Thanks so much for inviting me to speak today.
Should the government adopt an emissions cap for the oil and gas sector, our research suggests that a well-designed policy would be consistent with an economically prosperous pathway to net zero for Canada.
I would like to make three points today, drawing on our research.
First, a new zero pathway for the oil and gas sector is feasible. The institute's research shows that Canada can achieve net zero while maintaining economic growth. These pathways rely on two kinds of solutions.
Safe bets are already commercially available and scalable. In oil and gas, safe-bet solutions include methane capture from fugitive emissions, industrial energy efficiency, and carbon capture, utilization, and storage, CCUS, for concentrated streams of CO2. Safe bets are critical for achieving the 2030 target.
Wild cards on the other hand might be game-changers, or they might not contribute significantly. In oil and gas, wild cards include blue hydrogen, direct air capture for carbon removal, and CCUS for unconcentrated streams. Achieving net zero by 2050 becomes easier if wild cards become available. That means safe bets and wild cards are complements. Both are necessary, and both require policy.
Safe bets are driven by increasingly stringent carbon pricing and regulations, for example, methane regulations to the clean fuel standard. Wild cards are driven by expectations of future carbon prices; they require policy certainty, but also public investments in innovation demonstration projects.
A cap on emissions in the oil and gas sector should be part of a coherent strategy that includes policies to create incentives for both safe bets and wild cards.
Second, a cap should take into account international shifts. Our research finds that international action on climate change, and the market shifts that will come with it, will have bigger implications for the long-term competitiveness of oil and gas than domestic climate policy.
This shift is already under way. International investors with over 40% of global assets under management have committed to supporting net-zero goals. Countries representing more than 90% of global GDP have committed to net zero, and the costs of low-carbon technologies are dropping rapidly.
A sector cap should recognize that this international momentum could decrease demand for Canadian oil and gas over the medium to long term, creating risks of lost competitiveness and lower production. Projections from the IEA and the Network of Central Banks and Supervisors for Greening the Financial System highlight that an accelerating global low-carbon transition is a credible future with real risks and opportunities, and must be taken seriously by policy-makers.
An ambitious but practical cap on oil and gas emissions can also support long-term competitiveness in an investment environment that increasingly prioritizes transparency and disclosure around environmental performance.
Third, a cap on oil and gas emissions should be designed to cost-effectively work with other policies as a coherent package that can be adjusted and adapted over time.
A sector cap should cap emissions, not production. It should rely on a flexible, market-based policy instrument to implement a regulated cap. Existing output-based carbon pricing systems could be adapted to provide certainty with respect to emissions and emissions levels.
Incentives should be created for carbon removal. Credits for permanent carbon removal under the cap could create these incentives, but they also could create liquidity in markets for credible credits under the cap.
There should be coordination with other policies. A tax credit for carbon capture, utilization, and storage, for example, would make it easier for firms to achieve the emissions cap, but would also affect demand for tradable credits and the price of carbon in the sector.
It should be robust to uncertainty. Faster than expected declines in global demand and low oil prices could also lead to lower carbon prices under the cap. Spikes in demand could lead to high prices.
Relying on transparent and predictable governance processes is one approach to update and adjust these strategies in this coherent package of policies over time to address those challenges.
Thank you for the opportunity to speak. The institute looks forward to sharing additional research to inform this policy issue in the future.
I'm happy to take any questions.