Thank you, Mr. Chair.
Honourable members of the committee, it is with great pleasure and some humility that I offer my thoughts on the emissions cap for the oil and gas sector. My views are based on my detailed knowledge of Quebec's cap‑and‑trade emissions system and the economic literature on controlling polluting emissions.
Reducing greenhouse gas emissions is necessary to mitigate climate change, but it is also costly for the companies that produce them. It is this trade‑off between benefits and costs that calls for a gradual reduction over time. Depending on costs, different emitters should reduce their emissions at different rates. Those for whom it is the least costly should do it the fastest; those for whom it is the most expensive, the slowest.
The issue of the costs of reducing emissions is particularly important in the context of climate change. Canada alone cannot hope to significantly change the global climate trajectory, as it is responsible for less than 2% of global emissions. One of the ways we can draw other countries along is to show that it's possible to reduce emissions while maintaining a robust economy, and the better way to do that is to reduce emissions at the lowest possible cost.
Ideally, regulations would send a common signal to all GHG emitters and let market forces determine the speed of reductions in each sector of the economy. Current regulations in Canada are far from that ideal. It could even be described as Byzantine. A number of stakeholders have pointed out to this committee the risks of adding a new element to the existing regulatory mix. I share many of their concerns.
Nevertheless, I would like to use my time before the committee to highlight the important elements to be considered, should the cap on emissions for the oil and gas sector be introduced. This approach would be imperfect, but it would still leave room for regulatory choices that could be more or less effective. I have five points to make in this regard.
First, a cap can only be effectively implemented if emissions are properly measured. It's notable that emissions in the oil and gas sector are imperfectly measured, particularly fugitive emissions. It is imperative that the measurement of emissions from the sector be clarified before a cap is put in place.
Second, it is important that a cap be associated with tradable permits, both to send a clear cost signal to emitters through the price of those permits, and to allow emitters to trade permits, thereby reducing the total cost of meeting the cap.
Third, marginal cost of reducing emissions for the oil and gas sector should not be too different, either upwards or downwards, compared to the cost for other sectors of the economy. One way to achieve this goal is to impose limits on the price of permits in the cap‑and‑trade system. Introducing a floor price and a ceiling price, which could move in tandem with the federal carbon tax, would create a virtual connection between the regulated sector and the rest of the economy's emitters. This would avoid excessive differences in carbon prices between sectors.
Fourth, a system applying only to the oil and gas sector should nevertheless seek to cover the broadest possible share of emissions from that sector. A system with broad coverage would promote greater liquidity in the secondary market for permits, which would increase its value. A market with too few players could also suffer from a lack of competition in the acquisition and trading of permits, which would distort their price in the market. To remedy this situation, it would be interesting to open the permit allocation processes, such as auctions, to investors who are not only GHG emitters in the sector.
Fifth, it must be recognized that the oil and gas sector is exposed to the risk of emissions leakage abroad. This is particularly the case for oil, because of the strong capacity of the Organization of Petroleum Exporting Countries to increase production. To reduce leakage, emitters can be granted permits free of charge for a fraction of their historical emissions.
The five elements mentioned each have complex issues. In this regard, the federal government could benefit from Quebec's experience with its cap‑and‑trade system, which includes the elements mentioned, including a floor price, investor participation in permit auctions and a dynamic mechanism for allocating free permits.
In conclusion, I would like to reiterate that simply introducing an emissions cap for the oil and gas sector is no guarantee of success. This cap can be useless, if set too high, or unnecessarily costly, if it is poorly linked to the rest of the greenhouse gas emitting sectors. The devil is in the details, so the details will have to be carefully worked out to avoid the many pitfalls of this cap.
Thank you.