Oil pump jacks at sunset sky background.

The oil and gas industry will have to cut emissions by more than one-third or buy offset credits under the federal government’s new oil-and-gas cap policy being detailed Thursday.

The cap was promised by the Liberals in the 2021 election and is more than a year behind the schedule Environment Minister Steven Guilbeault initially wanted.

It also requires a smaller cut to emissions than initially estimated in the government’s emissions reduction plan last year.

But Guilbeault said in an interview that the plan in place was developed after extensive consultation with industry and other stakeholders to make sure it is achievable and won’t risk losing to a constitutional challenge from provinces over jurisdiction.

“I think what we’re doing is historical not just in the Canadian context but in the international context as well,” he said. “We’ve never put in place regulations in Canada that would ensure that the oil and gas sector reduces its overall emissions. We’ve never done that.”

A framework outlining the cap was published Thursday with plans to publish draft regulations next spring and get the final regulations in place in 2025.

Oil and gas production accounts for more than one-quarter of Canada’s emissions, and Guilbeault says capping their emissions is critical to meeting Canada’s climate targets.

The framework says the sector will have to cut emissions 35%–38% below 2019 levels by 2030.

However, they can buy offset credits or contribute to a decarbonization fund that would lower that requirement to just 20%–23%.

The government proposed either a cap-and-trade system or an industry-specific carbon price and after more than a year of consultation decided on cap and trade.

Guilbeault said a carbon price just wasn’t feasible for setting a clear cap, while cap and trade lends itself more easily to that.

“Clarity on emissions reduction pathways will enable more informed investment planning and risk management, and that’s central to every institution’s investment process,” said Kevin Thomas, CEO of the Shareholder Association for Research and Education (SHARE) in an email to Investment Executive, adding that he hopes the provinces and industry work with the federal government to help provide that clarity.

“The very worst thing for attracting investment in Canada now is for provincial governments to sow confusion and opposition rather than working across governments and parties to help us navigate this transition,” he said.

Thomas applauded the targets released today: “Without some kind of action, the current path of industry emissions will make meeting Canada’s 2030 and 2050 climate goals not just improbable but impossible,” he said. “Absent a framework for oil and gas sector emission reductions, other businesses across the rest of the economy would have to bear the weight of national reductions on their own, and that’s a problem for investors that hold economy-wide balanced portfolios.”

However, the targets faced criticism from the Montreal Economic Institute, which published a study last year that estimated an emissions cap like the one announced Thursday would cost Canada’s economy at least $6.0 billion per year, with the losses including reductions in wages, local consumption and tax revenues.

“Each time Ottawa forces the Canadian energy sector to contract, it is foreign producers who win,” said Gabriel Giguère, public policy analyst at the MEI, in a release. “Ottawa does not have the means to affect global demand, so reducing local supply will only end up exporting jobs and tax revenues.”

The Canadian Association of Petroleum Producers said the federal government’s plan to have the oil and gas sector cut its emissions by more than a third below 2019 levels by 2030 is problematic.

It says the industry is working to reduce its emissions, but Ottawa’s targeted time frame is too ambitious.

It says many of the technologies oil and gas producers hope to use to decarbonize their operations are still in the early stages of development.