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November 2, 2016 – Special Edition of Miller Thomson’s EnviroNotes: This publication is intended as an overview of Canadian federal and provincial climate change initiatives and their potential impact on businesses. The laws, regulations and policies discussed in this overview are stated as of October 2016. Legal advice must be sought for specific matters.
The Paris Agreement, which builds upon the United Nations Framework Convention on Climate Change, was adopted by consensus in December 2015 and is widely recognized as an historic turning point in the international common goal of combatting climate change. On October 5, 2016, the threshold for entry into force was achieved with 75 Parties, including Canada, having ratified the Convention. Accordingly, the Paris Agreement will enter into force on November 4, 2016.
The Paris Agreement’s key objective is to keep the increase in global average temperature this century to well below 2°C above pre-industrial levels, while strengthening efforts to limit the temperature increase even further to 1.5°C. In order to achieve this ambitious target, the Agreement establishes the goal of peaking global greenhouse gas (“GHG”) emissions as soon as possible, with the aim of achieving net zero emissions in the second half of the century. To this end, the Agreement requires all Parties to pursue best efforts through “nationally determined contributions”, which shall be updated and reported every five years. Parties will also be required to participate in the Agreement’s first global stocktake in 2023, and every five years thereafter, to assess their collective progress in achieving the goals of the Agreement. Additionally, Parties are required to monitor and report national inventories of GHG emissions based on standardized methodologies. In essence, the Paris Agreement marks a paradigm shift in the international response to climate change and builds a pathway to lower carbon economy.
More recently, on October 14, 2016, negotiators from 197 countries reached another historic milestone – the Kigali Amendment. It calls for developed countries, including Canada, to start to phase down hydrofluorocarbons (a potent GHG emission) by 2019; a group of developing countries is to follow suit between 2024 and 2028. It is expected that the implementation of the Kigali Amendment will help prevent up to 0.5°C of global warming by the end of the century.
As a Party to the Paris Agreement, the Government of Canada is committed to providing national leadership and partnering with provinces and territories to combat climate change, both domestically and internationally, and to make the transition towards a lower carbon economy. To this end, Canada has recently witnessed several significant advancements in the approach to combatting climate change. This publication is intended as an overview of climate change initiatives, both federal and provincial, and their potential impact on businesses in Alberta, British Columbia, Ontario, Québec and Saskatchewan. While other provinces and territories are also playing a key role in the fight against climate change, the scope of this paper is limited to provinces where Miller Thomson offers legal services.
II. Overview of Federal Climate Change Initiatives
On October 3, 2016, the federal government announced a pan-Canadian pricing plan on carbon pollution. This plan will set a national benchmark for pricing carbon emissions with the express purpose of reducing emissions to help Canada meet its GHG reduction targets set out in the Paris Agreement i.e. 30% below 2005 levels by 2030. Under this plan, all Canadian jurisdictions will have carbon pricing in effect by 2018, which must be at least as stringent as federal targets.
Currently, Canada’s four most populous provinces, together accounting for 86% of the country’s population (Ontario, Québec, British Columbia and Alberta), either have carbon pricing in place or will introduce it in 2017. In effect, this new plan will compel provinces and territories that do not already have a pricing mechanism to act.
Provinces and territories will have the flexibility to choose between two systems: a direct price on carbon pollution or a cap and trade system. Revenues generated from this plan will remain with the provinces and territories of origin. Pricing will be based on GHG emissions and should start at a minimum of $10/tonne of carbon dioxide equivalent (“CO2e”) in 2018 and rise by $10/year to reach $50/tonne of CO2e in 2022. Provinces and territories choosing a cap and trade system will need to reduce the number of GHG emission permits they make available to businesses, which will progressively decrease every year, based on both emission cuts through to 2022 (equal to or greater than what would be achieved by a direct price) and a 2030 target (equal to or greater than Canada’s). In 2022, the overall approach will be reviewed for its efficacy and to continue to increase its stringency.
III. Overview of Provincial Climate Change Initiatives
Following its election in 2015, Alberta’s NDP government introduced Alberta’s Climate Leadership Plan, which has four main objectives:
1. Phase out coal
Coal-fired electricity generation will end by 2030, with 2/3 of Alberta’s coal generating capacity being replaced by renewable resources (wind and solar) and 1/3 being replaced by natural gas. Starting in 2018, coal-fired generators will pay $30/tonne of CO2e based on an industry-wide performance standard.
