The cap on oil and gas emissions is doable, but time is scarce

Any further delay in setting the cap or deploying solutions to meet it puts Canada’s climate goals further out of reach

Summary

Stronger methane regulations can do a third of the work required to reduce emissions in the oil and gas sector to 110 Mt in 2030. Quick and effective implementation of the proposed oil and gas emissions cap can close the gap and help bring Canada closer to its economy-wide 2030 emissions-reduction target. An effective emissions cap is doable, and many solutions have a role to play. Carbon capture, utilization, and storage (CCUS) in particular could deliver significant emissions reductions, but the magnitude of its contribution depends on uncertain oil prices and technology costs. The oil and gas sector can navigate this uncertainty by pursuing other “safe bet” measures like electrification. Finally, while an emissions cap can be compatible with rising production in the sector, production levels will ultimately be determined by global market forces beyond Canada’s control.

Introduction

Rising emissions from the oil and gas sector are undercutting climate policy progress and putting Canada’s 2030 and net zero targets at risk. To bring the oil and gas sector in line with Canada’s climate goals, the federal government is expected to introduce regulations next year that will cap and reduce emissions from the sector, with a framework outlining the government’s approach expected imminently.

In a previous Insight, we explored how methane regulations and the proposed emissions cap can work together as complements to reduce emissions from the oil and gas sector to 110 Mt in 2030—or 42 per cent below 2019 levels—in line with the federal government’s previous projections. We found that the cap is achievable and can be made easier and cheaper simply by reducing methane emissions by 75 per cent below 2012 levels, as the updated federal target aims to achieve.

While reducing methane can play an important role in aligning the oil and gas sector with Canada’s emissions reduction targets, it can only do so much. Our analysis finds that the sector can achieve one-third of the emissions reductions required to reduce emissions to 110 Mt simply by complying with the more ambitious methane regulations, leaving the remaining two-thirds to be covered by the proposed emissions cap. Reducing carbon dioxide and other greenhouse gases is essential to curbing emissions from oil and gas production. This means that other solutions have a central role to play.

Which solutions? Our analysis finds that emissions reductions in the sector will come from a range of measures (see Figure 1 below), with the most cost-effective path to 2030 ultimately depending on oil prices and technology costs. In addition, we find that an emissions cap can be compatible with continued growth in the sector. The analysis shows that as long as international oil prices remain robust—supported by ongoing demand—oil and gas firms can implement a range of emissions-reducing activities while making a profit.

Ultimately, production levels are determined by global market forces rather than the proposed emissions cap.

Methane reductions can do a third of the work required to reduce emissions to 110 Mt

We worked with Navius Research to explore cost-effective pathways to reduce emissions to 110 Mt in 2030. In our analysis, we assume that the forthcoming methane regulations—which aim to reduce methane emissions by 75 per cent below 2012 levels—are the main policy driving methane reductions, whereas the emissions cap regulates all other greenhouse gases. The emissions cap and the methane regulations work together to reduce sector emissions to 110 Mt in 2030.

The methane regulations reduce sector emissions by 28 Mt in 2030 relative to 2020 levels, leaving the remaining 58 Mt to be covered by the emissions cap. If Canada exceeds the 75 per cent target, as British Columbia and Alberta already aspire to do, it could mean less effort from the cap. While our last Insight explored the role of methane reductions, the remainder of this Insight explores the range of solutions to achieve the emissions cap.

The sector can deploy a range of solutions to meet the emissions cap

The least-cost pathway to decarbonizing the oil and gas sector will vary by subsector and by region, and will depend on technology development, cost declines, and changing market conditions.

To understand how the oil and gas sector could comply with an emissions cap, we explored six scenarios. These six scenarios contain the full suite of policies from the 2030 Emissions Reduction Plan (ERP), including the 75 per cent methane regulations, the proposed emissions cap, and the CCUS investment tax credit. Each scenario toggles two factors—the global price of oil and the cost of carbon capture, utilization, and storage. Our three oil price assumptions are based on the Current Measures, Canada Net Zero, and Global Net Zero scenarios from the Canada Energy Regulator (CER)’s 2023 Energy Futures report. Reference and high CCUS cost assumptions can be found here. Both of these dimensions are uncertain and driven by factors beyond Canada’s control, including the global demand for oil and technology advancements. They also, unsurprisingly, have major implications for CCUS, which is a central opportunity to reduce emissions in the sector.

We explored the potential role of nine abatement opportunities for the oil and gas sector by 2030. Figure 1 shows the contribution of these different solutions in meeting the emissions cap across our six representative scenarios.

Negative values represent where a solution contributes emissions reductions in 2030 relative to 2020 levels, whereas positive values show where an abatement category increases emissions. For example, in some scenarios, the oil sands sector is using more natural gas in 2030 than in 2020, driving emissions up in the “natural gas switching” category. Critically, this figure does not include methane reductions since, in our analysis, those are already covered by the methane regulations.

The ranges in Figure 1 are not a prescriptive roadmap; model results are not a prediction. Instead, they help illustrate the role that different solutions might play in meeting the emissions cap.

