Introduction

British Columbia’s Climate Action Secretariat (CAS) has released two consultation papers in respect of proposed regulations it is looking to develop under B.C.’s Greenhouse Gas Reduction (Cap and Trade) Act.

The first can be found here, and is in respect of a proposed Emis­sion Trading Regulation. This will be of particular interest to large emitters with "covered sources," who will have their emission capped, and will have to obtain and surrender allowances and offsets to meet their regulatory obligations.

The second can be found here, and is in respect of a proposed Cap and Trade Offsets Regulation. Comments are due by December 6, 2010. This will be of particular interest to offset project developers.

Emissions Trading Regulation

The Emissions Trading Regulation (ETR) outlines the detailed mechanics of B.C.’s proposed cap and trade system.

Starting January 1, 2012, the regulation will apply to operations with annual emissions in either 2010 or 2011 in excess of 25,000 tonnes (CO2e) of greenhouse gas emissions, as determined in accordance with the existing Reporting Regulation. Possible covered sources are detailed in Appendix A to the consultation paper, and are some of the elements open for comment in the consultation.

At the end of each three year compliance period (i.e. 2012-2014), the ETR will require regulated operations to surrender compliance units in a quantity equal to its regulated emissions during that three year compliance period. Compliance units will include allowances issued by B.C. (and other regions to which the B.C. market is linked) and eligible project-based offsets.

The issuance of B.C. allowances would be determined by the B.C. government, but the total number of available allowances will be reduced over time. British Columbia will establish the cap on allowances to be issued during each three year compliance period prior to each compliance period. A portion of each year’s allowances (at least 10%) are likely to be auctioned through a coordinated regional auction together with allowances from other linked regulatory systems). The auction process is one of the elements open for comment in the consultation.

Allowances not auctioned could be distributed to existing regulated emitters for free (gratis) or retained by the B.C. government as a contingency or to facilitate new entrants. How allowances that are not auctioned are to be distributed is one of the elements open for comment in the consultation.

The ETR also defines the function of a detailed registry, in which all compliance units (allowances and eligible offsets) would be tracked. Both regulated entities and other parties will be able to establish registry accounts and participate in the market, permitting non-regulated parties to transact compliance units on the registry.

There would be significant oversight of the market. The primary market (government distrbution of allowances), and the secondary market (spot/cash market for compliance units) would be overseen by the B.C. Government. Any deriviative market activity (futures, swaps, options) would fall under the ambit of the B.C. Securities Commission.

Cap and Trade Offsets Regulation

The Cap and Trade Offsets Regulation (CTOR) will set out the detailed requirements applying to project-based greenhouse gas emission reductions in order for them to be recognized as offsets, and eligible for use by regulated emitters to satisfy their compliance obligations in B.C. Eligibility criteria will include requirements that the emission reductions be real, additional, permanent and verifiable.

Emission reductions would also have to originate from a project located in a qualifying geographic area (B.C., and likely other jurisdictions to which B.C.’s regulatory market is linked), and be “clearly owned” – the project developer must have a superior claim to ownership of the emission reduction or removal to that of any other person. The CTOR will not address emission ownership rights specifically, so project proponents will likely continue to have to establish clear ownership contractually, through the use of quitclaims or other agreements with potential competing title claimaints.

Validation and verification of the emission reductions would be completed by accredited third party validators and verifiers. Eligible projects would have to be conducted in accordance with protocols approved by the B.C. Ministry of Environment.

To be eligible, projects must have been undertaken no earlier than January 1, 2007, and must be registered within one year of the project start date, unless an approved protocol was not available at the time of the project start date. Emission reductions from any non-sequestration project would be available for a 10-year period, and that period could be renewed once for an additional 10 years. The crediting period for sequestration projects would be established by the applicable protocol, but will not exceed 100 years.

Project developers would retain the obligation to replace emission reductions nullified by a reversal due to the project developer’s intentional acts or negligence. British Columbia will establish mechanisms to address reversals that are not the result of project developer intentional acts or negligence.

Conclusion

British Columbia is moving ahead with plans to establish a greenhouse gas regulatory system, including a cap and trade regime, for large private sector emitters. This is a preparatory step in order for B.C. to be ready to implement this kind of system if national or regional regulatory regimes proceed that necessitate a cap and trade system be implemented in B.C. so as not to disadvantage the competitiveness of B.C. goods in other markets. B.C. will be monitoring the progress of other jurisdictions, including the other four WCI-partner jurisdictions expected to proceed with similar regulatory regimes (California, Ontario, Quebec, New Mexico), in assessing whether to implement a cap and trade regime in B.C.