Evidence of meeting #4 for Natural Resources in the 44th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was cap.
A video is available from Parliament.
Liberal
The Chair Liberal John Aldag
Our virtual clerk will call it.
(Motion agreed to: yeas 11; nays 0)
We will make every effort to invite Net-Zero back for an hour this week. We will communicate their availability and all the logistics.
Now I'd like to move on to the panellists who are joining us.
Is Mr. Jaccard with us?
Liberal
The Chair Liberal John Aldag
Thank you.
We also have Sara Hastings-Simon, assistant professor, University of Calgary. You're there?
Dr. Sara Hastings-Simon Assistant Professor, University of Calgary, As an Individual
Hello.
Liberal
The Chair Liberal John Aldag
Thank you.
From the Canada West Foundation we have Colleen Collins, vice-president. I see Colleen.
We're going to go for five-minute opening statements by the three of you. I have a handy card system. I'm going to give you the yellow card when there are 30 seconds left and the red card when the time is up. This applies when we're doing questions and answers as well.
Don't cut yourself off mid-sentence when you see the red card. Make every effort to wrap up as quickly as possible, so we can get to the next statements or questions.
With that, I will turn it over to Ms. Hastings-Simon for her opening statement of five minutes.
Assistant Professor, University of Calgary, As an Individual
Thank you.
Thanks for the opportunity to appear today.
I'd like to offer three observations and principles related to the plan for a greenhouse gas emissions cap for the oil and gas sector.
The first is that Canada's production of oil and gas takes place within a global market that is showing signs of a rapid change. This is important because the future demand for Canadian oil and gas is heavily dependent on the actions other countries take to respond to the climate crisis, and the price received by Canadian producers will depend on the global supply/demand balance.
The emissions caps design therefore should take into account how the demand and price may change. I'd like to offer one example to illustrate the speed at which markets are changing, which is the acceleration of the adoption of electric vehicles.
The IEA net-zero report published in May 2021 outlines the pathway for the global energy system that would allow the globe to reach a goal of net zero by 2050. The report highlights electric cars as one of three key technologies that would need to dramatically scale up by 2030 to achieve such a goal. The graph that I have provided shows the scale-up required, which is to 25% of vehicle sales by 2025 and just over 60% by 2030.
While the scale-up required is significant, the trajectory of sales of EVs through 2021 and sales expected in 2022, which is shown in bars on the same graph, are more than on pace with this ambitious target, demonstrating the potential to achieve this portion of the net-zero goal.
The report also examines the implications of following a net-zero pathway on the global fossil fuels supply and demand, showing that it would decline from 2022 onwards, with prices ultimately declining to $35 a barrel in 2030. Moreover, the current high oil prices are not incompatible with a sector under transition and instead are what one would expect in terms of significant volatility in prices during a transition period.
While the net-zero target remains ambitious and personal transportation is not the only source of demand for oil, it is significant both in its impact as well as an example of the potential pace of change. For example, in the United States, one of the largest importers of Canadian oil, 44% of oil consumption is in the form of motor gasoline. As a result, rapid adoption of electric vehicles would have a meaningful impact on the supply/demand balance.
My second point is on the structure of the cap and integration with existing mechanisms. If the intention is to implement a firm quantity limit, I believe the appropriate policy approach would be a cap-and-trade structure with full auctioning of permits. Decisions would need to be made as to the use of revenues from the permits, but they could be recycled in such a way as to support workers and communities and mitigate global competitiveness concerns. Such a cap should be integrated with existing mechanisms such as the OBPS system or provincial-level policies such as the OBA in Alberta.
It is, however, important also to identify areas where the current policy is not efficient. For example, in Alberta, the use of facility-level benchmarks in the carbon pricing system within the oil and gas sector creates different effective carbon prices for different projects. Without making changes to the system to revert to facility-level benchmarks, a declining cap could lead to a reduction in production from resources with a lower carbon footprint over those with a higher footprint because of the structure of the existing policy.
My third point is on the need for complementary measures to drive reduction under a cap. There are significant non-economic barriers to reduction of emissions within the oil and gas sector, just as there are across other industrial sectors. While a cap can be part of a policy approach to reduce emissions, it must be supplemented by policies that address these barriers directly.
There are also practical challenges and timeline constraints that support the use of complementary measures. Relying only on a cap is risky, as the experience with cap-and-trade systems elsewhere shows that systems are typically designed with some form of relief mechanism that distorts a hard cap, and even an ambitious timeline for design and implementation of a new cap would require one to two years to design, followed by some period for implementation.
