On June 25, 2015, Shannon Phillips, Alberta’s Minister of Environment and Parks announced that the province will be renewing its existing greenhouse gas (GHG) reduction regulatory regime, which is otherwise set to expire on June 30, 2015, albeit with two significant changes:
- An increase in operational efficiency requirements on a regulated facility from the current 12 per cent. The operational efficiency requirements will increase to 15 per cent for the year 2016 and 20 per cent from January 1, 2017 onward.
- An increase in the cost of contributing to the Climate Change and Emissions Management Fund (Fund) and obtaining Fund credits. The price of a Fund credit is currently set at C$15/tonne. That price will increase to C$20/tonne for the year 2016 and C$30/tonne from January 1, 2017 onward.
The Minister stressed that the changes are interim measures only. Alberta is currently revisiting its overall climate change strategy, of which the GHG reduction regime is only a part.
The province hopes to have a tentative proposal regarding its overall strategy prior to the upcoming World Climate Summit to be held in Paris, France in December 2015.
As discussed later in this bulletin, although the two changes appear relatively straightforward, they will likely have complicated effects.
Before the significance of the proposed changes can be considered, it is important to understand Alberta’s existing GHG regime. Alberta’s GHG regime is set out in the Climate Change and Emissions Management Act (Act) and regulations enacted under the Act, one of which is the Specified Gas Emitters Regulation (SGER). The recently announced changes will affect the SGER.
Under the existing SGER, any facility that emits more than 100,000 tonnes of carbon dioxide (CO2) per year is considered a “regulated facility” and is required to reduce its emissions intensity by 12 per cent versus its operational baseline. To put it another way, if a facility routinely emits 100,000 tonnes of CO2 per year during which it produces 1,000 units of something, it is required to become more operationally efficient and reduce its CO2 emissions to 88 per cent to produce the same 1,000 units. This would result in emissions of 88,000 tonnes of CO2/year for the 1,000 units.
If a facility cannot comply with the required 12 per cent increase in operational efficiency, it has three further options. It can:
- Purchase emission performance credits from other regulated facilities that reduced their emissions more than was required to meet their own 12 per cent operational efficiency requirements
- Purchase emissions offsets from unregulated facilities, such as wind energy generators, that obtain emission reductions through strict adherence to protocols approved by the Alberta government
- Contribute to the Fund and purchase a Fund credit, the cost of which has remained at C$15/tonne of CO2 since July 1, 2007
PROPOSED CHANGES’ POTENTIAL EFFECTS
Increasing the operational efficiency requirements from 12 per cent to 15 per cent to 20 per cent over two years will have a dramatic impact on existing facility operations, particularly on those facilities that are otherwise unable to make any further efficiency gains. If a facility has already maximized its operational efficiency at an amount less than 12 to 20 per cent from what it emitted during routine operations, the only recourse for that facility will be to look to the other compliance options.
Another potential impact of the proposed operational efficiency increase is that the availability of emission performance credits as a compliance option will likely decrease. Under the present regime, regulated facilities only generate emission performance credits if they attain efficiencies greater than 12 per cent from their baseline, with the excess above 12 per cent available as emission performance credits. However, since those same facilities will also have to obtain 15 per cent operational efficiencies in 2016 and 20 per cent operational efficiencies by 2017, they will have fewer, if any, emission performance credits available for use by other regulated facilities. That will necessarily increase demand for the remaining compliance options, namely emission offsets and Fund credits.
Increasing the costs of Fund credits from C$15/tonne to C$20/tonne to C$30/tonne will have a direct impact on a regulated facility’s compliance costs. It will also likely have a dramatic impact on the price of emission offsets. As discussed above, if there are few or no emission performance credits available, emission offsets become the only alternative to contributing to the Fund. By doubling the price of a Fund credit, it will invariably result in emission offset producers being able to charge a higher price for their offsets. This should increase the financial viability of both existing and proposed offset projects and could result in additional projects being undertaken in Alberta in the future that would otherwise not have undertaken, had the costs of contributing to the Fund remained at C$15/tonne.
The higher costs of the Fund credits will likely be coupled with an overall increased requirement for Fund credits. When the growing demand due to the increased operational efficiency requirements of regulated entities is coupled with the decreased supply of emission performance credits and the fact that additional emission offsets projects will take time to construct and/or come into operation, the only short-term recourse for regulated facilities will be the purchase of Fund credits.
Finally, any significant increase to the Fund due to the increased purchase of Fund credits is another issue to consider. The Fund is currently segregated from other government revenues and administered by an arm’s-length corporation. The monies in the Fund are used to support innovative climate change projects in Alberta, with an aim to decrease GHG emissions and adapt to climate change. Industry has contributed C$575-million to the Fund (or approximately C$75-$80-million per year) since the SGER’s inception. If those contributions significantly increase, which appears inevitable, it will be interesting to see if there is increased scrutiny on how the arm’s-length corporation approves subsequent climate change projects, or even if the government will allow the monies in the Fund to remain segregated or integrate those monies into general government revenue.
Because the proposed changes are interim only, many questions remain, including whether the SGER will continue to form part of Alberta’s climate change approach after the draft strategy is released later this year. Nevertheless, assuming they remain in place, the proposed changes will have a multitude of impacts on businesses in Alberta. On the one hand, they will invariably result in increased compliance costs for regulated facilities. On the other hand, they should also result in an increase in the financial viability of existing and proposed offset projects. Finally, it remains to be seen what the arm’s-length corporation and the government will do with the increased contributions to the Fund and the allocation of monies from the Fund.