Quebec’s proposed Bill would adopt a three-pronged approach to reducing greenhouse gases.

On May 12, 2009, the Canadian province of Quebec moved one step closer to creating a cap-and-trade system to reduce greenhouse gases (GHGs) when Bill 42, “An Act to amend the Environment Quality Act and other legislative provisions in relation to climate change” (the Bill), was introduced into the National Assembly.

The Bill lays the groundwork for Quebec to implement a cap-and-trade scheme by adopting a three-pronged approach. First, the Bill requires emitters of GHGs to report their emission levels, for a fee, in order to create a public registry. Second, the Bill requires that the Ministry of Sustainable Development, Environment and Parks (SDEP) establish a reduction target in GHG emission levels on the basis of 1990 emissions. Finally, the Bill allows the SDEP to implement a cap-and-trade system to reduce future emissions. It is expected that Bill 42 will pass into law at the end of June 2009.

The Bill only provides an outline for what the eventual cap-and-trade system will look like. The specifics of the system will be decided by future regulations. Once the initial emissions levels are reported, the SDEP will set the reduction-level goals. While the Bill does not set an initial GHG emissions level reduction rate, it does set a goal for a reduction of 10 million metric tons per year. Under the Bill, the SDEP has the discretion to set different reduction targets and emissions caps for different industries.

Notably, Bill 42 applies to a broad array of individuals and entities. The Bill covers any person or entity that operates a business, facility or establishment that emits GHGs; distributes a product the production or utilization of which involves emitting GHGs; or is specifically covered by future regulations. The proposed legislation focuses on the same GHGs targeted by the Kyoto Protocol: carbon dioxide (CO2), methane (CH4), nitrous oxide (N20), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs) and sulphur hexafluoride (SF6).

The Bill allows for emission allowances to be distributed either without charge or sold at auction. In addition, offset credits, early reduction credits and any other reduction units created by regulation may be used to meet reduction targets. Every emitter subject to regulation under the Bill must account for its annual emissions by submitting allowances or equivalent emissions credits. This combination of allowances and credits will allow the regulated entity to meet its target reduction levels. The Bill defines allowances or credits as being equal to one metric ton of GHG, expressed in CO2 equivalents. A CO2 equivalent is a value that describes, for a given quantity of a GHG, the amount of carbon dioxide that would have the same global warming potential over a set period of time.

Regulated entities that are allocated more allowances than they require may trade their excess credits on the recently formed Montreal Climate Exchange (MCeX). Regulated entities also are allowed to bank their unused allowances for future use instead of trading them on the exchange. However, regulated entities that cease to do business may be forced to surrender their extra allowances and credits back to the government instead of trading them. Fines and other penalties may be assessed against regulated entities that fail to satisfy their compliance obligations. All of the fees and fines collected under this system will be used to finance future projects relating to climate change and global warming.

Implementation of the cap-and-trade system will take place in two stages. The first stage, beginning in 2012, will be a cap on GHG emissions from electric companies and heavy-industry factories. The second stage, beginning in 2015, will target a larger number of industry sectors, including transportation and heating companies.

Quebec’s proposal is part of its commitment to the Western Climate Initiative (WCI), a partnership of American states and Canadian provinces working together to reduce GHG emissions. The WCI is committed to implementing a regional cap-and-trade scheme by 2012. Members include the American states of Arizona, California, Montana, New Mexico, Oregon, Utah and Washington, and the Canadian provinces of British Columbia, Manitoba, Ontario and Quebec. The cap-and-trade scheme in Bill 42 is designed to integrate into this eventual regional scheme. Passage of Bill 42 will make Quebec the second Canadian province, following the lead of British Columbia, to move towards implementing the WCI’s cap-and-trade initiative. Bill 42 also fulfills Quebec’s commitment to neighboring Ontario, dating from a Memorandum of Understanding signed in June 2008, to work together in order to meet their WCI obligations.