Oil and gas emissions cap regulations

Summary#

The federal government published proposed Oil and Gas Sector Greenhouse Gas Emissions Cap Regulations on November 9, 2024. If adopted, the rules would set a legal cap on emissions from certain oil and gas activities and require operators to register, report their emissions and surrender allowances or other compliance units beginning with a first compliance period in 2030–2032.

What it does#

• Sets a sector-wide emissions cap equal to 27% below reported 2026 emissions (i.e. the cap = 73% of 2026 reported emissions).
• Requires operators to register and report emissions. Registration must happen before January 1, 2026 for existing operators. Some operators start reporting for 2026 (first report due June 1, 2027); others start reporting for 2028 (first report due June 1, 2029).
• Makes it illegal for covered operators to emit GHGs in a compliance year unless they surrender the required compliance units after each three‑year compliance period (first compliance period: 2030–2032).
• Creates and distributes free emissions allowances equal to the cap. Allowances are distributed each year before the year they can be used (first distribution in 2029 for the 2030 year).
• Allows limited compliance flexibility: operators may use Canadian offset credits and decarbonization units in addition to allowances, but overall these options are capped (up to 20% of an operator’s obligation with Canadian offset credits allowed up to 20%, and decarbonization units up to 10%). Decarbonization units require a contribution paid at $50 per tonne.
• Applies rules at the operator level. An operator becomes “covered” if its annual cumulative production reaches 365,000 barrels of oil equivalent (annual threshold). Operators with monthly production at or above 30,000 barrels of oil equivalent during Jan 2024–Jun 2025 face earlier reporting. New large facilities projected to emit 10,000 CO2e tonnes or more in any of their first three years have special reporting and delayed remittance rules.
• Sets the allowances allocation method by production-based distribution rates (distribution rates are set using 2019 intensity data and reflect an across‑the‑board reduction of 45% in emissions intensity used for allocation).
• Includes enforcement measures and makes related amendments to the federal output‑based pricing rules.
• This is a proposed regulation. Interested parties had a 60‑day period from the publication date to comment.

Who's affected#

• The main groups are operators of upstream oil and gas and LNG facilities that carry out activities such as:
  • light and heavy crude oil and bitumen extraction and production (including thermal in situ and surface mining),
  • upgrading of bitumen or heavy oil,
  • extraction and processing of natural gas and natural gas condensates,
  • compression of natural gas, and
  • LNG production.
• The measures target operations concentrated in provinces such as Alberta, Saskatchewan, British Columbia, and Newfoundland and Labrador, but midstream and downstream facilities across the country may also be affected.
• The government estimates the rules would affect about 560 operators, of which roughly 270 are small businesses. The oil and gas sector directly employed about 171,800 people in 2022, so regional labour and communities tied to the sector may notice local effects.
• Small operators must still register, but many face delayed reporting and remittance deadlines to reduce early administrative burden.

Why it matters#

• The rule is designed to force absolute cuts in oil and gas emissions so Canada can meet its national climate goals (2030 targets and net‑zero by 2050).
• The department’s analysis estimates the proposal would deliver incremental emission reductions of 13.4 Mt CO2e over 2025–2032, valued at about $4.0 billion in avoided climate damages.
• The economic modeling projects costs to the Canadian economy of about $3.3 billion and administrative costs of about $219 million, leaving estimated net benefits of $428 million over the same period.
• Production is projected to keep rising overall but slightly less than it would without the cap (modelled reduction in growth of about 0.7%). That means higher costs for some operators, small changes in regional economic activity, and modest effects on jobs in producing regions.
• The proposal leaves room for in‑sector investments like carbon capture, hydrogen, and other technology while also allowing limited out‑of‑sector credits. The Government plans a review within five years to revisit the cap and other design features.
• The proposal does not quantify some likely effects, such as changes in local air pollution or long‑term benefits from new low‑carbon industries, so some real‑world impacts remain uncertain.