On April 26, 2007 the minority Conservative government released a Technical Paper describing its program for greenhouse gas, air pollution and consumer efficiency regulations for industry (the Regulations). The proposed program will be considered by some to be too aggressive while others will view the program as not being nearly aggressive enough. One thing that does seem clear is that the ultimate costs of compliance will almost certainly be borne by the public through increased prices. Much of the Regulations will be enacted under the Canadian Environmental Protection Act 1999 (CEPA) and follow the government’s Notice of Intent to Develop and Implement Regulations and Other Measures to Reduce Air Emissions. That Notice was introduced October 19, 2006 and accompanied the announcement of Canada’s Clean Air Act (Bill C-30). The Regulations are intended to be independent of Bill C-30.
Highlights of “Turning the Corner”
The Regulations will include emissions targets and compliance mechanisms. They are aimed at halving the emissions of smog and acid rain forming compounds by 2015 and contributing to the reduction of greenhouse gas emissions by 20% from 2006 levels by 2020, apparently predicted on an absolute, as opposed to an intensity, basis. In addition, other industrial compounds, volatile organic compounds (VOCs) and particulate matter (PM) emissions will be further restricted. A number of new auto and appliance efficiency standards also will be imposed.
The Regulations are intended to move industry away from voluntary compliance to legally enforceable regulation of greenhouse gas emissions. The industrial sectors specifically identified as being subject to the new greenhouse gas emissions targets are essentially the same as those identified under previous proposals – the fossil-fuel fired electricity generation, oil and gas, smelting and refining, some mining, iron and steel, cement, forest products, and chemicals production sectors.
Every facility that emits more than 100,000 tonnes of carbon dioxide equivalent gas per year (there are approximately 700 such facilities nation-wide) must decrease its “emissions intensity” (being an amount of emissions per unit of economic output, e.g., tonnes per barrel) by achieving a “target reduction rate” of 18% below 2006 greenhouse gas emission intensity levels by 2010. That rate will increase by 2% per year to reach 26% below 2006 greenhouse gas emission intensity levels in 2015.
Compliance with greenhouse gas emission intensity targets can be achieved in one of five ways:
- Direct emissions intensity reductions at the regulated facility (e.g., operational improvements);
- Contributing to a new greenhouse gas emissions reduction technology fund at a rate of $15 per tonne of carbon dioxide equivalent emitted in excess of the 18% target;
- Establishing or purchasing an offset, which must be attributable to third-party verified emission reductions located in Canada;
- Purchasing emissions credits from other Canadian regulated facilities; and
- Purchasing “Certified Emission Reductions” from projects in developing countries under the Kyoto Protocol’s Clean Development Mechanism.
Companies who voluntarily reduced their greenhouse gas emissions between 1992 and 2006 will be rewarded with a one-time credit for such reductions. The Technical Paper states that the government will explore domestic emissions trading, potentially in the context of a North American market, but with specific reference to certain emerging regimes, one of which is comprised of five states in the western United States (which British Columbia also recently joined), and another among 10 states in the Northeastern United States. A variety of other environmental funding initiatives (e.g., promoting public transit) are also described in the Technical Paper.
In addition to reducing greenhouse gas emissions intensity, the Regulations will cap total emissions of industrial pollutants that cause smog and acid rain – in particular nitrogen oxides (NOx), sulphur oxides (SOx), VOCs and PM – with a target of reducing present levels by 50% by 2015. A cap-and-trade system will be established for NOx and SOx. The government will explore integrating these systems with NOx and SOx cap-and-trade systems in place in the United States.
The Regulations also propose to increase automotive and appliance efficiency standards.
Greenhouse Gas Emissions Intensity Reduction
The Technical Paper explains that draft regulations under CEPA will be published in the Canada Gazette in the spring of 2008. The program will not impose an absolute emissions reduction target. Given the reasonably short timelines for the initial required intensity reductions, emitters should consider taking immediate steps to achieve compliance. For the past several years, large emitters have been required to report their greenhouse gas emissions under CEPA. This process will continue, and the 2006 results will establish each regulated facility’s emissions baseline. The Regulations will require each regulated facility to achieve an intensity target reduction rate of 18% from this baseline by 2010. That rate will increase by 2% per year to reach 26% below 2006 levels in 2015.
As mentioned above, in addition to direct emissions intensity reductions from regulated facilities, activities such as utilizing domestic offsets, payments to the technology fund, utilizing domestic emissions credits from other regulated facilities and utilizing credits under the Kyoto Protocol’s Clean Development Mechanism can all be implemented to achieve compliance with a facility’s target emissions intensity.
