Actually, that’s what we need.
Jackie Forrest:
This sounds good, but it sounds complex.
Peter Tertzakian:
No, the intent, it’s just let’s take stock. Let’s just take stock of what we have here.
Jackie Forrest:
And what’s working and what’s not.
Peter Tertzakian:
It’s just a federal provincial mess.
Jackie Forrest:
Well, and I think it’s a good point. Actually, some of these policies are working.
Peter Tertzakian:
Well, let’s find out which ones aren’t and which ones aren’t, and then look at the collective. What is the impact of the collective?
Jackie Forrest:
Well, let’s go back even 10 years. At first it was like, “Well, we just need, in order to meet our targets and our emissions reductions, we need greenhouse gas emissions pricing.” So we implemented that on the industry and on retail consumers, and that was going to get us there. But then, over time, it’s like, “Well, that’s not quite enough.” In the refining sector, we want things to go a little faster. So we put on a clean fuel reg on top of that. And then in the power sector, “Well, maybe we need it to actually go a bit faster. So let’s add another policy, which is this clean electricity because we want to accelerate here.” And, obviously, oil and gas, it’s maybe not going down at the pace that people would like, although I would argue that it actually is going down. So we need this other policy. But, actually, I think if we went back in time, a carbon pricing policy done might’ve been all we needed, and Sander to your point, creates that simplicity that people can actually invest in and understand.
Sander Duncanson:
Well, I think at its core, if the objective is decarbonization, which should be the objective behind a lot of this stuff, that requires significant new investment in the economy. So, we need to be mindful of how can we achieve emissions reductions, if that’s the goal, while facilitating significant new investments in the economy. The concern I have is these types of policies focus on the one piece of reducing emissions, but they ignore the piece of attracting investment.
Peter Tertzakian:
And no investment equals no transition equals no energy development. At a time when demand for energy is going up and electricity, and all things, our population’s rising, the economy’s growing, and you need investment to keep growing in parallel your energy systems.
Jackie Forrest:
And a time when our trade partner has much simpler policies, if not at all, maybe, and the policies they have are more like carrots. So, they’re not punitive like these. They’re incenting people to come and invest, although there’s some uncertainty around if those carrots will shrink over time. One other point I wanted to talk about is the debate about will this actually impact production levels, which I think is key to the Alberta government having a challenge here to say this will affect the energy industry, the natural resources industry that they have authority over. So, a little bit of controversy when this came out, there’s been three studies actually done already. One from S&P, one from Deloitte, and one from the Conference Board of Canada that predict this will reduce production of oil and gas in Canada, which would then reduce the GDP impact of our largest industrial sector in the country with implications to jobs and taxes and all sorts of things like that.
Now, the statement from ECCC or Environment and Climate Change Canada, when they released the new policy, is that none of these third-party reports are accurate anymore. They were done with misinformation, in that they didn’t have the details of this policy, so you can’t count on them, and their view is that it won’t impact production. But I would say, that actually, you can’t really predict that, because there’s too many scenarios here. In this scenario that the Oil Sands Pathways Group actually does their carbon capture storage project by 2030, and they’re talking about injecting and storing something like 20 million tons of CO2 annually by then. Well, if that actually happens, then I would agree with the government of Canada, that there’ll be so many reductions, that there’ll be a lot of allocations out there, and it won’t really be that those people that have to buy those allocations because they’re high carbon or they’re growing, it won’t cost them too much. And I would agree it probably won’t impact production.
Added to that, the methane reduction rules, if those are actually achieved, again, that would be another thing that would mean that we reduced our emissions so much that it’s not that prohibitive. However, and what I believe is the more likely scenario by 2030 that we don’t have pathways operating, that we probably don’t achieve all of our methane reduction goals. There’s going to be not enough reductions and there won’t be enough allocations for everybody to produce as they are today. And in that case, I think you will see production come down. Those growing companies will have to stop growing. Those high carbon producers may have to shut in. So, I actually would argue, and by the way, the cost of this could be quite high in that scenario, because if you need to force people to shut in, our math would show you need carbon prices that are in the several hundred dollars per ton or if not higher. And so, I think there is a real chance and a likelihood that this would reduce production and hurt the economy.
