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Debut Canadian emissions reductions plan leaves critics seeking more

04 April 2022 Keiron Greenhalgh

Canada's federal government laid out for the first time at the end of March how it plans to achieve its 2030 and 2050 emissions reduction targets, but a vast majority of observers see major holes in what Prime Minister Justin Trudeau's team formulated.

The blueprint for the pace of emissions reductions and where they will come from found critics across industries, various seats of federal and provincial government, and from lobby groups, as the Trudeau government seeks to balance supporting a natural resources-heavy economy that support exports, jobs, and tax revenues at the same time as holding to commitments made to combating climate change.

"Canada's 2030 Emissions Reductions Plan outlines how we can achieve our 2030 target, while building pathways to net-zero emissions by 2050 and creating economic opportunities for Canadians across the country," Minister of Natural Resources Jonathan Wilkinson said in a 29 March statement on the plan's release.

According to data from the government's most recent National Inventory Report, total national greenhouse emissions were 730 million mt of CO2 equivalent in 2019. Figures for 2020 are scheduled to be released later in April.

The plan is the first set of indicators of specifically where cuts are being targeted, the size of the investments required to make the reductions, and where those funds will go on the road to a 40% overall cut in emissions compared with 2005 by 2030.

Source: Government of Canada

C$9.1 billion in extra cash

The government said the plan includes C$9.1 billion ($7.26 billion) in new investments.

Nearly a third of that extra funding, or around C$2.9 billion, is set to be invested in charging infrastructure, offering financial support for buying zero-emission vehicles (ZEVs), backing clean medium- and heavy-duty transportation projects, and developing a mandate that 100% of new passenger vehicles sold in Canada be zero emission by 2035, it said. An interim target for ZEV passenger vehicles of at least 60% by 2030 was also set.

The government hopes to make Canadian homes and buildings more climate friendly with around an extra C$1 billion, it said. It plans to develop a national net-zero by 2050 buildings plan, the Canada Green Buildings Strategy, as well as facilitating "deep energy retrofits" for large buildings.

A Clean Electricity Standard (CES)—the nuts and bolts of how Canada would get to a carbon-free power sector—is on the table too, with additional investments of about C$850 million laid out in the plan. A consultation paper on the blueprint for the CES was issued 8 March. The deadline for comments is 15 April. The CES was a key part of the re-election mandate Trudeau touted ahead of his September 2021 election win.

Oil, gas sector targets

Another leg of the mandate was reduced subsidies for the oil and natural gas industry plus steeper emissions cuts. The emissions reduction plan submitted to parliament detailed exactly how big Trudeau and his colleagues expect those cuts to be.

The oil and gas sector would reduce its emissions by 26.25% by 2030 compared with 2005 to 118 million metric tons (mt) under the plan, and by 38% compared with 2019, according to a table on page 219 of the plan (see below). The oil and gas sector is Canada's largest emissions producer at 26% of the total, followed closely by the transportation sector at 25% of overall emissions.

Still, industry representatives took a diplomatic line. Canadian Association of Petroleum Producers (CAPP) Executive Vice President Terry Abel said 29 March the plan "acknowledges that global demand for natural gas and oil will continue for decades and Canada has a role to play in providing lower emission resources to the world's energy mix."

Canada's energy sector should be a key contributor to reducing global emissions while meeting the growing demand for affordable, reliable and trusted natural gas and oil, he said, adding that "Russia's invasion of Ukraine has brought the energy security and affordability crisis to the doorsteps of Canadians. This is a crisis brought on by years of energy policies around the globe that are misaligned with the realities of energy demand leading to an increasing reliance on dictatorships to provide critical energy supplies."

Finding a way to reduce emissions from the oil and gas sector is key for the world's fourth-largest crude and gas producer's attempts to maintain the health of its biggest source of export revenue.

"The challenge is going to be pretty large" for the gas industry especially, said S&P Global Commodity Insights' ENR analyst Ian Archer, who focuses on the Canadian gas industry, adding that he wasn't certain it could meet the 53% reduction compared with 2005 goal for production and processing players. The target for gas production and processing would be 29 million mt in 2030, compared with 2005's 61 million mt and 2019's 53 million mt, according to the plan.

