(Reuters) -The Canadian government released draft regulations on Monday that would cap emissions of greenhouse gases from the oil and gas sector at 35% below 2019 levels by 2030, drawing condemnation from the industry that said it will force a production cut.

Oil and gas is Canada's highest-polluting industry and its emissions continue to rise, undercutting progress in many other parts of the economy. Ottawa will likely fall short of its commitment to reduce emissions by 40-45% from 2005 levels by 2030 unless the oil and gas sector intensifies efforts to decarbonize.

Federal Environment Minister Steven Guilbeault said the sector's profits hit C$66.6 billion ($47.95 billion) in 2022 and that the government wants to motivate producers to invest those profits in decarbonization.

"This goes after pollution, not production," Guilbeault told a news conference. "We've worked carefully to develop what is technically feasible for the sector, to keep industry accountable to their own promise to be carbon neutral by 2050."

Canada is the world's fourth-largest oil producer and sixth-largest natural gas producer.

Ottawa said oil and gas production is still expected to grow 16% from 2019 levels by 2030-2032 even with the emissions cap in place, and there would only be a 0.1% reduction in Canadian GDP as a result.

The regulations will create a cap-and-trade system designed to recognize better-performing companies and incentivize higher-polluting firms to make their production processes cleaner.

Producers will be required to start reporting their emissions from 2026, and the first three-year compliance period will run from 2030 to 2032. The government said it will develop penalties for producers that do not comply.

Most of the emissions reductions are expected to come from cutting methane pollution and a proposed oil sands carbon capture project, federal Natural Resources Minister Jonathan Wilkinson said.

Prime Minister Justin Trudeau's Liberal government previously said it wanted the oil and gas industry to cut emissions by up to 38% from 2019 levels by 2030. Wilkinson said Ottawa settled on a 35% reduction after lengthy consultations to determine what was technically achievable for producers.

"If you start to go beyond what is achievable, you are moving this from an emissions cap to a production cap," he told Reuters in an interview.

Canada faces a federal election within the next year, which polls suggest Trudeau's Liberals will lose to the opposition Conservatives, led by Pierre Poilievre.

The Conservatives called the emissions cap an attack on the energy sector at a time of weak economic growth in Canada, but did not explicitly say whether they would scrap it if elected.

"Trudeau plans to crush the energy sector, putting hundreds of thousands of jobs at risk at the worst possible time," the Conservatives said in a statement.

INDUSTRY OPPOSITION

Oil and gas industry associations also pushed back against the cap, arguing it will kill jobs and cut tax revenue.

The Canadian Association of Petroleum Producers said it would likely deter investment in Canadian oil and natural gas projects, while the government of Alberta, Canada's main fossil fuel-producing province, said the cap would require a production cut of one million barrels per day by 2030.

"An emissions cap, which will act as a cap on domestic production of natural gas, will harm Canadian families and businesses by raising prices on energy," said Francois Poirier, CEO of pipeline company TC Energy, in a statement.

Climate advocates welcomed the draft regulations, although some urged the government to close what they described as a loophole allowing producers to pay into a decarbonization program or buy greenhouse gas offset credits to cover up to 20% of their emissions.

"The rules must take effect sooner than the proposed 2030 timeline, and align with Canada's climate goal of a 40-45% emissions reduction by 2030," Environmental Defence said in a statement.

Formal consultations on the regulations will run from Nov. 9 until Jan. 8 of next year. The final version will be published in 2025.

($1 = 1.3890 Canadian dollars)