Peter Tertzakian:
One of the things that’s missing in those reports that you mentioned, the three, the S&P, the Deloitte, and the Conference Board of Canada, is that the size of our industry, in terms of production and therefore dollars circulation, it’s about 180 billion a year of collective revenue. Out of that $180 billion, 30 billion is required just to keep production flat. If you don’t spend money to maintain operations, offset the production declines by replenishing reserves, then your production is going to go down. And actually out of that 30 billion, 20 billion is in the conventional because the declines are much steeper and more capital intensive now, and 10 billion is for the oil sands, which is much more now of a manufacturing operations.
Look at $30 billion. What’s missing is the psychology around the boardroom table when capital allocation decisions are made. So you’re saying, “Okay, now we have to spend even more on emission reduction and so on, and now I’ve got a choice between putting my money back in Canada or going across the border, or actually just giving it back to investors in terms of dividends, and maybe they go put it in AI stocks or somewhere else completely different.” And so, my point is that the probability of a production decline has increased, because some companies are going to say, “You know what?” And they’re investors by the way, that actually in the corporate governance really call the shots. Just going to say, “You know what? Let’s just let the production roll over and I’m just going to harvest this resource, take my money and put it somewhere else.”
Sander Duncanson:
Well, in terms of how this regulation works, that is the ultimate fallback. Under the provincial TIER regulation, if you don’t achieve the emissions reductions that you’re required to and you don’t acquire credits from somebody else, that ultimate fallback position is you have to buy credits from the government. And so, you know that that’s your worst case scenario, is you’re going to have to buy credits from the government, and you know what the price of that is. Under this regulation, again, recognizing that it’s part of criminal law, there are caps in terms of how many credits you can use from the provincial system. There’s caps in terms of how many credits you can buy from the government. The ultimate fallback is you have to reduce your production if you can’t, otherwise, meet the emission reductions.
Peter Tertzakian:
And so, there’s some legal issue with that as well, isn’t there? The federal government cannot undertake actions that affect production and that the provincial government is going to lock into that. What’s that issue about?
Sander Duncanson:
Well, it all goes back to constitutional law again. And I talked earlier about the criminal law piece around constitutional law. The other piece is fundamentally under the Constitution, there’s certain things that the federal government has exclusive responsibility for. There’s certain things that the provinces have exclusive responsibility for. The provinces have exclusive responsibility development of their natural resources. That is something that they can control. And if the outcome of this regulation is that the federal government can effectively reduce production of certain natural resources within a province and dictate how development of that resource should occur, that’s another reason why this regulation is on constitutional shaky ground.
Peter Tertzakian:
And so, how do you prove… We’ve got the studies, but they’re all numerical models of the future.
Jackie Forrest:
Well, and they were done with all these more recent details, but I would argue if they had the details, they’d come to the same conclusion.
Peter Tertzakian:
But ultimately, a judge would have to say, “I believe these models instead of the federal government modeling.” Which de facto says, there is not going to be a production drop.
Sander Duncanson:
Well, it comes down to what is the federal government really trying to do here? Are they trying to pass criminal law, because there’s an evil that needs to be prohibited? Or are they trying to regulate how a certain type of resource is developed in this country? Certainly, it’s arguable it’s the latter. And if that’s the case, it’s unconstitutional.
Jackie Forrest:
So, Sander, I think we’ve covered a lot of the points. Do you have any other concerns in terms of how you look at this?