2. Economy-wide carbon levy
Alberta is replacing its emissions intensity carbon pricing program with a program based on an emissions performance standard. The new carbon levy will be included in the price of all fuels that emit GHG when combusted, covering 78% to 90% of provincial emissions from transportation and heating fuels, such as diesel, gasoline, natural gas and propane. Revenue generated from the levy is to be reinvested in Alberta’s economy. Carbon rebates will be provided to lower- and middle-income Albertans. A short list of fuels are exempt from the levy (See Exemptions). The levy will not apply directly to consumer purchases of electricity.
In May 2016, Alberta Environment and Parks introduced Bill 20: the Climate Leadership Implementation Act, which puts the new carbon levy into effect. Starting January 1, 2017, the levy will be applied to fuels on the basis of $20/tonne, with exact rates varying by fuel type. On January 1, 2018, the levy will increase to $30/tonne. The levy will apply throughout the fuel supply chain, including: point of purchase; point of importation; and point of removal of fuel from a refinery, terminal, plant, or oil or gas battery. The carbon levy will also apply when the recipient flares or vents the fuel, or engages in a prescribed activity (regulations forthcoming).
At the time the Plan was released, the Alberta Government stated that the carbon levy would not further increase “until the economy is stronger and the actions of other jurisdictions, including the federal government, are better known”. Under the new federal climate change initiative, the federal government is mandating that every province impose a carbon price of $50/tonne of CO2e by 2022. It is unclear whether and how Alberta will adjust its current Plan in response to the federal requirement.
Large industrial emitters will continue to be subject to the Specified Gas Emitters Regulation framework until the end of 2017, at which point the province will transition to product- and sector-based performance standards. Further information will be made available following industry consultation. Under the current framework, facilities that emit 100,000 tonnes or more of GHG emissions are required to reduce their site-specific emissions intensity by 15% annually. On January 1, 2017, this requirement will increase to a 20% reduction. As of January 2017 the price of carbon credits will also increase, from $20 to $30 per tonne. While the carbon tax is not revenue-neutral like other jurisdictions, Alberta has promised to cut small business taxes from 3% to 2% to offset costs associated with the new levy.
3. Absolute cap on oil-sands emissions
Oil sands facilities are currently charged a levy under the Specified Gas Emitters Regulation based on historical emissions. There is currently no facility- or industry-wide limit on emissions. Under the Climate Leadership Plan, Alberta proposed transitioning to an oil-sands-based performance standard for the carbon price of $30/tonne, with an emissions limit on the oil-sands of a maximum of 100,000 tonne in any given year.
4. Methane gas reduction
Alberta is targeting a 45% reduction in methane gas emissions from oil and gas operations by 2025.
B. British Columbia
BC has been actively regulating climate change since 2007 with its Greenhouse Gas Reduction Targets Act (“GGRTA”). The GGRTA pledged to reduce provincial emissions to 33% below 2007 levels by 2020 and 80% below 2007 levels by 2050. This legislation was supported by BC’s 2008 Climate Action Plan, which introduced four important policies: (1) a comprehensive, revenue-neutral carbon tax; (2) a carbon neutral public sector; (3) a reduction in non-renewable energy sources in fuel; and (4) mandatory GHG emissions reporting.
1. Carbon Tax:
The carbon tax, which is set at $30/tonne of CO2e, is among the first of its kind in North America. The tax is broad in that it is paid by everyone in BC who purchases or uses fossil fuels in the province. The tax is collected at the wholesale or retail level and all revenues generated from the tax are returned to British Columbians through reductions in other taxes.
2. Carbon neutral BC Government:
The 2008 Plan also unveiled the BC government’s goal of becoming carbon neutral by 2010. In June 2016, BC reported that the provincial public sector had achieved net zero GHG emissions for the sixth consecutive year through a combination of reduction and offsetting.
3. Renewable and Low Carbon Fuel Requirements:
In 2010, BC implemented low carbon fuel standards requiring fuel suppliers to progressively decrease the average carbon content of their fuels by a minimum of 10% by 2020. Further, fuel suppliers must ensure that gasoline has a minimum renewable fuel content of 5% (4% for diesel).
4. Industrial Emissions Reporting and Control:
In January 2016, the Greenhouse Gas Industrial Reporting and Control Act (“GGIRCA”) came into force, requiring facilities in BC that emit more than 10,000 tonnes of CO2e per year to report their emissions and requiring facilities whose emissions exceed 25,000 tonnes to have their data verified by a third party. Additionally, new performance benchmarks were introduced for specific industrial facilities or industries, such as LNG and coal-based electricity generation operations. Under the new regulations, regulated industries must report their compliance. The newly established BC Carbon Registry allows for the issuance, transfer and retirement of compliance units, including offset units, for both industry and the BC government.