Complementary measures can ensure emission reductions continue during this time period. These complementary measures could include, for example, increasing the stringency of methane regulations as well as introducing energy efficiency regulations or requirements for electrification.
Where complementary measures and, in particular, direct public financial support for emission reductions are introduced, they should be done in a way that fairly shares the risk and reward of emission reduction technologies between the public and private sectors. This includes, for example, integrating support within the current carbon pricing system, and where public funds are used to pay for emission reductions, the future value of those reductions from the carbon price should be returned to the public.
Thank you.
Liberal
The Chair Liberal John Aldag
That's perfect timing. You are right on the five-minute mark. Thank you.
Mr. Jaccard, if you're ready, we'll move right to you for your opening five minutes.
Professor, Simon Fraser University, As an Individual
Thanks for this opportunity to appear.
In my remarks, I'm just going to focus on two challenges. The first is setting the level of the greenhouse gas cap, and the second is the design of a policy mechanism to achieve the cap, and I'm sure you're hearing a lot in both of those areas.
First, with setting the level of a greenhouse gas emissions cap, we need to clarify that this is an emissions cap, not a production of oil and gas cap. That might seem obvious to everyone here, but I hear a lot of environmentalists who will talk about a mandated decline in oil and gas production. This would be unnecessarily harmful to fossil fuel-endowed regions in our country and probably would be unconstitutional as a federal policy anyway.
Second, though, understand that an emissions cap that ultimately reaches zero is already technically feasible today, so this case on the other side.... There are environmentalists on one side and industry on the other. I hear people saying that it's not technically possible to get to zero emissions and that we're going to need offsets or other things, and that's not true, and it wasn't true 20 years ago. The issue is cost, of course, and more innovation would certainly help to decrease the cost, but we can get to zero now. We have the technologies.
The third point is to aim for a cap where the incremental costs of additional greenhouse gas reduction in the oil and gas sector in, say, 2030, 2040 or 2050 should approximate the incremental costs of reductions in other sectors. The idea is that you do that because this minimizes the cost to your whole economy of reducing greenhouse gases, but there is a qualification to that. The cost to the economy of greenhouse gas reduction in trade-exposed industrial sectors like oil and gas as well as steel, chemicals, aluminum and cement will be greater if Canada's policies are more stringent than those of the industries' foreign competitors.
In practice, this means that, while we might have a 40% national reduction target for 2030, we might require significantly more than a 40% reduction in some of our domestic sectors like electricity, transport, buildings and land use, and perhaps only a 15% to 25% reduction in trade-exposed sectors like oil and gas. I've also heard people say that the national target is this and therefore that's the cap level in oil and gas, and that, again, doesn't make sense to me.
In terms of the mechanisms—the second part of my talk—to achieve the cap, there's much to discuss here. Obviously in an opening comment I can't say a lot, but I would say that, given the importance of oil and gas in total Canadian emissions—some 25% and above—and its role in producing secondary energy products whose combustion is the main cause of climate change, it might be administratively easiest to remove oil and gas from the current output-based pricing system and establish its own sector-specific cap and trade system.
Within that system, producers within the oil and gas sector would of course trade with each other, and you would try to set it up in the way that Ms. Hastings-Simon was talking about, although I'm not sure you need to auction all the permits. Those are big discussions that one can have. Also producers within the sector could acquire lower-cost external kinds of offsets; but I'm talking about offsets that really do take CO2 from the atmosphere and put it underground, not the offsets that many of us analysts are finding somewhat bogus in many cases. Instead, it would be extracting CO2 from the atmosphere, something called direct air capture. We have the technologies now. They're in their early stages in burying the CO2 underground or even bioenergy capturing the CO2 and putting that underground.
My final point is that governments, whether federal or provincial, enacting the policy will want to adjust the sector target. So there's going to be some signalling from the federal government, and we may need to provide some public support to sustain the competitive position of Canada's oil and gas industry relative to foreign competitors in jurisdictions with laggard greenhouse gas efforts.
That was the point I was making earlier. You're going to look at what you achieve in oil and gas, and it can be different or less ambitious because it's a trade-exposed sector, and you may even provide some kinds of public support.
I will end my comments there and thank you very much for your attention.
Liberal
The Chair Liberal John Aldag
Thank you for those opening comments.
Ms. Collins, we will go right to you, in the interest of time. You have five minutes.
Colleen Collins Vice-President, Canada West Foundation
Thank you for inviting the Canada West Foundation to appear at your committee today.
The policy's purpose is to achieve emissions reduction. That's the central point of this policy and the Canada West Foundation certainly does not disagree with that purpose.