Upstream decarbonization of well pads will be especially tricky, said Archer, requiring a substantial power grid buildout. That work will be "doable but challenging," due to the remote locations of many wells, he added.

The province of British Columbia may find greater hurdles than say Alberta when it comes to the location of wells, Archer said. British Columbia will, however, have a couple of advantages on its neighbor to the east, he said, in that the province's power stack is low carbon and is dominated by a province-owned entity, BC Hydro.

Leaning on carbon capture

Oil and gas sector emissions could be cut by as much as 42% to 110 million mt by 2030 compared with 2019, the government said on page 92 of the plan, a figure cited heavily elsewhere, and a hefty part of those cuts will be addressed through the use of carbon capture, utilization, and storage (CCUS) projects. As a result, the government is developing an investment tax credit for CCUS projects, "details of which will be provided soon," it said in the plan.

CCUS projects are expensive, and the CAPP wants the credit to cover 75% of the costs while the Canadian Chamber of Commerce told the Ministry of Finance in a comment letter that the government should underwrite 70% of projects costs with the credit.

Shell said its Quest facility cost C$1 billion, of which C$865 million has been covered by grants and tax breaks from the federal government and the province of Alberta, where it's located. Cost estimates for a new CCS plant are tough to gauge because it's an emerging technology with fewer than 20 world-scale facilities operating today, and those operations vary greatly.

The government envisions CCUS capacity reaching 15 million mt, from 4 million mt currently. The pace of CCUS buildout would be unprecedented, S&P Global emissions analyst Kevin Birn told Net-Zero Business Daily 1 April. It would be a "Herculean" task to build enough CCUS to meet the targets in the Trudeau government's plan, Archer added during the same call.

Another analyst sees a different hurdle for the government's oil and gas industry emissions reduction plans' heavy reliance on CCUS—whether the facilities can meet the capture levels required for the pollution cuts.

Institute for Energy Economics and Financial Analysis analyst Omar Mawji said he is concerned about the ability of CCUS projects to meet the targets needed to navigate the path to the reduction goals. There needs to be an understanding of what the capture levels actually are, he said.

A C$90-$100/mt carbon price—the price is set to increase by C$15/mt a year from 2023 and reach C$170/mt by 2030 following the latest increase on 1 April—means CCUS makes economic sense in Canada, said Mawji. However, he said, from an environmental perspective, the question is whether enough carbon is going to be captured to meet the goals laid out, "so, are we going to spend billions of dollars to not achieve a large enough carbon reduction."

The second question to be asked is whether the federal government is panicking, he said, adding that the plan seems "frantic." Eight years is not a long time, he said, and it is difficult to see companies adapting so quickly. "Are we doing this to reduce emissions or are we doing this so that oil and gas companies can continue to emit carbon?" he asked, adding "there's been so much pressure just to put carbon in the ground."

Still, oil and gas-centric Alberta is plowing ahead with CCUS. On 31 March, the province said it had given six proposals the go-ahead to develop carbon storage hubs. All are located near the provincial capital of Edmonton and would store emissions from the Alberta Industrial Heartland cluster of refineries and petrochemical plants. The provincial government also issued a solicitation for hubs elsewhere in Alberta.

Unhappy Albertans

Jason Kenney, premier of Alberta, is an unabashed cheerleader for the province's oil and gas industry. However, the United Conservative Party leader is not a fan of the Trudeau government's emissions reduction plan, tweeting 31 March that "the only way that the Liberal-NDP emissions plan could achieve its ridiculous targets is through massive, permanent damage to Canada's economy, while driving up the cost of everything. It's a bad joke."

Kenney also took the carbon tax, including its impact on fuel prices for citizens, to task. The carbon tax increased 25% to C$50/mt on 1 April. A liter of gasoline rose 2.2 cents in Canada on 1 April as a result of the carbon tax increase.

Alberta's elected leader tweeted 31 March: "The Liberal-NDP carbon tax costs the average family [C$600] a year. [On 1 April] they'll rise it by 25%, while planning to increase it by at least 400% in the future. Why do they want to make everything more expensive when inflation is at a 30-year high?"

Politicians in the heartland of the Canadian oil and gas industry are unhappy with the emissions reduction plan, no matter the party they represent.

