On April 10, 2010 the federal government published its proposed Renewable Fuels Regulations[2] (“Regulations”) in Part I of the Canada Gazette. These Regulations are now open for public comment for a period of 60 days ending on June 9, 2010. The objective of the proposed Regulations is to achieve an incremental reduction of approximately 1 MT of greenhouse gases (“GHG”) per year nationally and a cumulative reduction of 23.8 MT GHG over a 25 year period.

The proposed Regulations require that gasoline fuel producers and importers (called Primary Suppliers) have at least 5% of the average annual volume of gasoline that they produce or import be composed of renewable fuel, beginning on September 1, 2010. The proposed Regulations also include a requirement for an average annual renewable fuel content in diesel and heating distillate oil by 2011. It is intended that that the relevant provisions for diesel and heating distillate oil will come into force upon successful demonstration of renewable diesel fuel use under what are referred to as “the range of Canadian conditions”[3]. As the coming into force of the rules for diesel and heating distillate has not been determined, our discussion below will focus on the obligations of Primary Suppliers of gasoline.

The renewable fuel content requirement will be based on the Primary Supplier’s total annual volume. The compliance period is based on the calendar year but the first period will be 16 months (from September 1, 2010 to December 31, 2011). The threshold for regulation is the production or importation of 400 m³ of gasoline. Primary Suppliers must register by sending a report to the Minister of the Environment “at least one day before they produce or import (or in combination) their 400th m³” during any compliance period.

Although the program is national, the regulation will not apply to:

  1. gasoline, diesel fuel or heating distillate oil, as the case may be, sold for or delivered for use in aircraft;
  2. gasoline, diesel fuel or heating distillate oil, as the case may be, sold for or delivered for use in competition vehicles;
  3. gasoline, diesel fuel or heating distillate oil, as the case may be, sold for or delivered for use in scientific research;
  4. gasoline, diesel fuel or heating distillate oil, as the case may be, sold for or delivered for use as feedstock in the production of chemicals, other than fuels, in a chemical manufacturing facility;
  5. diesel fuel or heating distillate oil, as the case may be, sold for or delivered for use in military combat equipment;
  6. gasoline sold for or delivered for use in Newfoundland and Labrador, the Northwest Territories, Yukon, Nunavut and that part of Quebec that is north of latitude 60°N;
  7. diesel fuel or heating distillate oil, as the case may be, sold for or delivered for use in the Northwest Territories, Yukon, Nunavut and that part of Quebec that is north of latitude 60°N;
  8. gasoline, diesel fuel or heating distillate oil, as the case may be, for export; and
  9. gasoline, diesel fuel or heating distillate oil, as the case may be, in transit through Canada, from a place outside Canada to another place outside Canada.”[4]

The proposed regulation also includes a system of tradable compliance units to allow gasoline fuel producers and importers to achieve compliance if they cannot incorporate the required level of renewable fuel content into their overall pool. The trading system will include Primary Suppliers and Elective Participants. Elective Participants (as the name suggests) must elect to participate. They do so by registering with the Minister of the Environment at least one day before they first create a compliance credit. An eligible person is one that :

  1. blends, in Canada, renewable fuel with liquid petroleum fuel,
  2. produces, in Canada, a liquid petroleum fuel — other than gasoline, diesel fuel and heating distillate oil — by using biocrude as a feedstock,
  3. imports into Canada a liquid petroleum fuel — other than gasoline, diesel fuel and heating distillate oil — that has renewable fuel content,
  4. sells, in Canada, neat renewable fuel to a neat renewable fuel consumer for use as fuel in a combustion device, and
  5. uses, as fuel in a combustion device in Canada, neat renewable fuel that they produced or imported;”[5]

Compliance units are created by the aforementioned activities and can be carried forward of backward into other compliance periods under certain conditions. The creation of compliance units must be confirmed by the recording of certain information relating to the creation process in a compliance unit account book held for that purpose. Without the recording, the compliance unit will not exist.

The proposed regulation imposes limits on the number of compliance units that a Primary Suppliers may hold. The true-up date for purposes of the unit limit is every month and the amount of compliance units held cannot exceed the greater of 6 times the number of litres in the Primary Supplier’s gasoline pool at the end of the month, and, 0.01 times the number of litres in the Primary Supplier’s gasoline pool for the preceding compliance period.

Aside from the position limits for Primary Suppliers, there are two other significant conditions on trading in the proposed Regulations. First, a compliance unit can only be transferred in a trade to a Primary Supplier. This provision would seem to be an attempt to eliminate market intermediaries who pool together small lots of credits to on-sell them with a spread to buyers looking for supply. To the extent that the pool of credit producers remains small and disparate and the buyers large and comparatively few in number, market aggregators might have been useful in order to render the market more liquid. However, if the market is generally long or if large Primary Suppliers decide to trade amongst themselves, then there may not be a need for aggregation. Second, a compliance unit that is created during a compliance period can only be traded during that same compliance period. It can however be carried forward or backward into the next or preceding compliance period under certain conditions. If so carried, it must be traded in the compliance period into which it is transported. These provisions, make the purchase and sale of different “vintages” of credits more difficult than is the case in the voluntary carbon market.

Carbon Round Up

Canada

As mentioned above, the Canadian federal government published in Part I of the Canada Gazette, its Renewable Fuels Regulations under the Canadian Environmental Protection Act, 1999 on April 1, 2010

In addition, on April 17, 2010 the federal government published in Part I of the Canada Gazette, its Passenger Automobile and Light Truck Greenhouse Gas Emission Regulations under the Canadian Environmental Protection Act, 1999.