Our analysis finds that several solutions can work together to decarbonize the sector and meet the oil and gas emissions cap. Some solutions have greater potential, but also greater uncertainty (represented by a wider band in Figure 1), whereas other solutions play a smaller, but steadier role (represented by a narrower band), and are nonetheless important contributors to reaching the cap.

CCUS has an important role to play

CCUS is a primary solution put forward by industry and governments to reduce emissions from the sector. Our analysis shows that CCUS could play a central role in aligning the oil and gas sector with Canada’s 2030 targets—contributing most of the reductions in 2030 under certain conditions. For instance, when oil prices are at or above current levels in 2030, and CCUS costs decline more quickly, CCUS is the main driver of emissions reductions, contributing 50 Mt, or 92 per cent of the reductions required under the emissions cap. However, these two cost drivers are uncertain (as is the expectation on the part of oil and gas companies and their lenders of sustained high oil prices over time—a requirement to justify continued investment).

When global oil prices are low and CCUS costs are higher, CCUS plays a smaller role, contributing 17 Mt or 32 per cent of reductions required under the emissions cap—8.6 Mt in the oil sands, 5.3 Mt in natural gas, 1.7 Mt in petroleum refining, and 1.3 Mt in conventional oil. This latter scenario, where low oil prices and high costs constrain the role of CCUS, aligns more closely with estimates of the potential for CCUS from government reports and strategies, industry proposals, and other studies.

While CCUS has important potential, there are real barriers to deploying capture technologies quickly and at scale. These include uncertain technology development, high current costs, long project lead-times, and public opposition. To date, CCUS has not met global expectations, with cost declines and technology deployment moving at a much slower pace than projected.

Governments have a role to play in de-risking investment in CCUS and other emissions reduction activities, including by legislating the CCUS investment tax credit and introducing a climate transition taxonomy—in addition to finalizing the emissions cap and stronger methane regulations.

Critically, CCUS is only one solution among many to reduce emissions from the oil and gas sector by 2030. When it plays a more modest role, other solutions step in to achieve the 2030 emissions cap, underscoring the importance of advancing multiple solutions at once.

The emissions cap can be compatible with growth in production

While some claim that reducing emissions to 110 Mt in 2030 is not achievable without major production cuts, our analysis shows that an effective emissions cap can be compatible with rising production and economic growth, so long as oil prices do not decline significantly.

In scenarios where oil prices remain at current levels or decline only slightly, the sector deploys the abatement opportunities described above, alongside deep methane reductions, to reduce emissions to 110 Mt while also increasing production between 2020 and 2030. This suggests that the sector chooses to deploy these solutions rather than shutting down production. Only in scenarios with low oil prices, where global demand for oil and gas declines due to factors beyond Canada’s control, does oil production decline and natural gas production grow only slightly.

This is consistent with the results of our 2022 independent assessment of the ERP, where the oil and gas emissions cap does not significantly affect economic growth in the sector. Instead, it's a low global oil price that poses the biggest threat to the sector’s prosperity.

A growing number of studies, including recent publications from the Canada Energy Regulator and the International Energy Agency, find that global demand for oil and gas could peak this decade. While changing demand could undermine incentives to invest in emissions reduction solutions, targeted government policy can help mitigate that risk.

Reducing emissions from oil and gas is not only necessary for aligning the sector with Canada’s emissions reduction targets, but also for maintaining the sector’s competitiveness as global markets shift towards lower-carbon products. This is especially true for Canadian oil sands, where certain sites have historically produced relatively high emissions per barrel of crude oil compared to global peers.

Meeting the emissions cap is doable, but time is running out

Reducing emissions from the oil and gas sector is critical to bringing Canada’s 2030 target within reach. A cap on oil and gas emissions, accompanied by strong methane regulations, can do just that.

Our analysis shows that a cap is doable and can be achieved by deploying a number of solutions. While CCUS does some heavy lifting in our analysis, other measures—from electrification to other forms of fuel switching—also have an important role to play. In combination with deeper methane reductions, these solutions can reduce emissions by 86 Mt by 2030, bringing emissions in the sector down to 110 Mt (Figure 2). In addition, so long as global oil prices remain robust, the sector can deploy these solutions without curbing production.

These changes won’t happen on their own. While Canadian oil and gas companies are already investing in and deploying a suite of technologies, they must move much faster to reduce emissions and remain competitive. At the same time, emissions-reducing technologies take time to implement and policy uncertainty in Canada risks slowing or stalling action.

Governments must accelerate the implementation of key policies in the sector—including the oil and gas emissions cap, the federal methane regulations, the CCUS investment tax credit, and a Canadian climate investment taxonomy—to reduce uncertainty and send clear signals to firms and investors that it’s time to ramp up action. Any further delay will only put Canada’s emissions reduction goals further out of reach.

Anna Kanduth is the Director of 440 Megatonnes at the Canadian Climate Institute. Brad Griffin is a 440 Megatonnes advisor and the Director of Simon Fraser University’s Canadian Energy and Emissions Data Centre.

Data provided by Navius Research.

440 Megatonnes: Tracking Canada’s path to net zero