This is a guest blog by Jessica Carradine, lead author of The Taxonomy Fossil Fuel Conflict: Why Oil and Gas Inclusion Would be Counterproductive. 

Since Canada announced in 2022 that it would create a sustainable finance taxonomy, Environmental Defence has advocated that it remains entirely free of fossil fuels. Now, as the official process moves forward with a proposal to include oil and gas, Environmental Defence’s position remains clear. The Canadian government should only adopt a taxonomy that achieves its primary objective: identifying investments that are aligned with Canada’s climate goals.

An effective taxonomy has the potential to support the development of sustainable industries across the entire economy by clearly defining what counts as a sustainable investment. The federal government has already announced plans to issue taxonomy-aligned bonds. Other countries that have developed fossil fuel free taxonomies – like Australia – have already started to see increased levels of green investment, sending a positive signal for Canada. 

However, the current proposal to include fossil fuels poses a threat to the taxonomy’s viability and credibility. Despite past recommendations from climate experts, the Taxonomy and Transition Planning Council is leaning towards including a category focused on the oil and gas sector – unless the feedback they get results in a change to the plan. 

The recently published Methodology Report lays out future plans for the taxonomy, including how it will be organized and what will be included. Canadians are being invited to comment on the proposal via online form until August 13th. The oil and gas-focused category, referred to as the “abatement measures category,” is detailed in the report. The category would aim to reduce emissions from Canada’s oil and gas industry by “enabling select, tightly ring-fenced emissions-reduction investments.”

Environmental Defence has shared our feedback on the methodology, recommending the exclusion of oil and gas from the taxonomy. In order for Canada’s taxonomy to succeed, it needs to be credible and science-based. Including the abatement measures category runs counter to the taxonomy’s core objectives.

As described in the proposed methodology, the category comes with a high risk of carbon lock-in and stranded assets. In order to stay on track with Canada’s climate targets and our commitments under the Paris Agreement, we must rapidly phase out oil and gas use while increasing investments in sustainable industries. 

The abatement category does not contribute to either of these goals. It encourages investment in technologies like carbon capture and storage (CCS) that are found to extend the lifespan of fossil fuel infrastructure and typically underperform emissions reductions targets. It relies on oil and gas companies publicly acknowledging that they will experience a decline in demand – which they have never done before. Finally, it does not include a plan to decrease emissions from the combustion and end uses of oil and gas – which are the vast majority of the oil and gas sector’s emissions. With such a high risk of prolonging oil and gas use and potentially no reward in the form of reduced emissions, including the abatement measures category isn’t worth it for Canada’s taxonomy.

The abatement measures category suggests that the oil and gas sector requires financial support to reduce its emissions – even though it is already one of the most profitable, highly subsidized sectors of the economy. Global expert bodies, like the International Energy Agency (IEA), have advised that oil and gas companies should bear the responsibility for paying for abatement technologies themselves. The necessary costs represent less than 2 per cent of annual income for the industry, according to the IEA. Without the abatement category, oil and gas companies can still invest in emissions reductions. 

Even if it does include the abatement category, the taxonomy cannot force oil and gas companies to stop expanding production. These companies can invest in abatement while increasing their overall emissions. Only regulations such as industrial carbon pricing and methane regulations are likely to reduce emissions from oil and gas production. 

At this point, the success of Canada’s taxonomy is riding on its ability to credibly define sustainable and transition-enabling investments without caving into fossil fuel lobbying pressure. Climate and environmental advocates from across Canada and globally are encouraged to submit responses to the public consultation. If enough submissions oppose the inclusion of the abatement category, Canada may still end up with a fossil fuel free taxonomy.