Introduction
The federal government has signaled that liquefied natural gas (LNG) infrastructure is a priority by including LNG Canada Phase 2 as a project “deemed to be of national importance and significance.” At least five other LNG facilities are under construction or in the planning stages in British Columbia with a potential total production capacity of approximately fifty million tonnes per year. There is also interest in the development of LNG capacity on the east coast.
As Canada considers expanding its LNG capacity, it is crucial to identify the trade-offs that significant increases in LNG capacity create for climate goals in Canada and globally. While impartial and verifiable data is scarce and comes with significant uncertainties, we assess implications for Canadian emissions, for global emissions, and for Canadian climate policy.
The answers in short: expanding Canadian LNG will increase domestic emissions and has ambiguous implications for global emissions. And as a result, the policy priorities for government should be to implement strong policies for Canadian LNG to support Canadian net zero targets and avoid the temptation to frame LNG exports as a substitute for domestic climate policy.
Is more Canadian LNG consistent with Canadian net zero goals?
Expanding LNG capacity in Canada makes it hard to meet net zero goals and greenhouse gas (GHG) targets in LNG-producing provinces across the country, even if Canadian production is at the low end of emission intensity across global LNG suppliers. While the greenhouse gas emission intensity of Canadian LNG is forecast to be among the lowest per tonne produced in the world, absolute emissions would be substantial with each major LNG facility that comes into production.
Emissions arise from each part of the supply chain: natural gas extraction, pipelines transporting the gas, LNG processing, LNG transport to port, and finally, burning gas in its final use.
To examine the impact on Canadian net zero goals, we consider the full stream of potential emissions that would occur in Canada. Currently, only one facility is in operation in the country—LNG Canada’s Phase 1—which requires our analysis to use a number of assumptions. An estimate for Phase 1’s emissions is 5.5 million tonnes (MT) of greenhouse gases per year released from its supply chain up to the point of shipment to foreign buyers.
The estimate assumes the facility is producing at its full capacity—14 million tonnes of LNG per year and a portion of its natural gas inputs are from B.C. deposits and additional to existing supply. That facility would be the largest point source of greenhouse gas emissions in the province. Total B.C. emissions forecast for 2023 are 65.2 MT. LNG Canada’s emissions would thus represent an increase by approximately 9 per cent (from 65.2 to 71.1 MT) and make it difficult for B.C. to meet its net zero goals without ensuring there is effective policy to control these emissions across the supply chain or greater reductions in emissions are made in other sectors.
There are a number of factors that influence estimates of emissions from LNG facilities. One is the emissions from up- and mid-stream gas (extraction and shipping to LNG facilities) that depend on how much of the natural gas comes from reductions in shipments to Canadian and U.S. consumers. Another is whether the total amount of electricity required for all the facilities liquifying the gas with electric drives will be available. For example, the Ksi Lisims facility intends to source its electricity from diesel generation until grid electricity is available.
If we look further out to 2035 and assuming six facilities in B.C. (LNG Canada 1 and 2, Cedar, Woodfibre, Ksi Lisims, Tilbury phase 2) are operating at rated capacity, total emissions would be just under 13 MT per year, increasing B.C.’s total emissions by just under 20 per cent compared to 2023 total emissions, assuming all but LNG Canada Phase 1 uses electricity to liquefy the gas. Thus, even with the high efficiency of B.C.’s processing plants, lower emissions intensity of its Montney natural gas deposits, and stronger controls of methane than many other competitors, net zero becomes a more distant goal at least for B.C., the only province likely to have LNG production by 2030 to 2035.
The demand for electricity from LNG facilities in B.C. is likely to outstrip supply available over the next 10 years. Supply can come from new electricity generation within B.C., purchases from other provinces, or the United States. At the very least, new generation within B.C. will put pressure on its ratepayers, an affordability concern. If the incremental supply does not come from renewable sources, emissions will rise further in the jurisdictions in which the electricity is produced, making it harder to reach net zero goals unless there are offsetting reductions elsewhere in the economy or sufficient carbon capture, storage, and/or utilization.
