This is the latest development in Ontario's new approach to climate change, following:
- the decision to challenge the constitutionality of the Federal carbon pricing regime; and
- the announcement of the Made-In-Ontario Environment Plan, which includes funding for carbon reduction initiatives.
1. Industrial Emissions Performance Standards
Ontario's proposed EPS would apply annual emission limits on facilities, processes or equipment that emit GHGs. These emission limits would be different depending on the sector or industry. Emitters would be charged for exceeding those limits, and be granted tradeable credits when they emit less than the limit.
The EPS closely resembles Saskatchewan's recently announced Climate Change Strategy, which rejects a carbon price in favour of flexible Output-Based Performance Standards (not to be confused with the Federal government's Output-Based Pricing System ("OBPS")). EPS also resembles the New Source Performance Standards regime implemented by the United States Environmental Protection Agency.
a. Who must comply with the EPS?
Ontario's EPS targets the same GHG-emitting sectors as the Federal OBPS and fuel charges. These include: (1) electricity, fuel, and energy sectors; (2) food sectors; (3) certain institutions; (4) certain chemical sectors; (5) metal, cement, lime and mineral sectors; (6) pulp & paper; and (7) vehicle manufacturing, among others.
The EPS will only apply to larger facilities, namely those that exceed a certain threshold of annual emissions (likely 25,000 or 50,000 tonnes per year of carbon dioxide (CO2) equivalent emissions, depending on the sector).
b. How do businesses comply?
The EPS is 'Sector-Based', meaning that the emissions limit will vary by sector. Ontario has not yet determined these emission limits. Ontario has also proposed stringency exceptions for the electricity-generation sector and for natural-gas-based thermal energy generation.
Emitters that fail to comply with their annual limit will be required to pay for 'Compliance Units' for each tonne of excess CO2. Ontario has proposed a cost for Compliance Units of $20 per tonne in 2019, increasing by $10 per year to a maximum of $50 per tonne in 2022.
Emitters who emit less than the limit can generate Compliance Units, which can then be sold to non-compliant emitters. Ontario has also proposed to develop an offset crediting system for unregulated parties who voluntarily reduce emissions or remove carbon.
c. EPS vs. carbon pricing
So what makes the EPS unique? Is it a carbon cap-and-trade system by another name? Not exactly.
The EPS is a performance standard. The EPS and carbon pricing (i.e. a cap-and-trade system or a carbon tax) are both a means of encouraging emitters to reduce emissions. The key difference is that a carbon price applies a market-wide standard across all industries, whereas performance standards apply differently to each industry. In addition, unlike a carbon tax, the EPS does not put a price on each tonne of GHG emitted. Costs for emission are only incurred if a particular emitter exceeds its industry-specific target. However, all emissions below that threshold are free.
Performance-based standards may therefore result in lower costs to industry participants and are intended to consider trade exposure and competitiveness. Critics often counter that performance based standards can be less effective at reducing emissions, especially when less stringent emissions limits are used.
2. Implications for the Federal backstop program
As we have discussed in previous articles, the Greenhouse Gas Pollution Pricing Act ("GGPPA") (also called the "Federal Backstop"), is the Federal carbon pricing program. The GGPPA imposes minimum requirements on Provincial carbon pricing programs. Where Provinces fall short of the Federal standard, the Federal backstop will apply either (1) a charge on fossil fuels for fuel producers, distributors and importers or (2) an output-based pricing system for industrial facilities.
Following Ontario's termination of cap-and-trade, Canada has begun to apply its Backstop in Ontario. Assuming Ontario's proposed EPS is enacted, Canada will reassess whether Ontario meets the Federal standard. However, Ontario's EPS may not ward off federal intervention if it is considered less stringent than the GGPPA. If Canada's approach to Saskatchewan's performance standard is any indication, Canada has said that it will apply the GGPPA backstop in Saskatchewan "to the emissions sources not covered by Saskatchewan's system". Then again, Saskatchewan's performance standards are more limited than Ontario's, only applying to Saskatchewan's largest facilities.
The fate of the EPS and the Federal Backstop will also depend on the outcomes of both Ontario's and Saskatchewan's pending challenges to the constitutionality of the GGPPA. If the GGPPA is stuck down by the Courts, the EPS would stand. If the GGPPA is upheld, the EPS will be vulnerable to Federal intervention.
Ontario's proposed EPS presents an important regulatory consideration for any industry that emits GHGs. The scale of its regulatory demands will depend on how the Province sets the sector-specific GHG emission limits and the price of Compliance Units.
Even if enacted, however, the EPS's fate is closely tied with that of its Federal counterpart, the GGPPA, whose constitutional validity is still pending.
The proposal has been posted on the Environmental Registry of Ontario for a 45-day public comment period, concluding on March 29, 2019. Ontario aims to have the EPS apply to emitters by as early as 2020.