Leave it in the Ground? A Welfare Economics Analysis of Curtailing Oil and Gas Production Under the Canadian Oil and Gas Emissions Cap

Aaron K. Lang and Michael G. Pollitt

Cambridge Working Papers in Economics from Faculty of Economics, University of Cambridge

Abstract: Canada currently has intensity-based regulations for industrial GHG emissions and has recently enacted updated methane emissions regulations to reduce emissions from its upstream oil and gas sector. In November 2024, the Canadian federal government considered an upstream oil and gas emissions cap to reduce emissions from 2030. This emissions cap was criticised for its potential to substantially reduce Canada’s GDP as it could cut oil and gas production. One year later the plan was dropped. We investigate the circumstances in which shutting in (i.e. curtailing) oil and gas production could be economically justified under the proposed emissions cap. We construct marginal cost curves for shutting in production at various emissions intensities for different production types (i.e. oil sands, natural gas, and conventional oil) using an input-output model to compare to the previously targeted CA$170/tCO2e minimum carbon price. We find that at the assumed 2030 car bon price it may not be cost-effective to shut in natural gas, oil sands, and conventional oil production relative to emitting methane and non-methane GHGs across the range of tested emissions intensities to comply with the emissions cap. We conclude that the government’s decision to remove the oil and gas sector emissions cap was generally the right decision from a welfare economics perspective.

Keywords: Cap-and-Trade; Output-Based Pricing System; Methane Regulations; Emissions Trading; Shut-Ins; Curtailment; Oil and Gas; Upstream (search for similar items in EconPapers)
JEL-codes: L94 (search for similar items in EconPapers)
Date: 2026-10-31
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Persistent link: https://EconPapers.repec.org/RePEc:cam:camdae:2690

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