The federal government recently announced details of a federal regulatory scheme involving a carbon cap and trade system, and carbon trading framework, as part of its “Turning the Corner” plan aimed at cutting greenhouse gas (GHG) emissions. The new carbon cap and trade system will apply initially to large industrial emitters across Canada, including those in the oil sands, electricity, mining, cement, pulp and paper, and chemical manufacturing sectors.

While the federal government has also announced and initiated a number of other GHG emissions reductions programs and incentives under the ecoACTION initiatives administered by Environment Canada, the carbon cap and trade system is pegged to be the source for major GHG emissions reductions. To properly prepare for this new regime, companies need to start thinking about their compliance options.

The federal government expects to publish regulations for the carbon cap and trade system in late 2008, and implement the system by January 1, 2010, with the 2010 calendar year to be the first compliance period.

To date, Alberta is the only jurisdiction in Canada that has legislated GHG emissions limits on large industrial emitters. Given that the planned federal GHG regulations will apply to many more facilities than the current Alberta regime, and that the federal compliance options are more limited and may be more onerous to comply with than the existing Alberta rules, commentators are suggesting that many regulated companies are not, and will not be, prepared to meet the rapidly approaching federal requirements. This is expected to be the case even in Alberta, where certain facilities have the benefit of experience.

Preparing for the 2010 compliance period may pose challenges for companies who have yet to focus efforts and properly consider the cost/benefit analysis of the various compliance options. Choosing the right mix will be a sector-specific and operations-specific determination. For example:

  • Companies planning capital turnover, significant capital equipment or fleet investments in upcoming years should consider the pros and cons of meeting compliance obligations through abatement (which refers to in-house reductions of GHG emissions, such as improvements in technology or processes, or fuel-switching). This is a particularly strategic consideration for new or future facilities in all sectors.
  • Companies for whom abatement may not be possible or economically feasible should seriously investigate purchasing credits or offsets (both of which should be considered in contracting), or making contributions to the federal Technology Fund (or through certain pre-qualified expenditures which could be deemed to be Technology Fund contributions) to comply with the federal requirements. The Technology Fund will largely finance investments in technology and infrastructure deployment that have a high likelihood of reducing GHG emission in the near future.

Meeting emission reduction targets will be more complex under the federal plan than under the existing Alberta regime because the federal plan will limit the quantum of federal Technology Fund contributions. This limit will make participation in the domestic carbon trading market a practical necessity for many businesses.

Businesses involved in industries that may create or obtain legal rights to offsets (generally speaking, projects or practices that remove or forego GHG emissions from the atmosphere) will be able to register their projects in Environment Canada’s new registry. Registration will be required to sell and trade offsets in Canada. It will also serve as a public notice forum of any legal rights to offsets being claimed by an individual or business in Canada.

McCarthy Tétrault Notes:

While the federal regulations will initially apply to large industrial emitters, regardless of the particular industry or the size of their current carbon footprint, all companies need to consider and plan for climate change risk. This may include developing a comprehensive climate strategy and taking steps to reduce carbon impacts in advance of regulatory requirements.

While there are costs associated with climate change activities, there are also significant business opportunities, including carbon emissions trading schemes, bottom-line cost reductions by reducing energy intake and capitalizing on operational efficiencies, and the development of carbon neutral or “clean” technologies and products for which consumers and investors have an increasingly insatiable appetite.