As the year winds down it might be useful to scan the horizon and do a bit of an overview of what are some of the drivers that are likely to have an impact on Canadian companies’ policies with respect to greenhouse gas (“GHG”) emissions in the near future and why it is increasingly important for Canadian companies to know their GHG emissions footprint and to have a plan in place to begin to reduce that footprint.

REGULATORY DRIVERS

USA

EPA:

The EPA has a Mandatory Reporting of Greenhouse Gases Rule[1], which requires that facilities involved in certain types of activities report their annual GHG emissions no matter what the volume of those emissions. For facilities that are not automatically captured, the threshold for reporting is 25,000 tonnes per year (“tpy”) Carbon Dioxide equivalent (“CO2e”) from fuel combustion or certain other categories of activities. Also, suppliers of fossil fuels and certain GHGs must report their quantities supplied over a certain threshold.

In December 2009, the EPA made what is called an “endangerment finding” with respect to GHGs[2]. This finding requires the EPA to act to protect U.S. citizens from these gases in the atmosphere.

On May 13, 2010, as a follow-on to its December 2009 finding, the EPA issued its “Final GHG Tailoring Rule”, which sets thresholds for GHG emissions from stationary sources under the Clean Air Act permitting programs[3]. These thresholds are to be phased in beginning on January 2, 2011 and will initially affect only companies already subject to EPA permitting requirements. For projects that are contemplating significant emissions increases (75,000tpy CO2e or more) use of Best Available Control Technology will be required.

Beginning in July 2011, Prevention of Significant Deterioration (PSD) permitting requirements will cover all new construction projects that emit at least 100,000tpy CO2e. Operating permits will also be required for sources that emit at least 100,000tpy CO2e.

Canadian companies operating in the US must be aware of EPA rulemaking in this area and that the level of obligations imposed by the EPA is going to increase over time. Unlike Canada, the lack of federal legislation has not meant an absence of development of regulatory standards for emissions of GHGs at a federal level in the U.S.

California:

Within the Western Climate Initiative (“WCI”), the most important single participant is the state of California, which is why this state is an important driver of GHG emissions policy for Canadian provinces and by extension Canadian companies, even if they do not do business directly in California. Although other sub-national groups exist in North America with the goal of regulating GHG emissions (i.e. Midwestern Greenhouse Gas Reduction Accord, Regional Greenhouse Gas Initiative), the WCI is the most important sub-national organisation in this area and the one that counts the greatest number of Canadian participants (four partners : British-Columbia, Manitoba, Ontario and Québec, and one observer, Saskatchewan).

Following the defeat of Proposition 23 in California during the state referendum held concurrently with the recent federal congressional mid-term elections and state level elections, which saw the election of Democrat Jerry Brown as governor, California is moving ahead with the implementation of Assembly Bill 32 and a cap and trade system to limit GHG emissions in that state. This news has been taken throughout the WCI as a signal to the other partners to complete their state or provincial programs to be able to come on line January 1, 2012. Political developments in the state of California are therefore having a direct impact on Canadian provincial politics and policy as the WCI cap and trade train begins to leave the station. See below in Peter Fairey’s comments on recent developments in British-Columbia and Paul Granda’s review below of a recent Québec regulatory amendment, both of which are linked to events in California through the WCI.

In California, The Greenhouse Gas (GHG) Mandatory Reporting Regulation (Regulation), which was approved by the California Air Resources Board (“CARB”) in December 2007 requires facilities to report their annual GHG emissions in 2009 and every year thereafter.

CARB is currently reviewing proposed amendments to the above regulation in order to reduce the reporting level to 10,000tpy CO2e[4] to support California’s cap and trade system in line with the draft recommendations of the WCI. The CARB regulation incorporates by reference certain elements of the EPA’s Mandatory Reporting of Greenhouse Gases Rule.

On December 16, 2010, the CARB endorsed a cap and trade regulation under Assembly Bill 32, which sets state-wide limits on GHG emissions from sources that account for 80% of California’s GHG emissions[5]. As a result, California has now stepped out in front and it remains to be seen which of its WCI partners will follow and at what speed.