British Columbia’s 2016 Climate Leadership Plan
On August 19, 2016, the BC government released the much anticipated Climate Leadership Plan. The Plan delineates a course of action to achieve the target reduction of GHG emissions to 80% below 2007 levels by 2050 – one of the targets legislated by the GGRTA. The Plan includes several action items in key sectors through which the BC government aims to reduce annual emissions across six key sectors by up to 25 million tonnes by 2050. Those sectors include: natural gas; transportation; forestry & agriculture; industry & utilities; communities & built environment; and public sector leadership.
The Climate Leadership Plan has been criticized for omitting the GGRTA’s 2020 target of achieving a reduction in GHG emissions of 33% below 2007 levels in favour of specifying a course of action to achieve its 2050 target of 80% below 2007 levels. BC has also faced criticism for declining to increase the carbon tax from its current $30/tonne. However, the BC Government has pledged to update the Climate Leadership Plan in light of the Federal Pan-Canadian Framework, which will require BC to increase the carbon tax to $50/tonne.
The Ontario government has made significant strides in 2016 towards its goal of combatting climate change. The government passed the Climate Change Mitigation and Low-carbon Economy Act (the “Act”) in May 2016, which sets out the framework for its cap and trade program. The Act was promptly followed by two regulations and guidance documents, which were incorporated into the respective regulations by reference:
- The Cap and Trade Program and its incorporated Methodology for the Distribution of Ontario Emission Allowances Free of Charge (the “Methodology”) set out the rules related to registration and participation, and information on distribution of emission allowances; and
- Quantification, Reporting and Verification of Greenhouse Gas Emissions, and its incorporated Guideline for Quantification, Reporting and Verification of Greenhouse Gas Emission.
The Act enables Ontario to enter into agreements with other jurisdictions for the harmonization and integration of its Cap and Trade Program. Along with Québec and California, Ontario is a founding member of the Western Climate Initiative (WCI) – a nonprofit organization that helps its members execute their cap and trade programs by offering administrative and technical services. Québec and California already have carbon markets in place; the Cap and Trade Program allows Ontario to ultimately link its Cap and Trade Program with existing markets.
Additionally, in June 2016, the government released Ontario’s Five Year Climate Change Action Plan 2016-2020 (the “Action Plan”), which sets out several action items the government will execute in key sectors to achieve its GHG emission reduction target of 80% below 1990 levels by 2050. Those action areas include: transportation; buildings & homes; land use planning; industry & business; collaboration with indigenous communities; research & development; government; and agriculture, forests & lands. The Action Plan initiatives will be funded by revenues generated from the Cap and Trade Program.
How will the Cap and Trade Program affect businesses?
Ontario is poised to launch its Cap and Trade Program, which will take effect on January 1, 2017, with the first compliance period ending on December 31, 2020. In essence, the Program relies on a market-based system of carbon credits to ensure the hefty carbon polluters lower their emissions.
The Greenhouse Gas Emission Reporting Regulation (Table 2, Section 5) outlines the activities that trigger reporting under this program. The Act mandates that, in addition to being responsible for their own facilities’ emissions, facilities that are involved with electricity importation, natural gas distribution, and petroleum product supply must also obtain emission allowances for their customers (with the exception of customers who are already participating in the Cap and Trade Program). The Cap and Trade Program includes two main types of participants – mandatory and voluntary – as well as market participants:
Mandatory Participants: Facilities that produce 25,000 tonnes or more of CO2e per year are subject to reporting requirements, including emission verification requirements. Mandatory participants need to register by November 30, 2016; the information required for registration is set out in Schedule 1 of the Cap and Trade Program.
Voluntary Participants: Facilities that produce between 10,000 and 25,000 tonnes of CO2e per year may opt into the Program, making them subject to the same rules as mandatory participants. Voluntary participants may register in 2016 if they meet the criteria set out in section 29 of the Cap and Trade Program. However, there are also opportunities for subsequent registration.
Market Participants: There are no reporting obligations for facilities that produce less than 10,000 tonnes of CO2e per year but those facilities may nevertheless enroll in the Program. A market participant may be an individual or an organization.
All participants in the Cap and Trade Program must first register to use the Compliance Instrument Tracking System Service (CITSS), WCI’s online auction platform, which tracks emissions allowances and offset credits. Only registered participants will be able to purchase, sell or trade emission allowances and credits.
