Canada asks oil firms to cut emissions by up to 38% in six years

By Ismail Shakil and Nia Williams

OTTAWA (Reuters) -Canada unveiled a plan on Thursday aimed at pushing oil and gas companies to cut emissions up to 38% from 2019 levels by 2030, by introducing a cap-and-trade system that drew immediate opposition from industry groups and some fossil fuel-producing provinces.

Federal Environment Minister Steven Guilbeault said the framework for the cap-and-trade system, which would allow companies to buy offsets if their emissions are too high, was "ambitious, but practical" and would help the industry cut pollution without cutting production.

"It considers the global demand for oil and gas, and the importance of the sector in Canada's economy, and sets a limit that is strict, but achievable," Guilbeault said in a statement.

The long-awaited proposal was slammed by two of Canada's main oil-producing provinces, Alberta and Saskatchewan, and the federal Conservative opposition, as well as industry groups who said a cap was unnecessary.

Canada, the world's fourth-largest oil producer, is aiming to cut emissions 40% to 45% below 2005 levels by 2030. The sector is Canada's highest-polluting industry, accounting for more than a quarter of all emissions.

Many climate campaigners have said oil and gas emissions should be capped at 110 megatonnes by the end of the decade, from 189 megatonnes in 2021, to meet that goal. Under the cap-and-trade system the emissions cap in 2030 would be set at 106 to 112 megatonnes.

However, oil and gas companies would be allowed to produce up to an additional 25 megatonnes and offset those emissions by purchasing carbon offset credits or paying into a decarbonization fund.

The federal government is aiming to publish draft regulations next year and the final regulations in 2025. The first compliance period is undetermined but will start between 2026 and 2030.

Climate policy analysts said the framework was a step toward meaningful and realistic reductions in oil and gas emissions, but the cap will need to decline steeply after 2030 for Canada to hit net-zero emissions by 2050.

"They have ended up at a reasonable level of stringency that looks like it's technically feasible and also gives firms a degree of flexibility," said Dale Beugin, executive vice president at the Canadian Climate Institute.

Beugin said the timeline is relatively slow however, and should be sped up, while a potential government change in Canada's next federal election, due to take place by 2025, could also undo the policy.

The opposition Conservative Party, currently leading in the polls, said the cap was "yet another attack on Canadian workers and Canada's world-class energy industry."

PROVINCIAL, INDUSTRY OPPOSITION

Alberta Premier Danielle Smith said the announcement intentionally attacked Alberta's economy, and that her government will develop a "constitutional shield" in response to the proposal in the coming months.

"This proposed cap also undermines the unity of our country," Smith said in a statement.

Alberta is also challenging the federal government's requirement for a net-zero electricity grid by 2035.

The Pathways Alliance, a consortium of Canada's six largest oil sands producers proposing a carbon capture and storage project to cut emissions, said Canada already had sufficient regulations in place to hit its 2050 net-zero target.

A report by the Canada Energy Regulator this year said the country will fall short of reaching net-zero emissions by 2050, unless it takes actions beyond the efforts already underway.

Pathways President Kendall Dilling said imposing an emissions cap "does nothing to advance the certainty" needed to build multi-billion-dollar decarbonization projects.

A number of other jurisdictions including the European Union and California use cap-and-trade systems to limit emissions.

(Reporting by Ismail Shakil, Steve Scherer and Nia Williams; Additonal reporting by Timothy GardnerEditing by Denny Thomas and Josie Kao)