US Securities Law:

In January of 2010, the Securities and Exchange Commission (“SEC”) issued a guidance on what publicly traded companies must disclose to investors in terms of material climate risks. This guidance was not a new regulation but rather an interpretive guidance to enable public companies to understand better what they needed to insert into their management discussion and analysis (MD&A) statements. The following areas were identified:

  • costs of compliance associated with pending laws and regulations;
  • impacts on business of climate change-related international accords and treaties;
  • physical impacts of changing weather on assets and operations;
  • opportunities for trading in new carbon markets;
  • changes in demand for products or services resulting from climate change impacts.

Canadian companies that are publically traded in the U.S. must comply with these requirements and they are therefore a driver of behaviour in Canada.

CANADA

Environment Canada:

In Canada, the federal government requires GHG reporting for stationary sources emitting over 50,000tpy CO2e, under its GHG Emissions Reporting Program.

Currently there is no federal requirement to have a permit to emit GHGs. However, in keeping with its strategy of adopting policy in line with that of the United States, the Canadian government has recently intimated that it may begin to regulate GHG emissions in a similar fashion as EPA, presumably in accordance with its policy of seeking shared standards. As a result, the Canadian federal government is not currently a significant driver of carbon policy for Canadian companies. If it decides to move ahead with EPA style regulation, this could change.

Canadian Provinces:

In view of the shortening window in which to prepare, the Canadian WCI partner provinces should be working on putting in place the required regulations in order to implant a cap and trade system in each province, which systems will link up under the WCI.

In British Columbia, the required reporting regulation is already in place (Reporting Regulation, B.C. Reg. 272/2009). The regulation calls for “Reporting Operations” with emissions of over 10,000tpy CO2e to file a report to the BC government before March 31 of the following year.

British Columbia has also published a Proposed Emissions Trading Regulation and Proposed Offsets Regulation for public comments. These are discussed by Peter Fairey below.

It should be noted however that a recent Globe & Mail column reported that the “Business Council of B.C. is putting pressure on the B.C. government to reconsider its commitment to the program because it could create a “competitive disadvantage” for companies by forcing them to meet increasingly more stringent emissions targets”[6]. It is too early to tell what effect this type of criticism might have on the progress of the cap and trade project in British Columbia but observers should keep an eye on it to see if it spreads.

Although Alberta is not a WCI partner it is appropriate to mention Alberta as it already has a cap and trade system. It continues to be the only one of its kind in North America. It is not linked to any other system and has no short term plans to do so.

In Manitoba, other than a public consultation that closed on March 15, 2010, and the passage of The Climate Change and Emissions Reductions Act in 2008, there does not appear to be any sign of an impending roll out of reporting or other regulations to enable a cap and trade system.

In Ontario, Ontario Regulation 452/09, Greenhouse Gas Emissions Reporting, calls for the reporting of emissions of more than 25,000tpy CO2e and although currently being amended, the amendments to not call for a reduction in the reporting levels. In theory, Ontario should eventually enact further amendments to its reporting regulation to lower it to the 10,000tpy level and eventually adopt offset and emissions trading regulation like British Columbia. However, the same Globe & Mail column referred to above indicates that there is behind the scenes pressure in Ontario from business and within government not to impose emissions trading[7].

In Québec, as described in more detail by Paul Granda below, the Regulation to amend the Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere, lowers the GHG emissions reporting threshold within the province to 10,000tpy CO2e, in line with the WCI. Previously, the reporting threshold was 50,000tpy CO2e, in line with the federal requirements. Additionally, it is widely believed that Québec’s emissions trading regulation is well advanced and likely to come out in the first half of 2011. As a result, it would appear that Québec will likely be the next province after British Columbia to put forward its cap and trade rules.