Sander Duncanson:
Just one other point I would make is whenever you have a big complicated regulation like this, there is a real fear of unintended consequences because there’s so many little details. Again, if the objective here is emissions reductions, when I look at the regulation, it starts in 2026. It’s based on emissions levels and production levels in 2026. If I was around a boardroom table and considering how aggressively to pursue emissions reductions between now and 2026, I would say, “Well, I may actually want to bank some of those potential emissions reductions until after this regulation becomes effective so that I can gain the allocation credit benefit under the regulation for that.” So, that’s just one example of an unintended consequence. This could actually slow down short-term investments in emissions reductions.
Jackie Forrest:
And drive production increases, because they’re going to establish the baseline production based on the average production levels starting in 2026. So, you should really be growing now if you want to be a growth company, right?
Sander Duncanson:
Absolutely.
Peter Tertzakian:
Yeah. And Jackie, also, the timeline is very aggressive. Is like by 2032. What is the new target?
Jackie Forrest:
Well, actually, that’s another really weird thing. This is getting really wonky, but you get the average production level is from between ’26 and ’28, but then it applies in 2030. So in 2030, you may be producing at a totally different level, but you’re going to be allocated based on your ’26 to ’28. And then, the other weird thing is you don’t actually have to show up with these allocations for a couple of years after 2030. So, I don’t know how the accountants are going to deal with all this stuff. It seems very complicated.
Peter Tertzakian:
It comes down, again, to the boardroom table decision where you’re supposed to allocate billions of dollars for emission reduction today, but you don’t know how many emission allowances you’re going to get in 2030. So, if I don’t know what I’m going to get, I can’t actually fill my spreadsheet in. So the default is to do nothing, harvest the cash flow and send it somewhere else.
Jackie Forrest:
I think so. I think it’s not great for investing. And I do want to… One other thing, we really focused on the producer side. I actually think there’s broader implications to the oil and gas markets that we should be considering. One is, in the case that we curtail oil and gas production here, I think it’s going to create a bit of a shortage of crude in the Midwest and Ontario who are sole source refineries that only can access crude that comes through the Enbridge pipeline, and they are going to have to pay up to stop crude from going further south. So, those refineries will need to pay more. They may squeeze the margins for those refineries, ultimately maybe even causing some refineries in these key regions to go out of business over time.
There’s also natural gas. In my view, Canada’s lost a lot of market share in Eastern Canada already. It’s not just my view. That’s a fact. Because American production has come up and displaced Canadian production into Ontario. Well, if we reduce our natural gas production, we’re just going to allow the Americans to take more of our market share. It’s not reducing the demand of natural gas in Ontario. It’s making Canada poorer and Americans better off. So, there’s just a lot of other, we can’t get into it all, but a lot of broader things that just make no sense at all.
Peter Tertzakian:
Okay. That’s why I’m saying timeout kids. Time out. We just need to take stock of what we have and then think about what we need to do. But I’m also going to call a timeout on this podcast because my head’s starting to explode, and it’s only 7:30 in the morning on a Monday. So Sander Duncanson, thank you so much for coming.
Sander Duncanson:
My pleasure. Always a-
Peter Tertzakian:
It was a third time-
Sander Duncanson:
Join.
Peter Tertzakian:
Does he get some kind of gift for being a third time return?
Jackie Forrest:
Free coffee.
Peter Tertzakian:
Free coffee.
Sander Duncanson:
I’ll take it.
Jackie Forrest:
Okay. And thanks to our listeners. And I do encourage you to participate. In the show notes we will put a link. And I really liked Sander’s idea of putting in, what did you call it?
Sander Duncanson:
Notice of objection.
Jackie Forrest:
A notice of objection. So, think about that as well.
Peter Tertzakian:
A NOO, is that what it’s called? A NOO? N-O-O.
Sander Duncanson:
Yeah, I guess that’s right. NOO.
Peter Tertzakian:
Or NOO. Okay. Anyway.
Jackie Forrest:
Okay.
Peter Tertzakian:
Thanks again.
Jackie Forrest:
Thanks again, and thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Announcer:
For more ideas and insights, visit arcenergyinstitute.com.
