On June 19, 2009, the Quebec provincial legislature assented to Bill 42 An Act to amend the Environment Quality Act and other legislative provisions in relation to climate change (the "Bill"). Sections 46.1 to 46.4 and Section 46.18 of the Environment Quality Act (the "Act"), enacted by Section 1 of the Bill and Sections 3 to 5, 7, 8 and 9 came into force on June 19, 2009, the rest of the provisions of the Bill will come into force on the date or dates determined by the Government.

The Bill, presented for the first time 38 days earlier, is the framework within which Quebec will establish targets in regards to greenhouse gas ("GHG") reductions and also provides the basis for one of the fundamental reduction tools to be employed by the Quebec government in order to achieve its goals: a cap and trade system for emissions reductions.

Between the time of its presentation and its assent, two days of hearings were held during which certain interested parties who had been invited to present their views on the draft Bill in writing were also invited to present their submissions verbally to the Transportation and Environment Commission of the Québec National Assembly (the "TEC").

Among the groups present were groups representing industry, the Montreal Climate Exchange ("MCX") and various environmental groups.

Subsequent to these public hearings a detailed review of the bill was undertaken by the TEC and the final version of the Bill was tabled.

The hearings were notable for several reasons. First, they where very short. The public hearings took place over two half days and the witnesses did not have a lot of time to deliver their views on what are extremely complex issues. Second, the parties called to testify did not represent the full spectrum of the stakeholders in the process. For example, only the MCX was heard from the world of finance. While the presence of the exchange was fitting, there seemed to be little realisation on the part of the members of the TEC that the MCX is a private business, and therefore holds a particular view of carbon markets. No other participants from the world of carbon finance were called, no financial institutions, no brokers, no offset developers. In our experience, there is a lot of deep knowledge of cap & trade systems and carbon markets within these groups and it will be interesting to see if future public hearings incorporate this pool of knowledge. In our view the input of these carbon market participants will be key to developing a cap & trade mechanism that is viewed in a positive light by the both the commodity and liquidity providers to that market.

Most of the changes retained by the TEC relate to the decision making processes applicable under the sections of the Act amended by the Bill. The opposition looked for and obtained from the government changes that ensure that certain decisions, which the government had initially intended to make by way of decree will now be taken through regulation, thus ensuring that the substantive content to be added to the framework in the future will be subject to review and debate by the legislature.

On the substantive side however, most of the content of the bill remained unchanged as a result of the public hearings. As will be discussed below, the definition of who is an emitter under the Act drew little criticism and remained unchanged. Some of the other important substantive issues which received little attention or which generated little debate, are as follows:

  • The baseline year for emissions reductions remains 1990 and it is interesting to note that the use of this baseline, which is not under consideration in either the proposed US or Canadian federal systems, drew no criticism from the witnesses.
  • Section 48.8 of the Act, as amended by the Bill, provides for the distribution of emissions units for free or through an auction process. Subsection 48.8(2) is important since it inserts into the system the concept of offset credits, which are project based emission reductions created without regulatory obligation but which can be purchased by emitters in order to satisfy their regulatory requirements. The inclusion or not of offsets has been a major topic of discussion in the implementation of cap & trade elsewhere in the world but in Quebec, the total discussion of the TEC in regards to allocation versus auction and the inclusion of offsets during its detailed review of the Bill was over in about a minute.

Under Section 48.8 of the Act, as amended by the Bill, offset credits will be granted for actions which avoid GHG emissions or which "capture, store or eliminate GHGs" within the periods to be set out by future regulation. Oddly, the creation of offset credits is not limited to emitters that are not subject to an emissions cap. Furthermore, no questions were raised as to why the term "store" was used as opposed to the more commonly used term "sequester".

Credit for early reductions will be granted under future regulations. Although the notion of early action credits was discussed in more depth during the public hearings than some other topics, the discussion was extremely high level and did not generate any debate at the stage of the detailed review of the Bill.

  • Under Section 48.9 of the Act as amended by the Bill, banking will be permitted, with no limit being set as to the future period(s) in which such banked allowances could be used. Conspicuously absent is a right to borrow from future compliance periods; another issue that the TEC failed to draw out for discussion.

One of the most striking aspects of the Act that remained unchanged from introduction to assent is the definition of who is an emitter under the Act. Under Section 46.1 of the Act, as amended by the Bill, an emitter can be a corporate or a physical person or a municipality that carries on or operates a business, an installation or an establishment. Up until this point, the definition does not overly innovate, however, Section 46.1 goes on to say that also included are a person or municipality that "distributes a product whose production or use entails the emission of GHGs".

