Reducing Greenhouse Gas Emissions Québec is About to Enforce its Own Cap-and-Trade System

For several years now, the participants of the Western Climate Initiative, including Québec, have been collaborating in order to promote, and eventually implement policies aimed at reducing greenhouse gas (“GHG”) emissions in their respective territories. The most notable project they strived to achieve is undoubtedly the cap-and-trade system, which Québec is set to formally implement on January 1, 2012 when the draft Regulation respecting a cap-and-trade system for greenhouse gas emission allowances (the “Regulation”) published on July 7, 2011 will come into force, making Québec, along with the state of California, the leading jurisdictions in that respect.

That being said, 2012 is a year destined for a transition period as the only mandatory provisions of the Regulation will be the ones regarding the registration of “emitters”, which are defined as persons and municipalities producing at least 25,000 metric tones of CO₂ equivalent per year (excluding the emissions related to the combustion or fermentation of biomass and biomass fuels and on-site transportation activities) at one of their establishments, and operating an enterprise in one of the following sectors of activities:

• Mining, quarrying and oil and gas extraction;
• Electric power generation, transmission and distribution;
• Natural gas distribution;
• Steam and air-conditioning supply;
• Manufacturing; or
• Pipeline transportation of natural gas.

Beginning January 1, 2013, most emitters will have to comply with the core piece of the Regulation. This means that at the end of a compliance period (the first one running from January 1, 2013 to December 31, 2014), emitters must verify and, for some, cover emissions that exceed the annual threshold of 25,000 metric tones of CO₂ equivalent by providing the Minister of Sustainable Development, Environment and Parks (the “Minister”) with enough emission allowances. Such obligation survives in the event of a change of operator of the covered establishment.

Where an emitter fails to provide the required emission allowances at the end of a given compliance period, he will be subject to an administrative sanction equal to the deduction of 3 emission units or early reduction credits (as defined below) for each missing emission allowance needed to complete the coverage.

There are mainly three different ways for emitters to acquire emission units from the Minister, namely:

• Pursuant to a free annual allocation;
• At an auction organized by the Minister; and
• Following a sale by a mutual agreement.

However, it is also possible for emitters, under certain conditions, to trade emission units with each other. Moreover, certain emitters may be eligible for early reduction credits if they fall under specific requirements of the Regulation. Such initiative constitutes an incentive for emitters to start complying with the Regulation beforehand. The period of eligibility runs from January 1, 2008 to December 31, 2011. Eligible emitters must submit an application to the Minister by December 31, 2012.

Finally, any contravention to the Regulation may result in a fine of up to $250,000 in the case of a legal person or of a person or a municipality operating an enterprise. If the contravention is related to a failure to provide the Minister with prescribed information or documents, then the maximum fine is caped at $50,000. The aforementioned fines are doubled in the case of a subsequent offence to the Regulation.