Turning the Corner to Emissions Trading, Intensity Targets and Offset Programs in Canada

Introduction

On March 10, 2008, Canada's Environment Minister John Baird announced further details of the Turning the Corner greenhouse gas regulatory framework setting out several new measures designed to help Canada achieve its national target of an absolute 20% reduction in greenhouse gases from 2006 levels by the year 2020.

The plan includes mandatory reductions for specified industry sectors that require companies to reduce emissions 18% by 2010 for every unit of production at existing facilities along with additional new measures to regulate two of Canada's key emitting sectors: oil sands and electricity. The plan specifies how the targets will apply to each industry sector, how the offsets and trading systems will work and how credits will be provided to companies that took early actions to reduce their emissions. The plan also confirms the government’s intention to move from emission-intensity targets to fixed emission caps in the 2020-2025 period.

Regulatory Framework for Industrial Greenhouse Gas

The Regulatory Framework for Industrial Greenhouse Gas Emissions sets out the final regulatory framework for industrial greenhouse gas emissions. It includes an elaboration of the regulatory framework first introduced in April 2007 in three key respects:

  • The Federal Government will establish a clean electricity task force to work with provinces and industry to meet an additional 25 megaton reduction goal from the electricity sector by 2020.
  • All oil sands upgraders and in-situ plants that come into operation in 2012 or after will be required to meet a stringent target based on the use of carbon capture and storage by 2018.
  • All coal-fired electricity plants that come into operation in 2012 or after will be required to meet a stringent target based on the use of carbon capture and storage by 2018.

Emissions Intensity Targets

Under the regulatory framework, all covered industrial sectors will be required to reduce their emissions intensity from 2006 levels by 18% before 2010 at existing facilities, with 2% continuous improvement every year after that. New facilities will be granted a three-year commissioning period before they would face an annual emission-intensity reduction target of 2%. New facilities are facilities that came into operation in 2004 or later and include greenfield facilities, major expansions and major transformations involving a significant change in process.

The Federal Government has adopted three approaches to apply the target: facility-specific; sector-wide; and corporate. For sectors governed by facility-specific targets, each facility within a sector receives an individual target of an 18% reduction from its own 2006 emission intensity. For sectors governed by sector-wide targets, all facilities within the sector will face the same target, which is an 18% reduction from the sector's average 2006 emission intensity. For the electricity sector, the only sector governed by corporate targets, each company receives a target of an 18% reduction from the average 2006 emission intensity of its entire fleet of facilities.

The regulatory framework will cover facilities that exceed the specified minimum threshold in the following sectors using the following target mechanisms:

For both existing and new facilities, fixed process emissions, which are emissions tied to production and for which there is no alternative reduction technology, would receive a 0% target in the regulations. Only certain processes that meet the technical definition of fixed process emissions are eligible for this classification.

Compliance Mechanisms

Firms can comply with the regulations either by reducing their own emissions through abatement actions or by making use of one of the following compliance mechanisms:

  • Inter-firm emissions trading: Firms whose actual emission intensity in a given year is below their target would receive tradable credits equal to the difference between their target and their actual emission intensity, multiplied by their production in that year. These credits could be banked for future use or sold to other parties, including other regulated firms.
  • Technology fund: Firms can also obtain credits for compliance purposes by contributing to a technology fund. The fund would be a means to promote the development, deployment, and diffusion of technologies that reduce emissions of greenhouse gases across industry. Contributions to the fund are limited to 70% of the target in 2010 and reducing to 10% in 2016. The contribution rate for the fund will start at $15 per tonne of carbon dioxide equivalent (CO2e) and remain constant until 2013 when the contribution rate will increase to $20 per tonne and then increase annually thereafter to 2017 at the rate of growth of nominal GDP.
  • Offset system: Firms can also obtain offset credits for compliance purposes. Offsets are projects that result in incremental real, verified domestic reductions or removals of greenhouse gas emissions in activities that are not covered by the federal greenhouse gas regulations. We outline the offset system in more detail below.
  • Clean Development Mechanism: Firms can also use certain credits from the Kyoto Protocol's Clean Development Mechanism. Access to these credits for compliance purposes would be limited to 10% of each firm's total target.
  • Credit for early action: Firms that took verified action between 1992 and 2006 to reduce their greenhouse gas emissions would be eligible to apply for a share of a one-time credit for early action. We outline the credit system in more detail below.

Incentives

The regulatory framework also provides incentives for new and existing facilities, including:

  • an incentive for new facilities to adopt the best available technologies by applying a target based on a cleaner fuel standard;
  • an incentive until 2018 for facilities to be built carbon-capture ready; and
  • a special incentive for high-efficiency co-generation.

Canada’s Offset System

Canada's Offset System for Greenhouse Gases is designed to encourage cost-effective domestic greenhouse gas reductions or removals in activities that are not covered in the proposed industrial air emissions regulations. The Government will administer the Offset System under the Canadian Environmental Protection Act, 1999.

To be eligible to generate offset credits, projects must be within the scope of the Offset System, and must achieve real, incremental, quantified, verified and unique reductions of greenhouse gases. The credit creation process is as follows:

  • A Protocol Developer creates a quantification protocol for the project type and Environment Canada approves the protocol;
  • A Project Proponent applies to have their project registered;
  • Environment Canada registers the project;
  • A Project Proponent reports the greenhouse gas reductions achieved from a registered project and ensures that a verifier has provided a reasonable level of assurance on the reductions claim; and
  • Environment Canada certifies the reductions and issues offset credits.

The Government of Canada is welcoming comments on the Offset System and will consider those comments as additional guidance materials are finalized. The detailed eligibility requirements and application processes will be set out in a series of guidance documents that will be published later this year. Environment Canada will begin reviewing quantification protocols this summer and project applications in the fall.

Credit for Early Action Program

The Credit for Early Action Program will recognize firms that took verified early action to reduce greenhouse gases between 1992 and 2006. The purpose is to address the disadvantage that a firm could incur for having undertaken an incremental action to reduce greenhouse gases before the regulatory regime was set out. The Government of Canada is seeking feedback on the proposed program including eligibility rules and the process for allocating credits. Comments will be accepted up to May 14, 2008.

Next Steps

The Government of Canada has begun translating this framework into regulatory language, and the draft regulations are expected to be published in the Canada Gazette, Part I for public comment in Fall 2008. The final regulations relating to industrial greenhouse gas emissions are expected to be approved and published in the Canada Gazette, Part II in Fall 2009, with the greenhouse gas provisions of the regulations coming into force, as planned, on January 1, 2010.