Based on the review of the testimony and discussion before the TEC, it is clear that the commission had in mind that this definition would be a means to capture downstream distributors of combustibles (i.e gasoline, home heating oil etc) as well as upstream emissions created outside of Québec, however, the ultimate effect is to initially include within the definition of the term "emitter" an extremely large number of businesses that distribute products whose production or use generate GHG emissions. As an example of a different approach, the draft American Clean Energy and Security Act in the United States, rather that using broad language, specifically targets companies that distribute more that a fixed amount of natural gas to customers that are not covered entities.

Under Section 46.2 of the Act, emitters determined by government regulation will have to declare their emissions. A review of Subsection 46.2(1), shows that the emissions that an emitter must declare are those resulting from the operation of its enterprise, installation or establishment or the "production or use of a product that it distributes". As a result, if the regulation setting out the reporting thresholds for emitters does not also exclude emissions relating to production and use of products distributed by the emitter, they will have to determine and declare such emissions to the government.

Emissions generated by the production and use of a product are considered to be scope 3 emissions in The Greenhouse Gas Protocol: A Corporate Accounting an Reporting Standard1, and under that protocol companies are given the option of reporting such emissions or not. As a result, the inclusion of such emissions within the "footprint" of emitters creates a potentially higher standard both for reporting and reduction in Quebec than in other jurisdictions which decide not to include such scope 3 emissions within the footprint of emitters within their jurisdictions.

Furthermore, under Subsection 46.2(2) of the Act, the emitter must supply the Minister with information or documents required by regulation in order to establish the emissions set out in Subsection 46.2(1). Unless the scope of emissions for which reporting is required is reduced by regulation, measuring and reporting these emissions will be difficult and costly as the emitter may not control either the production or the use of the product that it distributes. Moreover, in many cases, the measurement of the GHG emissions created by the use of a product will quite simply not be feasible.

Under Section 46.6 of the Act, every emitter determined by regulation must, within the conditions and for the period set out in the regulation, cover its GHG emissions with an equivalent number of emission units. The GHG emissions referred to in Section 46.6 are those described in Section 46.1 and, as a result, unless such emissions are carved out by regulation an emitter will have to cover the scope 3 emissions referred to previously.

In both Sections 46.2 and 46.6 of the Act, the government has given itself the ability to restrict the classes and categories of emitters that will be subject to reporting and reduction obligations. However, to the extent that the regulations simply refer to threshold emissions for inclusion in either of the provisions, the broad scope of emissions considered to be part of any carbon footprint may cause the government’s net to cast wider than it intended (or at least publicly declared). To avoid this, the trigger or conditions used in the eventual regulation(s) to determine whether or not an emitter is subject to a reporting or reduction obligation, will require a further carve-out in order to limit the scope of emissions subject to the reporting or reduction obligation. In the absence of such a carve-out, the reporting and reduction obligations will include the scope 3 emissions described in Section 46.1.

While the broad scope of the covered emissions may surprise some, it is not out of line with the steps that some private corporations have taken recently with respect to their suppliers. As early as 2007, the Financial Times reported that Wal-Mart was asking its suppliers to measure and report their GHG emissions. Ironically, the motivation behind Wal-Mart’s action was to find efficiencies in its supply chain, the logic being that cutting carbon equates to more efficient energy use, which equates to lower costs and therefore lower prices for customers.2

Other companies have also taken up the standard, with UK supermarket Tesco putting carbon labels on certain products to show consumers how much carbon went into the production of the product.3

Such initiatives could serve as an incentive for the Quebec government to stay the course in the event that its expansive definition of covered emissions generates push back from emitters. On the flip side, if the cost of compliance is driven too high by the inclusion of emissions that are not covered in other jurisdictions, the issue of leakage may become front and centre and some distributors could choose to withdraw from the province or at the very least remove certain product lines from the shelves in Quebec, rather that cover emissions that they may not believe are their responsibility.

Finally, the Act does not specifically state that emissions relating to the production of a product distributed in Quebec that are accounted for in another regulatory regime, will be excluded from the footprint of the emitter. This issue along with all of the others discussed will have to be worked out in the regulation(s) otherwise, having cast its net wide, the Quebec government may catch more fish than expected.