Is Canadian LNG consistent with global net zero goals?
If adding substantial LNG capacity in Canada makes it difficult to meet domestic net zero targets, could Canadian LNG help meet global net zero goals? The answer is complex and depends on aggregate demand for LNG worldwide and how much supply is available. It also depends to what degree Canadian LNG would substitute for coal, more emission-intensive LNG from other countries, or renewables. At least three questions can help assess whether Canadian LNG will help or hinder reaching global net zero goals.
Will Canadian LNG replace higher-emission LNG exports from other countries?
Canadian LNG has lower transportation costs to Asia, lower costs of liquefication due to cooler ambient temperatures, and in recent years, lower natural gas and electricity prices than a number of other suppliers, particularly those in the U.S. Actual costs, however, depend not only on these factors but operational factors at the plant level. Delays in bringing product to market, operational performance, and other issues will affect overall competitiveness.
Forecasts for LNG prices and for production costs range from highly favourable to much less so. We do not know what the total supply of LNG and demand for it will be in the next decade and whether Canadian LNG producers are simply price takers or if any cost advantages will persist and create scope for displacing other sellers.
Bottom line: there are no guarantees that Canadian LNG will displace other countries’ LNG and reduce global emissions.
Will LNG replace coal in the generation of electricity?
Combustion of natural gas instead of coal to generate electricity would reduce CO2 emissions per unit of electricity produced. The question is to what extent Canadian exports of LNG will lead to a substitution of natural gas for coal in the consuming countries.
Answers to this question depend on a number of complex factors related to costs. Factors include the relative prices of LNG to coal in existing or planned fossil fuel-driven electricity generation, the price of fossil fuels relative to renewable sources of electricity, and the ability to get LNG to the power plant (e.g., additional transport costs or pipeline capacity after regasification).
These factors will vary by country and over time. We cannot predict prices, costs, or capacity over the next 10 to 25 years, let alone in the coming five years.
We can look at trends over the recent past to draw inferences about how electricity generation has been changing in major consuming countries that would be potential markets for Canadian LNG, including China, India, and Japan. There the story has been one of steadily increasing renewables, which has helped keep the market share of gas power either relatively stable or caused it to decline. Based on International Energy Agency and other energy data from 2015 to 2024-25, we examine the shares of different fuels in electricity generation for these three countries.
China’s use of natural gas has remained constant at 2.5 per cent of total generation, while coal has declined by 20 per cent but remains the largest share overall at 56 per cent currently. The substantial change is the growth in non-hydro renewable generation, which now sits at 23.5 per cent of the market, nearly five times the total share from just a decade earlier.
Coal continues to dominate India’s electricity generation with a relatively constant share of 70 to 76 per cent. Non-hydro renewables have grown substantially from a 0.6 per cent share of total generation to 15.4 per cent over the time period while gas has declined from 5 per cent to under 3 per cent.
Gas has been the dominant share in Japan, followed by coal, but both have declined since 2015: gas by 20 per cent and coal by 15 per cent. The share of non-hydro renewables has almost tripled from just under 6 per cent to almost 18 per cent. The big story has thus been the growth in renewables rather than any sort of major substitution of gas for coal.
Whether LNG replaces coal in electricity generation and thereby lowers global greenhouse gas emissions turns in large part on the relative prices of coal to natural gas, as well as any effects overall on total demand for electricity and hence fuel use. A recent economic study simulates the impact of a hypothetical very large LNG export facility (2.1 Bcfd) on global emissions for different price elasticities for coal and gas and rebound effects on total fuel demand. They find that only if there is perfect substitution between coal and gas, will emissions unequivocally decline; something that is unlikely in practice. Simulating varying assumptions about the degree of substitution and relative prices of gas to coal, emissions range from a reduction of 39 MT with low natural gas prices and high substitutability to an increase of 11 MT where rebound effects offset any pricing advantages.