The proposed automobile and light truck regulations establish mandatory greenhouse gas emissions standards for 2011 and later vehicle model years that are aligned with U.S. federal standards. This alignment has been a primary concern of the federal government, which was critical of the province of Québec’s provincial tailpipe emissions regulation initiative (see below), claiming that it would drive auto sales into other jurisdictions.

Under the proposed automobile and light truck regulations, vehicle manufacturers and exporters must meet a fleet average greenhouse gas emissions standard. As is the case with the proposed Renewable Fuels Regulations, the proposed automobile and light truck regulations include an emissions credit creation and trading system to create more flexibility in terms of compliance options. As appears from the Regulatory Impact Analysis Statement posted on the Canada gazette website at http://www.gazette.gc.ca/rp-pr/p1/2010/2010-04-17/html/reg1-eng.html, the goal of the exercise is to align Canadian tailgate emissions standards with those of the United States.

On May 5, 2010, the Climate Change Accountability Act (Bill C-311) introduced by the New Democratic Party passed final reading in the House of Commons and now heads to the Senate. The bill seeks to force the government to adopt measures to cut greenhouse gas emissions to the long term levels recommended by the United Nations Framework Convention on Climate Change and to establish mid-range targets to ensure that the end result is achieved.

British Columbia

On April 6, 2010, the federal government and the provincial government of British Columbia signed an Agreement in Principle on efforts to address Climate Change. The federal government describes this agreement as the first step toward a formal equivalency agreement under the Canadian Environmental Protection Act, 1999, which the federal government believes will “avoid the need for duplication of regulatory measures and ensure that the environmental needs of the province are met.”

Readers would be advised to consult our partner Patricia Leeson’s article entitled “Will Canadian equivalency agreements avoid a patchwork of regulation?” which appeared in Point Carbon’s Carbon Market North America News weekly on December 12, 2008[6] with regard to the possible pitfalls that may await the federal government and the provinces when they attempt to negotiate equivalency agreements in this area.

On April 28, 2010, the BC government introduced a Clean Energy Act. The government press release is available at http://www2.news.gov.bc.ca/news_releases_2009-2013/2010PREM0090-000483.htm#.

Saskatchewan

On March 22, 2010 the Saskatchewan government released proposed its draft Management and Reduction of Greenhouse Gases Regulation. The regulation provides for the definition of what is a greenhouse gas and identifies the industries that will be subject to an emissions reduction obligation in Saskatchewan. The threshold for the application of the regulation is 50,000 tonnes of CO2e emissions annually. Entities with emissions over the above-mentioned threshold will be required to reduce their emissions by 2% per year between 2010 and 2019 in order for the province to achieve a 20% net reduction by 2020 over 2006 levels. The government of Saskatchewan is currently holding stakeholder meeting in regard to the proposed regulation. More information is available at http://www.environment.gov.sk.ca/Default.aspx?DN=9192fbe8-23fe-4077-ac7d-30b7b269bdbf.

Quebec

On January 14, 2010 The Regulation respecting greenhouse gas emissions from motor vehicles came into force in Québec. The regulation aims to reduce new automobile and light truck emissions for model years 2010 through 2016 that are sold, leased or otherwise marketed in Québec. Automobile manufacturers must ensure that their average fleet GHG emissions do not exceed the standards set by the regulation.

The government claims that these standards will encourage the use of more efficient technology in the transportation industry and that applying them will allow a 25% to 35% reduction in new motor vehicle emissions for the target model years.

The regulation is available online at http://www2.publicationsduquebec.gouv.qc.ca/dynamicSearch/telecharge.php?type=3&file=/Q_2/Q2R6_001_A.htm.

USA

In the United States, the draft climate change bill being worked on in the United States Senate by Senators Kerry (Dem-Mass), Graham (Rep-SC) and Lieberman (Ind-Ct) was to be released publicly on Monday, April 26, 2010, which did not occur. According to Senator Graham, his refusal to cooperate in the public release of the bill is a protest over efforts by the Democratic leadership to prioritise immigration reform. In our view, the fact that the draft bill was sent to the EPA for modelling by Senators Kerry and Lieberman with Senator Lindsey’s consent means that the non-release is more political manoeuvre than anything else and that the bill will come to the floor of the Senate for debate once it has passed through the EPA modelling process, estimated to take about six weeks.

The WCI continued to move forward with the Markets Committee releasing the following documents: Market Oversight White Paper Presentation, Market Oversight Draft Recommendations, Auction Design White Paper, Market Oversight Draft Recommendations Presentation and the Auction Design Presentation. The Offsets Committee meanwhile released the following documents: WCI Offsets System Essential Elements Draft Recommendations and Review of Existing Offset Protocols.[7]

On January 29, President Obama announced that the U.S. Federal Government will reduce its greenhouse gas emissions by 28% by 2020. According to the White House, achieving the Federal GHG emission reduction targets will lead to the reduction of $8 to $11 billion in avoided energy costs through 2020. This action is significant as the federal government is the largest energy consumer in the United States.

This announcement was further to Executive Order 13514 issued in October 2009 by President Obama directing US federal agencies to “establish an integrated strategy towards sustainability in the Federal Government and to make reduction of greenhouse gas (GHG) emissions a priority for Federal agencies.” The Executive Order required Federal agencies to set reduction targets within 90 days for scope 1 and 2 GHG emissions by fiscal year 2020, relative to a 2008 baseline.

The required reductions will be achieved by measuring current energy and fuel use, increasing energy efficiency and transitioning from traditional fuel sources to clean energy sources such as solar, wind, and geothermal.

In an era where the Canadian federal government’s self declared policy is to align itself with the United States, this is one initiative it has conveniently overlooked.