Federal Emissions Reduction Plan

The Top Line

Today, the Federal government published a new emissions reduction plan that lays out a pathway for how the national target of reducing emissions by 40% – 45% by 2030 could be reached. Entitled the 2030 Emissions Reduction Plan: Canada’s Next Steps for Clean Air and a Strong Economy (the ERP), it is the first of many regular updates to Canada’s climate plan that are now required under the Net-Zero Emissions Accountability Act.

The ERP pledges $9.1 billion for measures to reduce emissions, notably including increased Federal spending on energy efficiency retrofits, Zero Emissions Vehicles infrastructure, electrification of the power grid, funding for emissions reduction projects by other levels of government and the non-profit sector, and incentives and requirements for industries to reduce emissions. More detail on that spending is promised in Budget 2022, which, per another announcement today, will be tabled next Thursday, April 7.

While the ERP is a landmark in Federal climate policy; in many ways it is only the beginning of a much longer policymaking and implementation process for many of the measures announced in the plan. Moreover, the ERP is meant to be evergreen, so it could change in the coming years to include new policies or feature increased stringency for some of the policies announced today. Progress reports on the ERP are due in 2023, 2025, and 2027. As such, climate stakeholders should prepare for an elongated period of advocacy about the ERP.

In that context, just some of the policies that are central to the ERP and that still require substantial consultation and development include:

  • Measures specific to the oil and gas sector, such as a cap on sector emissions and a Carbon Capture Use and Storage (CCUS) tax credit;
  • A National Climate Change Adaptation Plan;
  • More ambitious sales mandates for light-duty and medium- and heavy-duty Zero Emission Vehicles (ZEVs);
  • Federal-Provincial work on developing a Pan-Canadian Electrical Grid; and
  • New protocols under the Federal GHG Offset System, including for projects that focus on nature-based climate solutions (e.g., natural carbon sinks).

Notably, the mix of already-implemented (e.g., pollution pricing), in-development (e.g., the Clean Fuel Regulations), and only just proposed (e.g., carbon border adjustments) policies in the ERP means that there is a lot of flexibility and uncertainty along Canada’s path to 40% emissions reductions – and eventually net-zero emissions by 2050. Moreover, the ERP is not prescriptive about how different industries should decarbonize. So, for example, while there are ambitious ZEVs sales mandates in the ERP, the Government will need private and public sector collaboration to drive the manufacturing of those vehicles. Similar challenges exist for labour and industry in areas like energy efficiency retrofits and electrification.

In that context, the capacity for climate stakeholders to engage on and shape the outcomes of the ERP is high, so proactive engagement of the Government is advised.

A Deeper Dive

Current Context and Modelling

In a nutshell, the ERP proposes that Canada can reduce its emissions by 40% by 2030 through a mix of existing, developing, or newly-announced policies that will drive emissions reductions in broad economic sectors – which are defined in the plan as: Oil and gas, electricity, transportation, heavy industry, buildings, agriculture, and waste and other. This is the first Federal climate plan that includes modelling of future expected emissions reductions for specific sectors and proposes how much each of them must reduce its emissions by in order to meet the national target (previously, some of that information was available through the Canada Energy Regulator, but those reports were not spotlighted in government communications).

As key context, the modelling in the ERP attempts to determine the most economical and effective ways to achieve emissions reductions – so the pathways proposed in the ERP are not the only ways to achieve the 2030 target. As such, there remains ample space for sector-specific stakeholders to engage the Government about how their sector could reduce emissions differently or better. Moreover, as the ERP itself acknowledges, some the modelling could be proven inaccurate in time, and could be corrected in future versions of the ERP.

For now, as a very general summary, the modelling shows that total national emissions were 730 million tons of carbon dioxide equivalent in 2019, which is approximately 9 million tons lower than in 2005 – illustrating the depth of the climate change challenge. Since 2005, emissions in the oil and gas and transportation sectors have increased by 20% and 16%, respectively, and those sectors are the largest source of Canadian emissions. In that context, the Government is envisioning reaching 443 million tons of carbon dioxide equivalent in 2030, with the oil and gas and transportation sectors accounting for the bulk of that reduction.

