A cap on oil and gas emissions would make Canada’s climate pledge credible

Without a strategy to control emissions from the oil and gas sector—which pollutes more than any other part of the economy—Canada’s climate plans are not credible. In response to a proposed cap on national fossil fuel emissions, some argue that what’s needed instead is a further increase in Canada's globally ambitious carbon prices. While there are good reasons to like carbon pricing, a myopic focus on this one tool is all but guaranteed to fall short when it comes to cutting emissions—especially in the oil and gas sector. In contrast, a national cap on the industry’s emissions would advance the country's climate agenda without undermining its commitment to market-based policies. Danny Cullenward is a climate economist who studies international policy effectiveness. Photograph courtesy of Danny Cullenward. Successful climate policy requires a view of the world as it is, not as we wish it might be. As my co-author David G. Victor and I documented in a recent book on the global experience with carbon pricing policies, practical options to cut emissions vary widely by sector. Every industry has different technologies, degrees of trade exposure, and political opportunities to press for emission reductions. But because increasing an economy-wide carbon price imposes costs on all sectors of the economy, policymakers are limited by the political constraints of the least ambitious sector. This approach has proven ineffective at managing oil and gas emissions in California, where a multi-sector carbon pricing program remains stuck in low gear. None of this detracts from the merits of Canada’s existing carbon pricing policy, which is sound. But the economic logic of carbon pricing—the consistent treatment of emissions across sectors and regions—is also its political weakness. Addressing fossil fuel emissions exclusively through national carbon pricing would require the government to manage outcomes not according to what is practical for the sector, but by what it can achieve through higher carbon prices when many of its major trading partners, including the United States, are not following suit. Moreover, any suggestion that carbon pricing treats emissions consistently is mostly a myth. Comprehensive research shows that carbon-price incidence varies by sector because politics prompt governments around the world to provide carve-outs for trade-exposed and politically influential industries. Canada itself illustrates how regional prices vary according to politics: Quebec participates in a carbon market run jointly with California, where carbon prices are about $40 per tonne—much less than the minimum $65 per tonne required of other provinces this year. As policymakers in Ottawa debate the best way to address oil and gas emissions, they should be careful to avoid ideological rigidity as well as bait-and-switch arguments. A recent report warns of the economic risks of capping oil production—a completely different proposal than capping emissions. But you don’t have to take my word for it: look at the carbon capture and storage subsidies the oil industry seeks to decouple its process emissions from production levels. If production and emissions were inseparable, you might expect them to fight these subsidies with equal vigour. Of course, they do not. In short, the oil industry’s revealed preferences speak volumes, and should come with binding environmental conditions. In fact, a singular focus on carbon pricing is unprecedented in the history of successful climate policy. No country has ever allowed carbon pricing to dominate its approach to cutting pollution, such that other policy instruments are excluded from consideration. To date, the only other major economy that has embraced carbon pricing as fully as Canada is the European Union. But like Canada, Europe illustrates how the most ambitious governments adopt a mix of carbon pricing, regulation, and public investment, without requiring the political limits of one approach to constrain policymakers’ use of the others. It has become fashionable in American policy circles to criticize carbon pricing, especially now that the Biden Administration has embraced industrial policy as an alternative. No doubt this development is frustrating for those who worked hard to elevate carbon pricing in Canada’s environmental and trade agendas. But just as some American critics are too quick to dismiss any role for carbon pricing, some Canadians are flirting with an equally one-sided outlook today. Canada should be proud of its carbon pricing policy, which is among the world’s most ambitious. But to deliver on the government’s 2030 climate pledge and its commitments under the Paris Agreement, the country needs to do more. That includes a strong cap on national oil and gas emissions. Danny Cullenward is a climate economist who studies international policy effectiveness. He is the co-author of Making Climate Policy Work, and is vice-chair of California’s carbon market advisory committee. The Hill Times