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Strong methane regulations make the oil and gas emissions cap easier and cheaper

Cost-effective methane reductions can do a third of the work required to align the oil and gas sector with Canada’s 2030 target.

Greenhouse gas emissions from the oil and gas sector pose a major challenge to Canada’s climate commitments. Emissions in the sector have risen by 12 per cent since 2005 and now account for 28 per cent of Canada’s total. Failure to bend the curve on these emissions will make it more difficult, or even impossible, to achieve Canada’s 2030 target. 

To get the sector on track, the federal government has committed to introducing regulations next year that will cap and reduce oil and gas sector emissions. Successful implementation of a stringent emissions cap can keep Canada’s climate ambitions in sight. How stringent, however, depends on how other policies for the sector are designed, in particular regulations that require oil and gas firms to dramatically reduce upstream methane emissions. 

While there are a number of emissions-reducing solutions that can put the sector on a pathway consistent with Canada’s 2030 targets, some are easier and cheaper to implement than others. In particular, reducing methane emissions—which occur when methane is released accidentally, due to leaks or equipment failures, or intentionally for safety and operational reasons—is recognized as the most cost-effective and impactful way to curb emissions from the oil and gas sector. 

In this week’s deep dive, we break down how reducing methane through aggressive regulations is a win-win for the oil and gas sector—making it easier, and more economical, to meet the proposed emissions cap. 

Our approach

We worked with Navius Research to understand the role of regulations to reduce methane emissions as a complement to the proposed oil and gas emissions cap. 

In our analysis, total emissions in the oil and gas sector decline to 110 Mt in 2030—in line with projections from the Emissions Reduction Plan (ERP). Those emissions reductions can be achieved through a combination of policies that cover different emissions within the sector. We focus on two major policies in our analysis—the proposed regulated emissions cap and the federal methane regulations:   

  • While the federal government has yet to outline the specific design for the proposed emissions cap, the two options on the table require a price on emissions. Including methane under the cap may be challenging, since methane emissions are difficult to measure and therefore price—which is why they are largely excluded from current carbon pricing systems. In our analysis, the emissions cap regulates all greenhouse gas emissions except for methane.1  
  • The federal methane regulations are the main policy driving methane reductions in our analysis. These regulations require industry to meet certain facility and equipment standards to reduce venting and fugitive methane emissions from the upstream oil and gas sector, including by introducing venting limits and requiring regular leak detection and repair. 

The regulated cap and the methane regulations work together to reduce emissions to 110 Mt in the sector, with more work by one policy requiring less by the other. 

To isolate the role of methane regulations, we modelled two scenarios. Both contain the full suite of policies from the ERP, including the proposed cap, but toggle the stringency of the federal methane regulations. In the Current Methane Regulations scenario, the federal regulations are designed to reduce methane emissions in the sector by 45 per cent below 2012 levels by 2030—in other words, no reductions beyond what is currently regulated for 2025. In the Deeper Methane Regulations scenario, the regulations are designed to reduce methane emissions by 75 per cent, in line with the proposed regulations expected this Fall. 

Finally, our analysis assumes “reference” global oil prices based on the Current Measures scenario from the Canada Energy Regulator’s 2023 Energy Futures report

A quick caveat before we get into results. While we use the reported methane emissions from Canada’s National Inventory report in this analysis, we know that historical, and therefore projected, methane figures are significantly underestimated due to reporting and measurement challenges. Better measurement and reporting are essential to benchmark, track, and reduce methane emissions in Canada’s oil and gas sector. 

Methane reductions can do a third of the work to get to 110 Mt

We assessed two indicators in this analysis—emissions and economic activity. 

With respect to emissions, we wanted to understand what share of emissions reductions required to achieve 110 Mt in 2030 could be met simply by complying with the new, more stringent methane regulations. While the total sector emissions remain consistent across both scenarios, declining to 110 Mt in 2030, the specific composition of the sector’s emissions changes depending on the stringency of the methane regulations (Figure 1). 