Canadian Securities Laws:

In Canada, each province has its own securities laws and regulations but the Canadian Securities Administrators (“CSA”) work collaboratively to try and harmonize the rules of the various jurisdictions by creating national instruments.

In October 2010, the CSA adopted Staff Notice 51-333 Environmental Reporting Guidance. See Patricia Leeson’s article below for more details.

Conclusion:

Increasingly, companies are becoming subject to express requirements to at least report their GHG emissions directly if not reduce them. In addition, they are being called upon to make statements as to the impact of climate change and GHG regulation on their business.

It is self evident that to make proper disclosure a company must possess self-awareness. The company must know what its own level of GHG emissions are in order to be able to accurately determine what its risks are in relation to changes that may flow from climate change.

Without an understanding its own GHG emissions, a company cannot determine accurately the applicability or not of government legislation, nor report on the potential impact of that legislation on its business. This can expose the company to the following non-exhaustive list of risks:

  • the company may fail to report emissions that it has a legal requirement to report under federal or state or provincial legal requirements;
  • the company may fail to realize that it has an projected reduction obligation under impending GHG cap & trade legislation; or
  • the company may fail to accurately disclose to investors risks associated with its GHG emissions and climate change more generally.

VOLUNTARY DRIVERS

Self Regulation:

The best example of this is the Carbon Disclosure Project (“CDP”). The CDP is a program that seeks to incite corporations to measure their CO2e emissions and publicly report them, thereby giving investors an accurate picture of a company’s emissions. It is interesting to note the level of support for the CDP among S&P 500 companies. In 2010 up to 70% of S&P 500 companies responded to the CDP questionnaire and 59% of S&P 500 companies reported their carbon emissions to CDP. Even more impressive is the fact that overall, 70% of S&P 500 questionnaire respondents disclosed how they plan to capitalize on commercial opportunities related to climate change[8]. It is clear that companies that are business counter-parties to these S&P 500 corporations will increasingly be required to demonstrate self-knowledge about their own emissions so as to be able to help their S&P 500 business counter-party understand the emissions which the consummation of a business transaction may incorporate into that reporting company’s “GHG emissions balance sheet”.

Voluntary Reductions:

Large companies are increasingly undertaking publicly to remove GHG emissions from their supply chains. As a result, suppliers companies must know their GHG emissions in order to be able to contribute. Based on their sheer size and buying power, certain companies such as Walmart can create a quasi-regulatory regime by requiring GHG reductions of their suppliers.

In fact, on February 25, 2010, Walmart announced a goal of cutting 20 million metric tons of GHG emissions from its global supply chain by the end of 2015. In order to achieve this goal, Wal-Mart has produced a document entitled Walmart Supplier GHG Innovation Program Guidance Document[9] which summarizes Walmart’s supplier GHG reduction goal and gives guidance for submitting projects to contribute to this goal.

On January 29, 2010, the US Federal Government announced it would reduce its GHG emissions by 28 percent by 2020, under Executive Order 13514 on Federal Sustainability[10]. As a result, the single largest consumer in the U.S. economy is now driving GHG reductions in its supply chain.

Beyond these examples, companies continue to use carbon neutrality as a marketing device (recent television adds for Hyundai vehicles and the carbon neutral declarations of the Bank of Montréal and the TD Bank are good examples).

Conclusion:

The foregoing examples demonstrate that there is a clear movement towards the permanent inclusion of GHG emissions in the data which businesses must collect and understand. As well, there are other drivers that have an impact on Canadian companies that could easily have been mentioned, such as the existence of the European Emissions Trading System and the United Nations Framework Convention on Climate Change.

As a result of the foregoing, failure by a company to take steps to collect and understand its GHG emissions can cause the following non-exhaustive list of risks:

  • the company may be excluded from supplying existing customers as they require reporting and reduction of GHG emissions from their supply chain;
  • the company may not be able to respond competitively to requests for proposals for new business, which require inputs derived from GHG emissions data, including reduction plans; and,
  • the company may be perceived publicly as lagging behind its competitors on the issue of GHG emissions management.