Under the Cap and Trade Program, the total number of emission allowances progressively decrease each year (between 4 and 5%). Participants will only be able to emit the amount of GHG permitted by their allowances. A limited number of allowances per year will be reserved by the government for free distribution to eligible participants in order to cover their emissions. The eligibility application requirements are set out in sections 85 and 86 of the Cap and Trade Program, and the number of free allowances allocated to participants will be calculated in accordance with the Methodology. The deadline for submitting an application is September 1 of each year of the compliance period.
As the total number of allowances progressively decreases each year, participants will have to either lower emissions or purchase allowances from other participants that have credits to sell. Moreover, the government will auction emission allowances every year on four separate occasions. The first auction of emission allowances is scheduled for March 2017; this will be an exclusive Ontario auction and will not be linked with Québec or California. Penalties for non-compliance with the Act and related regulations will be accordingly levied. Penalties include a minimum fine of $25,000 to a maximum of $6 million for corporations and a minimum of $5,000 to a maximum of $4 million for individuals.
Given that Ontario is expected to increase fuel prices in 2017, end consumers of fuel that are not participants in the Cap and Trade Program will pay carbon tax in the form of increased fuel prices. Therefore, voluntary participants could benefit from receiving free emission allowances that essentially translate into savings, whereas non-participating end users will pay higher fuel prices.
In April 2016, Québec released the highly anticipated 2030 Energy Policy. Notably, the new Energy Policy is a significant departure from previous policies, which were relatively short-term policies and focused on further increasing electricity production and transmission. Key measures outlined in the new Energy Policy include:
- Introducing “zero coal” legislation to eliminate thermal coal by 2030;
- Establishing multi-fuel service stations offering gasoline, biofuels, natural gas, propane, electricity and hydrogen;
- Making available $4 billion (over a period of 15 years) to help households, businesses and public establishments with transition to energy efficiency and energy substitution measures;
- Promoting the export of wind energy thereby taking advantage of the opening of new markets stemming from growing worldwide demand for wind power; and
- Adopting a legal framework governing hydrocarbons to ensure safe transportation and responsible exploitation, social acceptability in the host communities, and the enforcement of stringent technical and environmental standards.
The new Energy Policy also establishes five major targets to be met by 2030:
- increase energy efficiency by 15%;
- reduce amount of petroleum products consumption by 40%;
- eliminate use of thermal coal;
- increase overall renewable energy production by 25%; and
- increase bioenergy production by 50%.
Québec’s climate change commitments are also set out in the 2013-2020 Climate Change Action Plan (“2013-2020 CCAP”), which establishes measures for all GHG emitting sectors. In particular, its initiatives focus primarily on transportation, industry and building sectors as they account for the maximum portions of Québec’s emissions inventory.
Mechanics and Impacts of Québec’s Cap and Trade System
The flagship initiative of Québec’s 2013-2020 CCAP is its Cap and Trade System, which comes under the WCI’s carbon market and came into force in January 2013. It created Canada’s first carbon market and was swiftly linked with California’s Cap and Trade system through a bilateral agreement in January 2014. Revenues generated by the carbon market are allocated to the Green Fund, which are then reinvested into the various programs of 2013-2020 CCAP.
Under Québec’s Regulation Respecting A Cap-And-Trade System For Greenhouse Gas Emission Allowances, businesses that emit 25,000 tonnes or more of CO2e per year are subject to the Cap and Trade System. Only the industrial and electricity sectors were subjected to the system for the first compliance period (2013-2014). However, fossil fuel distributors are also subject to the system during the second and third compliance periods (2015-2017 and 2018-2020). In addition, the Cap and Trade System is open to individuals and other non-regulated entities that would like to participate in the carbon market. In order to reduce emissions, the government establishes a yearly cap on emission allowances, which progressively decreases every year (between 3 and 4%). All participants in the Cap and Trade System must first register to use the CITSS.
In 2013 and 2014, certain industrial emitters received free emission allowances as incentives to remain in Québec instead of relocating to carbon pricing free zones. However, electricity producers and distributors of fossil fuels did not benefit from these free allowances. The emission allowances that are not allocated free of charge are auctioned off by the Québec government four times a year. The current 2016 auction price is reserved at $12.82. The government also holds joint auctions with California for which the minimum bid is set at the highest minimum of each jurisdiction, taking the variation in currencies into account. Auctions are open to all participants registered with CITSS.