Low prices for LNG creates a dilemma for Canadian production. Low LNG prices would help support arguments that LNG substitutes for coal. But these same low prices affect the revenues of Canadian facilities and hence, their profitability and ability to sustain production.
As a result, our conclusions are that any projections of Canadian LNG leading to a decline in coal-fired generation and hence lower global emissions is speculation. Canadian producers cannot control how other countries generate their electricity nor can they set prices that would ensure LNG has a competitive advantage over coal or renewables.
Will aggregate demand for LNG grow significantly over the life of the facilities?
Canadian LNG could be additional to, not a substitute for, higher emission-intensive fuels and hence, hinder global net zero goals. Demand for electricity is growing rapidly around the world and aggregate demand for both fossil fuels and renewable energy sources may rise, meaning that total emissions could rise, even with Canada’s lower emission intensity than other LNG producers and coal. Shell Canada projects global LNG demand to grow by 60 per cent to 2040. That could mean a significant increase in global emissions if LNG has a larger share than renewables in electricity generation or does not significantly substitute for coal.
Yet gas demand is likely to be asymmetric in different markets, affecting the likelihood that planned or potential Canadian LNG operations will have long-term markets for their product. The International Energy Agency’s World Energy Outlook suggests that LNG demand could decline in Europe, China, Japan and Korea under the stated policy scenario but go up in other countries such as India. Even under the current policy scenario which assumes no changes in current policies, gas demand in Europe continues to decline.
What does this mean for climate policy in Canada?
Expansion of Canadian LNG capacity will make it harder to meet Canada’s net zero goals and thus has significant implications for climate policy in Canada. Robust domestic climate policy is the only way to prevent new projects from undermining national emissions targets and demonstrate that Canada is doing its share to support global pathways to net zero.
Overall, Canadian policy should set the rules, stick to them, and then let the market take on the risk if it wants to. The federal government should:
Finalize and implement stringent methane regulations for the oil and gas sector to address leakage and venting. The new regulations would require the use of the best technology to measure fugitive emissions and reduce emissions in the sector 75 per cent by 2030. Methane leakage is a significant contributor to total emissions from the LNG supply chain, comprising 38 to 40 per cent of total greenhouse gas emissions depending on whether natural gas or electricity liquifies the natural gas. Moreover, official estimates of methane emissions are almost certainly low given challenges in measuring and underreporting: actual methane emissions connected to the lifecycle of fossil fuel extraction could be seven times higher.
Methane leakage is a loss to industry (lost revenue) and is an extremely potent greenhouse gas, more than 80 times that of carbon dioxide in its global warming potential. While it is shorter lived than carbon dioxide, its per unit climate impacts to 2050 are much greater than the carbon dioxide emitted from combustion of natural gas.
Make industrial carbon pricing policy work by providing clear signals to producers that the stringency of the policy will increase and provide ongoing incentives to reduce their total emissions. LNG facilities have to be incorporated in industrial carbon pricing systems with appropriate benchmarks that reflect whether their energy sources are natural gas or electricity and providing a timeline for how these will tighten over time. Currently, in B.C. the province’s industrial carbon pricing system does not publish details on any emissions benchmark that could apply to LNG facilities. The largest facility in operation—LNG Canada’s Phase 1 project—is subject to a financial agreement that limits the carbon costs paid by the joint venture to the provincial government.
Avoid subsidies to LNG: In general, private investors, not taxpayers and electricity ratepayers should take on the risks associated with LNG development, given global market projections. Subsidies have opportunity costs, and as a result public dollars should be used wisely, weighing risks and benefits for society, including impacts on government deficits, costs to taxpayers, and programs they may crowd out. Risks that assets will be stranded are real. Avoid treating LNG expansion as a substitute for domestic climate policy: LNG production is definitively not an alternative to reducing Canadian emissions. As we have discussed, benefits for global emissions are far from clear cut. And international emissions trading mechanisms are highly unlikely to generate credits for Canada from LNG exports.
