Oil and Gas Sector Greenhouse Gas Emissions Cap Regulations (Draft Regulations)

On 9 November 2024, Canada published the draft Oil and Gas Sector Greenhouse Gas Emissions Cap Regulations (“Regulations”). The Regulations propose to establish a national cap-and-trade system for GHG emissions from Canada’s oil and gas sector. The cap-and-trade system will cover various activities related to oil and gas, including oil and gas extraction, oil processing and production, natural gas compression, natural gas processing, and LNG production. The cap-and-trade system would be structured around three key obligations, which will enter into force gradually: (1) registration; (2) reporting; and (3) remittance.

First Obligation: Registration

 

The first obligation would be for oil and gas operators to register. All oil and gas operators would be required to register with the federal Environment Minister before 1 January 2026. After this date, oil and gas operators that have not registered with the Minister would be prohibited from emitting any GHG from their industrial activities. 

 

Second Obligation: Reporting

 

The second obligation would be for oil and gas operators to report their GHG emissions (including their methane emissions) to the Environment Minister. Oil and gas operators would be required to produce two reports: (1) an annual report for each producing facility, including the quantity of GHG emissions attributed to the facility; and (2) a cumulative report for their total production across all facilities. Both reports would need to be verified by an accredited third party. Quantification of GHG emissions would need to be done in accordance with the methodology set out in the Quantification Methods for the Oil and Gas Sector Greenhouse Gases Emissions Cap Regulations. The annual report would need to include information on the quantity of GHGs from all specified emission sources at the facility, including from venting, flaring and leakage.

 

The reporting obligation would start on 1 June 2027 for large operators (for the 2026 calendar year) and on 1 June 2029 for smaller operators (for the 2028 calendar year). Small operators are those with a total monthly production below 30,000 barrels of oil equivalent for all months between January 2024 and June 2025. After the first report, operators would be required to continue submitting reports for each calendar year in which they emitted GHGs.

 

Third Obligation: Remitting 

 

The third and final obligation would be for oil and gas operators to remit sufficient “compliance units” to cover their GHG emissions. Starting on 1 January 2030, oil and gas operators would be prohibited from emitting GHGs from their industrial activities unless they remit sufficient compliance units to cover their reported GHG emissions. One compliance unit would be equivalent to one tonne of CO2-equivalent emissions. The remittance obligation would apply over a three-year “compliance period”, with the first compliance period starting on 1 January 2030 and ending on 31 December 2032. The remittance obligation would only apply to oil and gas operators whose total annual production is equal or superior to 365,000 barrels of oil equivalent in any of the 2026, 2027 or 2028 calendar years.

 

To comply with their remittance obligation, operators would have two options: (1) remitting emission allowances; or (2) remitting “compliance flexibilities”, as explained in further detail below:

• Emission Allowances: Under the proposed Regulations, the oil and gas sector would become subject to a cap on GHG emissions. The cap would be set at 27% below the total GHG emissions reported by oil and gas operators for the 2026 calendar year. Over time, the emissions cap would be gradually reduced to reach net-zero by 2050. Based on the emissions cap, the Environment Minister would distribute emission allowances to covered operators (free of charge) on an annual basis. Allowances would be distributed according to the distribution rate (emissions per unit of production) specified in the Regulations for the applicable industrial activity. Distribution rates would be set based on national emission intensities for different industrial activities (rather than absolute emissions), which is intended to incentivized emission intensity improvements. 

• Compliance Flexibilities: There are two compliance flexibilities that oil and gas operators would be able to remit in lieu of emission allowances: (1) Canadian offset credits; and (2) decarbonization units (obtained by making a contribution to a decarbonization program). However, oil and gas operators would not be allowed to remit the entirety of their GHG emissions through compliance flexibilities – rather, oil and gas operators would only be allowed to remit compliance flexibilities in order to cover a maximum of 20% of their GHG emissions. 

 

Oil and gas operators with a deficit of free emission allowances would have various available strategies to comply with the remittance obligation: purchasing allowances from other covered operators; deploying abatement technologies; using compliance flexibilities; or reducing production. In contrast, oil and gas operators with a surplus of free emission allowances would be able to sell them to other operators or keep them for use in a future year.

Estimated Impacts

 

According to the Government of Canada, setting the emissions cap at 27% below reported emissions for 2026 will align with a 35% reduction in GHG emissions below 2019 levels. When also considering compliance flexibilities, the Government of Canada estimates that the oil and gas sector will be able to emit up to a "legal upper bound" of 19% below 2019 levels. 

 

The Canadian Government estimates that between 2025 and 2032, the proposed Regulations will result in cumulative GHG emission reductions of 13.4 MT, equivalent to 4 billion CAD in avoided climate change induced global damages. 

 

 

 

 

 

 

 

 

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