Figure 1 shows the relative contribution of methane versus carbon dioxide (CO2) and other greenhouse gases in reducing emissions in the sector to 110 Mt in 2030 in both the Current Methane Regulations and Deeper Methane Regulations scenarios. In the Current Methane Regulations scenario, methane reductions contribute just 10 per cent—or 9 Mt—of the total reductions required to reduce emissions to 110 Mt in 2030, leaving the remaining 90 per cent of effort—or 77 Mt—to come from other, often more difficult and expensive abatement measures. By contrast, in the Deeper Methane Regulations scenario, methane reductions contribute a third of the reduction required–equivalent to 28 Mt, leaving less work for other abatement measures. 

Simply put, the sector can achieve a third of the emissions reductions required to reduce emissions to 110 Mt simply by complying with the forthcoming methane regulations.

Stronger methane regulations lower costs

Going deeper on methane reductions can also have economic benefits. Despite claims from industry that the emissions cap is not achievable without major production cuts, our analysis shows that the emissions cap can be compatible with continued economic growth. And that growth is larger when the sector taps into low-cost methane abatement opportunities like detecting and repairing leaks, introducing stronger venting and flaring limits, and replacing equipment with low- or zero-emissions alternatives. These solutions are relatively cheap for industry to implement, especially compared to more expensive options like carbon capture utilization and storage. 

Methane abatement may even result in savings for companies if the value of the reserved or captured methane, which can be sold as fossil gas, is greater than the cost of the abatement technology. In addition, methane abatement is vital to making new lines of business for oil and gas firms, like blue hydrogen production, economically viable and consistent with net zero goals.

As Figure 2 shows, the Current and Deeper Methane Regulations scenarios, which both include the oil and gas emissions cap, show increased economic activity in the sector in 2030 compared to 2020. However, the oil and gas sector’s contribution to gross domestic product (GDP) in 2030 is $6.3 billion higher in the Deeper Methane Regulations scenario than in the Current Methane Regulations scenario. Our analysis shows that going deeper on low-cost methane abatement can reduce the need for more expensive, harder-to-deploy solutions, thereby lowering the costs of reducing emissions to 110 Mt and freeing up more capital to drive economic growth. 

Reducing methane emissions by 75 per cent should be the minimum for cost-effective policy 

Bending the curve on the oil and gas sector’s emissions is critical for keeping Canada’s economy-wide targets within reach. Both an emissions cap and aggressive methane regulations have complementary roles to play. Our analysis shows that the cap is achievable and can be made easier and more economical simply by reducing methane emissions in line with the updated federal target. And that’s only taking into account meeting the minimum regulatory requirements. 

In fact, the 75 per cent target is more of a regulatory floor than a ceiling. The trajectory of methane commitments at home and abroad is pointing towards more ambitious methane reductions. Alberta and British Columbia, for their part, have committed to stronger methane targets, and the heads of major oil and gas companies are aiming for near zero methane emissions by 2030. 

But more ambition does not necessarily mean more action. Government policy is required to ensure these emissions reductions happen in practice, especially when vented and leaked methane emissions are not currently covered by most carbon pricing systems in Canada. In particular, targeted policies like the strengthened federal methane regulations are essential to ensuring that methane emissions decline quickly in order to reap the emissions reductions and economic benefits they deliver. And, if methane emissions are in fact significantly higher than reported, the rationale and urgency for reducing those emissions is even stronger.

Ultimately, while reducing methane emissions is the low-hanging fruit of the oil and gas sector’s emissions reduction efforts, methane currently makes up only one fifth of the oil and gas sector’s total reported emissions. Stay tuned for a future insight where we’ll explore the role of other solutions in closing the gap to 110 Mt. 

Anna Kanduth is a research lead with the Canadian Climate Institute and manages the 440 Megatonnes project. Brad Griffin is a 440 Megatonnes advisor and the Executive Director of Simon Fraser University’s Canadian Energy and Emissions Data Centre.

Data provided by Navius Research.

1 In our analysis, revenue collected under the emissions cap is recycled back to industry and the oil and gas sector is excluded from the output-based pricing system.