An influential think-tank wants Ottawa to adopt a "regulatory flexibility" that incorporates elements of a cap-and-trade system when it drafts much-anticipated emissions regulations for the oil and gas industry.

In a report released today, the International Institute for Sustainable Development, a non-partisan Canadian think-tank, points out that this system is already being used in the government’s light-duty and heavy-duty vehicle greenhouse gas emissions regulations released over the past two years.

"It has elements consistent with cap and trade, but it’s not cap and trade," David Sawyer, IISD's vice-president of climate, energy and partnerships and co-author of the report, explained to CBC News.

A cap-and-trade approach to reducing the greenhouse gas (GHG) emissions that cause climate change has been a controversial topic in Ottawa lately.

The Conservative government has gone on the attack against the Opposition NDP, claiming its plan for a cap-and-trade system amounts to a $21-billion "carbon tax" that will drive up the price of goods in Canada. The NDP counters that the Conservatives themselves backed a cap-and-trade system in their 2008 budget before dropping it in favour of rules-based industry-specific emissions.

The main difference between regulatory flexibility and a cap-and-trade system is that there is no hard cap on emissions in the regulations, just an intensity target, says Sawyer. In other words, the regulations demand a per unit decrease in GHGs as opposed to a specific decrease for the entire industrial sector.

The way it works now for light-duty and heavy-duty vehicle regulations is that if a company meets and exceeds its emissions target for a product, it can bank the difference. The company can then use that amount toward a future product that is over the GHG limit, or it can sell that amount to another company whose product is unable to comply. Unlike a true cap-and-trade system, trading can only occur within each industrial sector.

The IISD report suggests that the oil and gas regulations may need to be even more flexible than those for light and heavy vehicles if the sector hopes to meet targets that will help Ottawa achieve a 17 per cent cut in GHGs from 2005 levels by 2020.

Report tests 3 scenarios

The report mapped out two targets with three scenarios each to be met by 2020.

There was a 20 per cent intensity target, which would result in an estimated 30-megatonne overall GHG reduction; and a 50 per cent target resulting in a 84-megatonne reduction.

The scenarios included:

  • A rigid scenario, in which each company must meet the target on its own.
  • A scenario that envisioned trading within the sector, similar to the vehicle regulations.
  • And a scenario that allowed the oil and gas industry to trade outside its industrial sector.

In the rigid scenario, the industry could not meet either target. In the second — trading within the sector — oil and gas could meet the 20 per cent target but not the more ambitious 50 per cent one.

To meet the 50 per cent target, the oil and gas industry would need to trade with sectors outside of its own. The report makes two suggestions on this front.

The first is something similar to what Alberta does with its carbon tax. The industry would set aside a certain amount of money into a technology fund depending on how far off target it is. That money would be used to develop clean technologies.

The second suggestion was to create some version of carbon offsets.

In 2010, the oil and gas industry was responsible for 22 per cent of Canada’s GHG emissions, second only to the transportation sector.