On July 6, 2011 the Minister of Sustainable Development, Environment and Parks announced that the Quebec greenhouse gas (GHG) emissions cap-and-trade system will come into force on January 1, 2012. A draft Regulation was published in the Official Gazette of Québec on July 7, 2011 and the 60-day comment period recently ended.

The draft regulation introduces provisions whereby subjected enterprises will be obligated to cover their GHG emissions, and establishes a system to purchase, sell and trade emission allowances.

According to the current text, most manufacturers operating in Québec will be subject to the obligation to cover their GHG emissions, if they produce 25,000 metric tonnes or more CO2 equivalent annually. The Regulation will impact, in addition to other sectors, all manufacturing activities that have a North American Industry Classification System (NAICS) code beginning with 31, 32 or 33. For example, the following activities would be subject to the GHG system: manufacturing of food, beverages, tobacco products or textiles; manufacturing of goods made of leather, wood, paper, rubber, plastic, glass, ceramics, cement, gypsum or metal (steel, iron, etc.); and manufacturing of chemicals, computers, electronic products and furniture. Other sectors are also impacted by the draft Regulation, such as mining; quarrying; oil and gas extraction; electric power generation, transmission and distribution; natural gas distribution and pipeline transportation, and the supply of steam and air-conditioning.

For all such sectors the first compliance period will begin in January 2013 if the Regulation comes into force as currently proposed. A compliance period is the period in which GHG emitters who are subject to the Regulation must cover their GHG emissions declared for the period with emission allowances.

Enterprises that distribute fuel would also be subject to the Regulation, according to its current text. GHG emissions at or exceeding 25,000 metric tonnes CO2 equivalent attributable to the combustion or use of the fuels distributed will trigger the requirements. The first compliance period for this sector would begin in January 2015.

The draft Regulation provides details on emission allowances accounting, the allocation of free emission allowances to certain emitters, the sale, purchase and trade of emission allowances, and other accounting and record-keeping measures required to comply.

The current text of the Regulation has GHG emissions capped starting in 2013. However, the draft Regulation would allow emitters and other participants in the cap-and-trade system to register as system users and to buy and sell GHG emission allowances in 2012.

Limited early reduction credits will be available. Terms and conditions set out in the draft provide that certain reductions in GHG emissions made during the period starting on January 1, 2008 and ending on December 31, 2011, with a reference period from January 1, 2005 to December 31, 2007, are eligible for early reduction credits. Unfortunately, these reference and reduction periods would deprive many emitters of the benefits associated with the reductions which many businesses implemented prior to 2008. For certain emitters it will be worthwhile to determine whether any entitlement to such credits exists, and to take the necessary steps to have them issued. The deadline to apply for such credits, as currently drafted, is December 31, 2012.

It is expected that a separate regulation on offset credits will be issued this fall. It should be noted that an emitter would, under the current draft, be entitled to cover up to 8% of its GHG emissions with offset credits.

Given the short time frame until the cap-and-trade system likely comes into force it is important for all affected businesses to start preparing now to meet the requirements of the GHG system. This means, for instance, verifying if sufficient and reliable information is available to claim early reduction credits (if applicable), determining if the business will be admissible to free emission units, determining if emission units will have to be purchased on the system and budgeting for same and, of course, signing-up for the system as soon as possible.