Thank you to the chair of the natural resources committee for the opportunity to speak with you today.
My name is Francis Fong. I'm managing director of ESG research at TD Economics. As a bit of background, TD Economics produces economic analyses, forecasts and research on a wide variety of macroeconomic issues, with my team specifically focused on environmental and social issues.
In my opening remarks, I'd like to put forward a few different perspectives that I feel will be important as the committee considers both the implementation and policy design of a hard cap on oil and gas sector emissions.
First, while it has likely already been discussed in previous meetings, I'd like to reinforce the importance of addressing the emissions intensity of fossil fuel production.
Second, I'd like to discuss the difficulty in assessing the potential economic implications of this policy by situating this discussion in the broader milieu of Canadian climate policy.
Third, I'd like to discuss how government can and should play a more active role in helping to address the sector's emissions through ancillary policies including incentivizing decarbonization and through areas like carbon border adjustments.
Let me start by saying that this is a critically important discussion to be having, particularly now with our interim emissions reduction target now set at 40% to 45% from 2000 levels by 2030. Canada, like many countries, is going to face difficulty in reaching this goal. It is, however, critical that we do so in order to remain on the pathway to keeping average temperature increases well below 2°C and in line with 1.5°C, but this, of course, raises the question of how we can do so in such a short period of time.
A natural place to look is in Canada's fossil fuel production, specifically oil and gas. The sector currently accounts for more than one-quarter of our total greenhouse gas emissions. Those emissions have risen steadily by almost 90% between 1990 and 2019 due to a combination of rising production to meet growing demand for fossil fuels and high average prices for those commodities, making Canada's relatively emissions-intensive production economical.
As such, there is an urgent need to address emissions in this sector, given the prevalent role that oil and gas production plays in Canada's aggregate emissions profile. However, I would note that focusing on oil and gas production is one side of the equation. As Professor Anderson has already succinctly put, which I'll add to, 66% of Canada's primary energy consumption is generated from fossil fuels, a share that has not shifted significantly in recent years.
While this is an obvious point, it is still worth stating that there are two ways to go about adjusting emissions in the sector: reduce our overall dependence on fossil fuels by decarbonizing end-use services, or reduce the emissions intensity of production. We likely need to pursue both pathways aggressively if we are to reach our target.
A hard cap on oil and gas sector emissions is one of many policies that ought to be considered as part of a broader package that balances aggressive emissions reductions in production with equally aggressive incentivization of decarbonization of end-use services. Such policies should also factor in other considerations, including transition policies for those who will be most impacted by climate change, both in terms of extreme weather events and the clean energy transition itself, and ensuring the reliability of our energy supply.
In considering a hard cap on emissions as part of a broader policy package, it is difficult to fully assess economic implications in isolation from others and against the broader economic backdrop that we currently find ourselves in. Certainly there would be concern that this might impact the competitiveness of oil and gas, but how this policy would interact with the Greenhouse Gas Pollution Pricing Act, including the evolution of the emissions benchmark used in the output-based pricing system, clean fuel regulations, etc., is not exactly clear.
Notionally these climate policies individually and in aggregate would act in helping to reduce emissions gradually over time, but perhaps at the expense of competitiveness relative to those countries with less stringent climate policies in a sector that still plays a very significant role in the broader economic prosperity of this country. However, this too might currently be mitigated by the current path of commodity prices. Putting aside that one of the sources of this is the horrifying events unfolding in Ukraine, it is undeniable that the outlook for the sector has been altered due to the high level of commodity prices.
It is also possible that any competitiveness impact is also muted by other policies already under consideration. Consider Canada's proposed methane regulations. Our recent commitment made in October of last year pledged to reduce methane emissions in the oil and gas sector by 75% from 2012 levels by 2030. These come mainly from venting and fugitive emissions and have been on a downward trend since the late 1990s. However, methane still represents roughly one-quarter of total emissions in this sector, and so reaching this 75% reduction target would mean a net decline in CO2 equivalent of approximately 28 megatonnes from current levels.
Adjusting methane, which I'm given to understand is achievable using current technology, might simultaneously achieve the same goal of reducing emissions in the sector. Combine that with efforts to decarbonize big ticket end-use services, which Mr. Merk and Professor Anderson have already alluded to, areas like the transportation sector where greenhouse gas emissions have risen steadily and consistently since 2007 even as emissions in most other sectors of the economy have either flatlined or fallen.
If efforts to increase the adoption of electric vehicles, for example, are successful, then again it's possible we might find that a hard cap on oil and gas sector emissions ends up being less relevant. As such, we need to be combining this policy with other policies to get at the root of emissions.
Perhaps I'll leave it there.