A draft framework that will serve as the foundation of Canada’s sustainable finance taxonomy is now — and it’s raising a critical question about whether investments in the oil and gas sector should be included in the set of voluntary sustainable investment guidelines.
Released Thursday, the 66-page draft methodology report lays out the objectives, principles, scope and overarching “ambition” of the science-based taxonomy, which is to help Canada attract capital so it can meet its legislated target of achieving net zero emissions by 2050, in line with the Paris Agreement.
It also identifies six priority sectors where it sees the greatest impact in decarbonizing Canada’s economy and positioning it for long-term economic growth in a net-zero world: electricity, buildings, transportation, mining, manufacturing, and agriculture and forestry. Technical screening criteria will be developed for these sectors over the next two years.
The development of the voluntary sustainable finance guidelines is being led by the Canadian Climate Institute, Business Future Pathways as well as a dedicated taxonomy council and advisory groups.
In a backgrounder, the council states that in order for the taxonomy to be credible, effective and attract the capital needed to achieve the country’s net-zero-by-2050 target, “Canada’s taxonomy must align with climate science and reflect the realities of the country’s emissions‑intensive economy.”
In that vein, the draft methodology report proposes three categories for assessing sustainable investments — “green” and “transition” categories, which were previously included in a Taxonomy Roadmap Report developed by the government-funded Sustainable Finance Action Council, along with a new “abatement” category.
As set out in the draft framework, the new abatement label will “apply to select investments that achieve substantial, near-term emissions reductions in emissions-intensive activities that are highly likely to experience demand decline in Paris-aligned pathways.” This could include “major decarbonization investments” in the upstream production, refining and distribution of oil and gas, it notes.
Unlike the green and transition categories, which will see the introduction of sector-specific technical screening criteria over the next two years, the report says further research and engagement will be done to determine appropriate guardrails for the abatement category in 2027. Technical screening criteria for measures in the novel category are expected in a later phase.
“By proposing the abatement category, the Council is asking: is it possible to significantly drive down emissions in the oil and gas sector in the short and medium term without locking Canada into higher emissions in the long-term?” Marlene Puffer, chair of the Canadian Taxonomy and Transition Planning Council, said in a backgrounder accompanying the draft report.
“Given that oil and gas production and refinement represents nearly one-third of Canada’s total greenhouse gas emissions, it is incumbent on us to ask this question.”
Puffer added that it’s an “open question” as to whether the abatement category will ultimately be included in the taxonomy and that the council is “very interested in people’s feedback on this topic.”
Prior to the publication of the council’s report, a coalition of environmental organizations, investors and sustainable finance advocates called Credible Taxonomy Canada released their own report, warning that any inclusion of oil and gas-related activities in the taxonomy would “invite manipulation and greenwashing from industry in practice,” “be unworkable in practice” and “be misguided.”
“Both the production and combustion of oil and gas must decline to ensure a livable future,” that report, released July 2, states. “Endorsing investments in reducing the emissions marginally from production without associated production declines creates carbon lock-in and further sunk costs into oil and gas infrastructure, slowing the required transition. This risk applies to all types of oil and gas, including LNG.”
The Credible Taxonomy Canada report also argues that Canada should follow in the steps of Australia, which has developed a “fossil fuel free” taxonomy. And it contrasts that guidebook with the European Union’s taxonomy for sustainable activities, which, due to its inclusion of gas, has triggered multiple legal battles.
The federal government has said that Canada needs to scale up climate investment rapidly to make up for an estimated $115-billion annual shortfall in spending required for the country to achieve net zero by 2050.
The draft methodology report is open for public comment until Aug. 13, with work on sector-specific criteria to follow.