On October 20, 2014, BC Environment Minister Mary Polak introduced legislation for the management of greenhouse gas (GHG) emissions from the province’s burgeoning liquefied natural gas (LNG) industry. With the objective of ensuring that BC has the cleanest LNG facilities in the world, Bill 2 (also known as the Greenhouse Gas Industrial Reporting and Control Act) seeks to establish a GHG emissions intensity benchmark of 0.16 carbon dioxide equivalent (CO2e) tonnes per tonne of LNG produced. A number of details of the new GHG regime for the LNG industry have yet to be determined in regulations, but the legislation marks an important first step in keeping BC’s GHG emissions in check as the province strives to achieve its legislated GHG emission reduction target of 33% below 2007 levels by 2020. The BC government estimates that five LNG plants in BC will generate 13 million tonnes of GHG emissions, on top of the province’s current annual GHG emissions of 62 million tonnes.
The 0.16 benchmark, which will cover all facility GHG emissions (including combustion, electricity generation, venting and fugitives) from the point when gas enters a facility to where it is loaded on to a ship or rail car to go to market. Under Bill 2, a “facility” is defined as including all buildings, structures, stationary items and equipment that are (i) located or used primarily on a single site, contiguous sites or adjacent sites, (ii) are controlled by the same person, and (iii) function as a single integrated site. This means that gas-fired generation owned by another party and supplied to an LNG plant would not fall within the definition of a “facility”, nor would the regime capture emissions from upstream activities. In its press release, the BC government indicated that the 0.16 benchmark sets a new, recognized global standard for LNG facilities; it was determined through independent studies and government analysis that the leading global facilities have emissions intensities of between 0.18 and 0.27 tonnes of CO2e per tonne of LNG produced. Bill 2 also covers emissions from coal-based electricity generation, which has been given a limit of 0 tonnes of CO2e emissions.
Flexible Compliance Options
In terms of compliance, LNG proponents will have flexibility to meet the benchmark through the following mechanisms:
- improvements in energy efficiency or increased use of clean electricity as part of the facility design;
- purchase of emission offsets from BC-based emission reduction projects at market prices; or
- contribution to a technology fund at a rate of $25 per tonne of CO2e.
Failure to comply with targets and reporting obligations could face fines of up to $1.5 million or two years’ imprisonment.
These compliance costs will need to be incorporated into project plans along with the LNG tax, carbon tax, royalty regime, corporate and other taxes. The province has indicated that investments from both the emission offsets and the technology fund will be used to reduce GHG emissions in the natural gas and other sectors in BC. While no details have been made available yet, it is expected that the offsets and the technology fund will drive investments in strategies and technologies to reduce carbon emissions across the life cycle of LNG production, including low or no venting equipment, electrification, cogeneration and waste heat recovery, natural gas vehicles, and potential opportunities for carbon capture and storage or reuse.
To track the creation and retirement of offset units and credits, as well as the transaction of compliance units, Bill 2 provides for the establishment of a registry which may be operated by the BC Ministry of Environment of an external administrator. The details of the registry will be set out in the regulations.
LNG Environmental Incentive Program
To encourage the incorporation of lower emitting technology into LNG facilities, the government has established the LNG Environmental Incentive Program which will reward facilities that invest in cleaner technology with an escalating incentive based on their compliance costs between 0.23 and 0.16 tonnes of CO2e per tonne of LNG produced. In particular, facilities that have achieved annual performance below 0.23 tonnes of CO2e per tonne of LNG produced will be eligible to participate in the program:
- performance below 0.23 and above 0.16 will received a pro-rated incentive based on their actual compliance costs; and
- performance below 0.16 will earn the facility a performance credit that can be sold to other LNG facilities.
The program will require the provincial government to commit new spending dollars to provide the incentive program, but it anticipates the costs of the program will be covered by the taxes and royalties collected from the LNG industry.
The BC Ministry of Environment will administer the benchmark, offset program, technology fund and the incentive program.
Interim Ambient Air Quality Objectives
In addition to the GHG emissions regime, BC also announced that it is implementing interim ambient air quality objectives for nitrogen dioxide and sulphur dioxide for all new and expanding industrial facilities that are consistent with the benchmarks in the Kitimat Airshed Assessment, which establishes air emission levels to protect human health.
Moving Away from Cap & Trade
Notably, Bill 2 includes an explanatory note at the end which says that the Bill repeals and replaces the Greenhouse Gas Reduction (LNG Environmental Incentive Program) Act, which was enacted in 2008 as part of the then provincial government’s intent to establish an emissions trading system. It would appear that the prospect for an emissions trading system, along with the potential to link with the California and Quebec emissions trading systems, has been set aside at least for the time being. However, Bill 2 does not preclude the possibility of regulated entities from using emission offsets from other jurisdictions to meet their compliance obligations as there is discretion in the legislation for the director to establish protocols for emission offset projects.
Finally, the BC government has indicated that new measures in every sector will help BC to reach its climate change goals in tandem with the growth of the LNG industry. While no details have been released as to which other sectors will be included as part of emission reduction efforts, the transportation and construction sectors may be potential candidates for action. The BC government will be releasing its plans to achieve the province’s climate change goals in the coming months.