The US proposal could change the way Canadian oil companies report their carbon footprint

The size of the officially disclosed carbon footprints of Canada’s largest oil companies could swell if tough new climate rules proposed by a US regulator earlier this year go into effect.

The SEC proposal — which has not been enacted at this point and faces stiff opposition from industry groups and conservative lawmakers — would require listed companies to account for total “life-cycle” greenhouse gas emissions.

The rules will apply not only to companies listed on the stock exchange south of the border, but also to more than 230 Canadian companies listed on US stock exchanges. (Among these are Canadian energy giants such as Enbridge Inc., Suncor Energy Inc., Imperial Oil Ltd., and Canadian Natural Resources Ltd.)

Under the new proposal, companies are required to disclose Scope I and Scope II emissions (terms that include greenhouse gases produced directly by the company’s operations, as well as indirectly through the generation of energy the company purchases such as electricity to run the business).

But they would also have to publicly account for their Scope III emissions, which means all the other greenhouse gases they indirectly produce, including the emissions customers produce when they use the company’s product.

In other words, for oil producers, scope 1 and 2 emissions are the emissions the company emits itself (methane emitted directly from a well, for example, or the electricity an oil sands producer uses to power its massive facilities). The third range of emissions are the emissions that an oil company makes when it sells its products (when a driver burns gasoline in a car, for example).

“The moment we ask companies to report on the third scale, we are now focusing on the carbon intensity of the product itself,” said Timma Bansal, head of Canadian research in business sustainability at the University of Western Ontario’s Ivy School of Business. The carbon intensity of their process – which they can and can reduce dramatically – is the carbon intensity of their products. “

Industry emission reduction targets focus on the first and second tier

Several Canadian energy producers began reporting first and second scale emissions in the years following the 2015 United Nations Paris Agreement on Climate Change.

These numbers often form the basis for some of the industry’s toughest emissions reduction targets, such as Pathways to Net Zero – a coalition of the country’s largest oil sands producers who have set a joint goal of reaching net zero carbon emissions by 2050.

The companies behind this initiative (Suncor, Cenovus, CNRL, Imperial, MEG Energy and ConocoPhillips Canada) have developed a roadmap to net-zero that includes the widespread deployment of carbon capture and storage technology, and they are asking for government support to help do so.

However, their plan addresses only the first and second range of emissions. In fact, the oil and gas industry as a whole has been very reluctant to talk about emissions from the combustion of its own product.

“Scope 3 emissions reporting remains a challenge at this time and will prove difficult to provide in a timely manner, if at all possible,” the Canadian Association of Petroleum Producers wrote in a report recently submitted to Canadian Securities Officials. (The CSA is currently studying its own set of proposed climate disclosure rules, although the Canadian version will allow companies to opt out of Scope 2 and 3 disclosures as long as they explain why they are doing so.)

“We believe this (disclosure of scope 3) will not only add an additional burden to the industry, but is also impractical because upstream oil and gas producers have no knowledge or control over the end use of their sales products,” the industry lobby group wrote.

The problem of the company or the choice of the consumer?

While a very small minority of Canadian oil and gas companies attempt to report Scope 3 emissions at the moment, it is already clear that having to disclose these numbers will significantly increase the size of the carbon footprint that companies have to report to investors and the public. .

For example, Cenovus Energy — which began disclosing estimated band 3 emissions in 2020 — says that band 1 and 2 emissions in 2019 were 23.94 million tons of carbon dioxide. But the emissions of the third scale, resulting from the final use of the company’s products by customers, amounted to 113 million tons.

More than 80 percent of emissions from fossil fuels fall under the third band umbrella – that is, they are produced when the product is consumed, said Duncan Kenyon, director of corporate engagement with the advocacy group Climate Change Investors Compliance in Paris.

“I always hear from (the oil companies) that Scope 3 is not our problem, it’s consumers’ choice,” Kenyon said. “But you can’t be allied with Paris and a believer in the climate if you’re going to say 80 percent is someone else’s problem.”

He added, “It also undermines the claims that ‘well, if we can control everything and put it underground, we’ll be fine for 2050,’ because no, you won’t.”

Oil and gas companies have been paying big dividends to shareholders last year thanks to soaring global energy demand, so it’s easy to wonder why investors are interested in the third-band issue at all.

But Kenyon said investors focused on ESG (Environmental, Social and Governance) view climate change as a real risk to business, and want to know how prepared the company is to adapt to what’s coming. For example, an energy company that is actively working to reduce tier three emissions aims to increase the proportion of renewables in its portfolio.

“If you make a third-scope disclosure, it becomes really clear quickly where your company is in the decarbonization game,” he said. “And then you have to decide what kind of company you want to be in five years, 10 years, or 25 years.”

When the regulator’s proposal was released in March, SEC President Gary Gensler said that greenhouse gas emissions have become a commonly used metric for assessing a company’s exposure to climate-related risks that are reasonably likely to have a material impact on its business.

“Investors need to decide what risks they must take, as long as public companies provide full, fair and honest disclosure in these disclosures,” Gensler said in a press release. “Today, investors representing literally tens of trillions of dollars support climate-related disclosures because they recognize that climate risks can pose significant financial risks to companies, and investors need reliable information about climate risks to make informed investment decisions.”