Alberta New Democratic Party Leader Rachel Notley said in a statement March 29: "This is not a real plan to reduce emissions, and in fact, I would argue, it obstructs the rollout of a real plan that would actually address climate change. We need serious targets, not aspirational goals."

"While the federal government met with industry, today's announcement shows they weren't actually listening during those meetings. The new targets announced today come without any credible plan to reach those goals on schedule," Notley said.

Taking up a similar line to Mawji, she added: "There are practical, physical limits on how quickly facilities can be constructed, operated, or projects even approved. These new targets have no awareness of these real-world issues and the federal government would know that if they had collaborated with our energy industry in a meaningful way."

Some observers are more optimistic though, with Nnaziri Ihejirika, an analyst with The Oxford Energy Institute for Energy Studies, arguing a sharply higher carbon tax may provide the business case for broad-based adoption of innovations such as CCUS at scale.

"The Canadian oil and gas industry is entering into an uncertain period, where the ability of firms to develop and deploy technological breakthroughs while maintaining focus on operating costs and shareholder returns will be key," Ihejirika said. "The carbon tax hike, while onerous in the short-term, could be the catalyst for a new cycle of investment and profitability, even in a carbon-constrained world."

A carbon tax with predictable prices in place, and the emissions reduction plan, could promote the development of multi-billion-dollar projects such as CCUS hubs, said S&P Global's Birn, adding that policy stability is an absolute must for investors making long-term infrastructure decisions.

The potential for change in policymaking is both an advantage and disadvantage of building infrastructure in a democracy, said Birn. One of the challenges for climate policymakers is walking the tightrope between the extremes of the demands of industry groups who fear change and environmental lobbyists who want rapid advancements, he added.

Environmentalists see holes

One of those environmental lobbyists believes the reduction plan is a positive first step, but still sees room for improvement.

"This plan has a better chance of success than any of Canada's previous climate plans," David Suzuki Foundation climate team lead Sabaa Khan said. "Sector-by-sector emission projections linked to specific measures enable the accountability that will help Canada stay on track."

"If the plan is to have its desired effect of doing Canada's fair share to address the global climate crisis, key shortcomings must be addressed. Greater clarity to limit the role of carbon offsets and removal technologies like carbon capture and storage are critical," Khan added.

A group of other Canadian environmental groups led by Climate Action Network Canada said a whole of government approach—as US President Joe Biden is promising—is missing, adding that the plan still falls short of the level of transparency and ambition required.

Caroline Brouillette, national policy manager, Climate Action Network Canada, added: "Tackling climate change must be a team effort, but the plan released today shows that some players are still sitting on the bench. At a time of compounding crises, we need an all-hands-on-deck-approach to climate action, but according to this plan, some sectors—most notably oil and gas—will not contribute their fair share, letting the burden fall on workers, consumers, and other industries."

The other end of the political spectrum also wants more from the government. The Canadian Chamber of Commerce's Senior Director of Natural Resources, Environment & Sustainability, David Billedeau, said that "if Canada is to meet its emissions reductions targets and achieve an orderly transition to net zero by 2050, the business community needs clarity on several subjects—such as emissions caps, offset markets, skills development, support for breakthrough technology, energy supply, electrification, CCUS input tax credits, and carbon border adjustment mechanisms."

Billedeau added that the chamber also wants to see plans to sustainably increase its critical minerals output, improve ZEV charging infrastructure, develop commercial hydrogen projects for medium and heavy-duty vehicles, and position Canada as a global leader in nuclear power.

Against the backdrop of the strident criticism, progress under the plan will be reviewed in reports produced in 2023, 2025, and 2027, the government said, adding that further targets and plans will be developed for 2035 through to 2050. It is the first Emissions Reduction Plan issued under the Canadian Net-Zero Emissions Accountability Act. The act became law on 29 June 2021 and was the first time a Canadian government had legislated emissions reductions accountability to address climate change.

The plan is one of a number of climate change measures the inaugural Canadian green bond will pay for. Canada issued the debut C$5 billion green bond 23 March after publishing a green bond framework on 3 March. Environmentally and socially responsible investors represented 72% of the buyers of the green debt while international investors made up more 45% of the investor base, the Ministry of Finance said.



This article was published by S&P Global Commodity Insights and not by S&P Global Ratings, which is a separately managed division of S&P Global.

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