Future of The Federal Carbon Tax

A key policy of the Trudeau government since it was implemented in 2019, the Federal benchmark price on carbon pollution will continue to be the cornerstone of Federal climate policy. The ERP confirms the existing plan for that price to rise by $15 per ton of pollution per year, until it reaches $170 per ton in 2030. As such, Provinces that have pollution pricing plans will need to continually update their policies to stay in line with the Federal benchmark, and the benchmark will continue to be imposed on Provinces that don’t do so.

Looking to the global context, the ERP commits the Government to exploring border carbon adjustments as a potential complement to domestic carbon pollution pricing andas a way to allow for greater stringency of that price. Note that, as the ERP is being implemented, the European Union is developing a border carbon adjustment mechanism (BCAM) that could take effect as early as 2023. That precedent will undoubtedly be noted by the Trudeau government and BCAMs are a clear issue to watch and engage on for future progress reports on the ERP.

The Government is also considering ways to make the price on pollution more permanent – ahead of an eventual, inevitable change in the governing party. One proposal to do that is for the Government to enter into contracts that enshrine future pollution price levels with low-carbon project investors. The thinking is that would both attract investment and discourage future governments from abolishing the carbon price (due to penalties in the potential contracts). Notably, a similar approach to green energy contracting yielded mixed results during the transition from the Wynne to Ford governments in Ontario.

Spotlight on The Oil and Gas Sector

As mentioned, the ERP leans heavily on reducing emissions from the oil and gas sector – to the tune of an 81-megaton cut in emissions by 2030 (or 31% less emissions than that sector created in 2005) to achieve the national target.

The communications for the ERP are clearly aimed at prodding the industry towards working with the Government to achieve that goal. There are repeated references in the ERP to record “cashflow” and “revenues” for the industry which position it to do “its fair share in contributing to the country’s climate goals”, and Prime Minister Trudeau and Minister Guilbeault also stressed that messaging in their announcements today.

That said, a huge challenge for the Government is that many of the proposed policies to realize emissions reductions in the oil and gas sector are the least developed sections of the ERP. Clearly, this is an area of the ERP for which more stakeholder consultation is needed and will provide clarity, but the scale of the challenge is highlighted by the amount of work yet to be done.

For example:

  • Public consultations on a cap and cut of emissions from the oil and gas sector are yet to begin (a soon-to-be published discussion paper is signalled in the ERP);
  • Consultations are ongoing on improving methane reduction from the sectors – oil and gas, agriculture, and waste – that most produce it, and the Government’s new target of reducing methane emissions from the oil and gas sector by at least 75% below 2012 levels by 2030 is very demanding.
  • A CCUS tax credit is in development, but is not fully costed or realized in the ERP (more detail is expected in Budget 2022).
  • Details on Federal plans to eliminate “inefficient” fossil fuel subsidies and phase-out public financing for the fossil fuel sector are few.

Consultations on those topics will be a priority for the Government in the coming year. But, conversely, Conservative political buy-in for stringent climate policies in this area is weak and there will be regional opposition. For example, today, the Alberta Parliament began considering a United Conservative Party motion to ask the Federal government to freeze the carbon tax.

What This Means for You

As mentioned, this is the first ERP under the Net-Zero Emissions Accountability Act. Regular progress reports for the ERP are mandated over the next eight years and additional targets and plans must be developed for 2035 through to 2050, as the Government increasingly focuses on net-zero emissions by 2050.

Combined, what the Net-Zero Emissions Accountability Act and the ERP really signal is that, for the foreseeable future, regular, detailed, and sector-specific consultations on different aspects of Canada’s climate policy will be a major feature of Federal policymaking. Obviously, addressing climate change has long been a priority of the Trudeau government, but attention to the issue has only intensified over time.

As broader context for all this, the Confidence and Supply Agreement announced by the Liberal Party and the NDP last week should give the Government stability to further develop the Federal climate plan over the coming three years, and offers climate stakeholders a clear window of opportunity to shape those policies before the next election. That Agreement emphasized climate change policy, and made clear that the Liberal Party and NDP will broadly collaborate on advancing Federal action in that area.

Looking ahead, the Government pledges that future ERPs will be developed after longer consultation timeframes. There is a recognition that this ERP came quickly on the heels of Election 2021 and COP26 Glasgow. However, stakeholders should expect the volume of policymaking on climate change to remain very high as long as the Liberals are in power – and act accordingly.

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