We also recognize there are many pathways to get there. There's no silver bullet. It's going to take carbon capture, energy efficiency, process improvements, fuel switching, electrification, renewables, nuclear, hydro, and new technologies on the horizon.
There are also many policy tools. Carbon pricing alone can't do it. We already have a complex mix of carbon pricing, cap and trade, methane regulations, fuel standards, emissions standards, incentives for innovation, investments in new technologies like carbon capture, and then there are emission caps.
As one of the big emitters, emissions reductions from oil and gas sectors is a big part of the solution. A 2020 Canada West Foundation report found that 43% of all emissions regulations in place across the country at that time specifically addressed the oil and gas sector and that number increases to 65% when you include large emitters.
You also, I am sure, are aware that Alberta already has an emissions cap for the oil sands. A 100 megatonne cap was introduced in 2015 as part of the climate leadership plan. The Oil Sands Emissions Limit Act remains in place despite changes to other climate policies since then. Since then, other provinces have enacted targets or caps or cap and trade programs.
Before extending this tool across the entire oil and gas sector across several provincial jurisdictions, I would like to bring three points to the committee's attention as it considers whether there are sufficient expected benefits from this proposed policy to compensate for the additional costs to producers and the economies of producing provinces and the rest of Canada.
The Alberta cap works because there is room for growth under the cap. It supports economic growth and innovation to reduce emissions, so the environment and the economy are explicitly recognized in the design of that cap. It's one thing to regulate 35 oil sands sites with six producers, but it's a whole other thing to regulate 200,000 sites across different provincial jurisdictions to establish this cap.
Finally, this additional regulation will create even more complexity, uncertainty and federal-provincial wrangling. The Supreme Court decision on the Greenhouse Gas Pollution Pricing Act was narrow. This proposal is very broad. There will be federal-provincial battles over the cap. There will be battles over measurement and the validity of the policy itself, none of which is good for investment required in new technologies to reduce emissions or for the economy. Uncertainty is the reason Teck declined to proceed with the Frontier oil sands mine in 2020, and that was only [Technical difficulty—Editor] of emissions. Uncertainty is the reason Canada has one LNG facility, which is under construction, while Australia has 16, the U.S. has seven, and the rest of the world has 70 LNG facilities.
Are these benefits primarily symbolic? Canada and its provinces are already recognized leaders in emissions reduction policy. One has to ask what the value is of additional legislation that creates even more uncertainty and distracts from the business of implementing existing policies.
I will cede the rest of my time for additional questions.
Liberal
The Chair Liberal John Aldag
Thank you.
We're going into some rounds of questioning.
First up for six minutes, we have Ms. Rempel Garner.
Conservative
Michelle Rempel Conservative Calgary Nose Hill, AB
I wish I had 20 minutes, Chair.
For all the witnesses here, anticipate calls from me.
How I'm going to structure this is I tried to distill some recommendations based on all your presentations and I would like to get a yes or no on if I have summarized this right.
The first one is that this needs to be a cap on emissions, not on production, in order to respect jurisdiction. Is that correct? Do any of the witnesses object to that?
Assistant Professor, University of Calgary, As an Individual
I don't object to the cap on emissions rather than production. I don't have a comment about the jurisdiction piece of that.
Conservative
Michelle Rempel Conservative Calgary Nose Hill, AB
The second would be to avoid carbon leakage by including a system for measuring carbon leakage in the cap and then setting an equilibrium point to ensure that we're not having a perverse incentive.
Does that make sense?
Professor, Simon Fraser University, As an Individual
It's Mark Jaccard here.
Yes, but it's also leakage. It's also how you decide how much you're doing in other sectors in Canada. There are two parts to it.
Conservative
Michelle Rempel Conservative Calgary Nose Hill, AB
That brings me to my other one.
You stole my thunder, Mr. Jaccard. It's a terrible place to be.
We need to have a simultaneous sector-by-sector approach on emissions caps to ensure that we're not creating the situation that you just talked about and that we're also not disadvantaging one region of the country over another. Is that correct?
Conservative
Assistant Professor, University of Calgary, As an Individual
I don't think it has to be done that way. I think there are different ways to reduce emissions across the sectors.
Conservative
Assistant Professor, University of Calgary, As an Individual
At what level would that be? When you say “cap”, it sort of—
Conservative
Michelle Rempel Conservative Calgary Nose Hill, AB
If the government's going through the process for the oil and gas sector, is there any reason why they shouldn't be looking at, let's say, concrete or cement, at the same time?
Assistant Professor, University of Calgary, As an Individual
So you're talking about other industrial sectors?
Assistant Professor, University of Calgary, As an Individual
I think it would make sense to look at other sectors—not necessarily at the same level, though.