At the end of each compliance period, participants can only emit the amount of GHG permitted by their allowances. Several compliance options are available to participants, which include purchasing emission allowances from other participants and acquiring emission allowances through government auctions. Québec and California have also agreed to apply common holding limits in order to restrict the number of emission allowances that can be held by any emitter. Implementing has the effect of minimizing the risk of market manipulation.
Saskatchewan is progressively working towards effecting statutory schemes to provide incentive to private companies to reduce GHG emissions.
At this time, Saskatchewan does not impose any carbon taxes or carbon pricing scheme. Until recently, the future imposition of a Saskatchewan legislative scheme was largely dependent upon the proclamation of the proposed Management and Reduction of Greenhouse Gases Act (the “Proposed Act”). However, the Proposed Act does not comply with the new national benchmarks and, as such, will face further review.
In a white paper released on October 17, 2016, the Saskatchewan government put forth its position that Canada’s nationwide tax plan as a fiscal mechanism to address climate change is ineffective. Instead, it posited a focus on innovation and clean technological development as the more appropriate path to long-term and sustainable results. In light of Premier Brad Wall’s public opposition to the new federal carbon pricing plan, it remains to be determined what Saskatchewan’s future imposition of a federally compliant legislative framework targeted at reducing GHG emissions will be. Saskatchewan is considering a constitutional challenge to the federal carbon pricing plan. Ultimately, we expect this matter to be adjudicated by the Supreme Court of Canada.
Currently, the Proposed Act is targeted legislation aimed at the reduction of GHG emissions and adaptation to climate change. Specifically, the Proposed Act establishes a scheme whereby certain GHG emitters (a class not yet defined) will be required to reduce GHG emissions in accordance with an annual reduction target prescribed by the legislation. Regulated emitters that fail to reduce their GHG emissions by the provincially established target amount will pay a carbon compliance payment into the Saskatchewan Technology Fund, which will finance investments in low-emitting technologies. The legislation is focused on motivating emitters to invest in GHG-reducing technology within the province of Saskatchewan. However, as indicated above, the legislation is likely to change in light of the new federal climate change policy.
In other legislative climate change initiatives, Saskatchewan’s Boundary Dam Carbon Capture and Storage Project is the world’s first and largest coal-fired carbon capture and storage electricity project of its kind. At full force, it is expected to result in a 90% reduction in carbon dioxide emissions. This Saskatchewan funded project allows the province to reduce emissions drastically while still using coal as a fuel source.
Contact the lawyers at Miller Thomson for more information about how provincial and federal climate change initiatives might impact your business.
IV. Summary of Federal and Provincial Climate Change Frameworks
|Jurisdiction||Carbon Pricing Mechanism||GHG Reporting Requirements||Emission Reduction Targets|
|Federal||>$10/tonne CO2e in 2018;|
Increase of $10/year to reach $50/tonne of CO2e in 2022
|Pending||30% below 2005 levels by 2030|
|Alberta||$20/tonne CO2e in 2017 (with exact rates varying depending on fuel type);|
$30/tonne beginning January 2018
|Facilities emitting > 50,000 tonnes of CO2e per year must report in accordance with the Specified Gas Reporting Regulation which expires December 31, 2017;|
Facilities generating ≥ 50,000 tonnes of CO2e per year must also report under federal Greenhouse Gas Emissions Reporting Program
|45% reduction by 2025|
|British Columbia||Revenue neutral carbon tax set at $30/tonne of CO2e||Facilities generating ≥ 10,000 tonnes or more of CO2e per year must report their emissions;|
Facilities generating ≥ 50,000 tonnes of CO2e per year must also report under federal Greenhouse Gas Emissions Reporting Program
|80% below 2007 levels by 2050|
|Ontario||Cap and Trade Program will take effect on January 1, 2017||Facilities generating ≥ 10,000 tonnes of CO2e per year must report in accordance with Greenhouse Gas Emission Reporting Regulation;|
Facilities generating ≥ 50,000 tonnes of CO2e per year must also report under federal Greenhouse Gas Emissions Reporting Program
|15% below 1990 levels by 2020;|
37% below 1990 levels by 2030;
80% below 1990 levels by 2050
Settlement price of 2016 vintage allowance is $17.64
|Facilities generating ≥ 10,000 tonnes of CO2e per year to report total annual GHG emissions;||20% below 1990 levels by 2020;|
37.5% below 1990 levels by 2030
|Saskatchewan||Pending||Provincial requirements are pending;||Pending|