Domestic offsets are actions or projects which reduce greenhouse gas emissions where not otherwise required by law (e.g., “carbon sink” activities, such as planting trees or capturing and injecting carbon dioxide into reservoirs).
Payments to a new, independently administered, greenhouse gas emissions reduction technology fund may be made at a rate of $15 per tonne of carbon dioxide equivalent; however, contributions to this fund will be capped to avoid over-reliance on it by industry as well as to avoid the appearance of a carbon tax. For 2010, regulated facilities will be entitled to use the technology fund for 70% of their compliance requirements. That percentage will drop to 65% in 2011, 60% in 2012, 55% in 2013, 50% in 2014, 40% in 2015, 30% in 2016, and 10% in 2017 and beyond. The technology fund contribution rate will rise to a rate of $20 per tonne in 2013. As of 2015, that contribution rate will increase in proportion to the annual increase in Canada’s Gross Domestic Product. The Technical Paper notes carbon capture and sequestration and an enhanced national east-west electricity grid as potential projects for the application of the technology fund.
Domestic emissions credits may be purchased from other emitters who have earned such credits either from having exceeded the target reduction rate or through the establishment of offsets.
Similarly, “Certified Emission Reductions” may be purchased from verified emission reduction projects in developing countries under the Kyoto Protocol’s Clean Development Mechanism. However, the use of Certified Emission Reductions may only comprise a maximum of 10% of an emitter’s compliance requirement. While the Technical Paper anticipates increased participation in international carbon trading markets, it cautions that certain international credits not explicitly tied to real, verified emission reductions will not be recognized. In addition, the Technical Paper reiterates the government’s previous position that it will not participate in the carbon market.
New facilities (including facilities built between 2004 and 2007) will receive a three-year grace period before the Regulations’ greenhouse gas emissions intensity standards apply. At the end of the grace period, their emissions intensity must decline in relation to “cleaner fuel standards” as well as by an additional 2% on a yearly basis. Also, operations which rely on a process for which a technology to reduce greenhouse gas emissions does not exist are exempt from the intensity reduction requirement. The Technical Paper anticipates that sectoral deviations from the general regime may be developed, but must be equivalent to the overall approach. A one-time credit is available to companies who have achieved greenhouse gas reductions through voluntary efforts between 1992 and 2006; however, the availability of this credit will be capped at a total of 15 megatonnes for all emitters and at 5 megatonnes for all emitters in any particular year. If total claims from all emitters for such early action credits exceed either cap, successful claimants will receive pro-rata shares of those maximums.
In addition to the operational provisions noted above, the Technical Paper notes that CEPA provides for suspension of its provisions when equivalent provincial regimes are present. Taking particular note of Alberta’s emissions regime (under which enhancements recently have been passed into law, with draft regulations pending), the Technical Paper contemplates the harmonization of such systems. The Ontario government has also recently indicated that it intends to develop its own regime for greenhouse gas reductions, possibly in conjunction with the ten states in the Northeastern United States. It may be difficult to harmonize, or even determine equivalency with other systems that may be based on absolute reductions as opposed to intensity.
Air Pollution Reductions
The Technical Paper forecasts the publication of draft regulations for the reduction of air pollutants in the spring of 2008, following completion of the “benchmarking” of air pollution targets. Absolute emissions caps will be set for NOx, SOx, VOCs and PM. Individual emission levels of each of these substances will set, with an overall reduction target of 50% from present levels by 2015. Identified industries will also receive caps for additional targeted substances (e.g., mercury), which will be benchmarked based on current emission levels and other comparable compliance regimes. The targets will come into effect some time between 2012 and 2015.
A cap and trade system for SOx and NOx will be established, with each facility receiving individual emission allowances for each substance. Note that the use of purchased allowances will be restricted for facilities located in areas where the air quality does not meet national air quality standards.
Finally, three regulations pertaining to solvents and aimed at reducing exposure to VOCs will be introduced some time in 2007. A list of indoor air contaminants will be developed under CEPA for further government evaluation.
Verification and Enforcement
CEPA contains compliance and enforcement provisions and empowers enforcement officers to investigate, verify and order compliance with its regulations. Enforcement mechanisms include warnings, compliance orders and penalties such as fines and imprisonment.
The Technical Paper also envisages new fuel efficiency standards to be implemented in the automotive, rail, marine and aviation sectors under the appropriate governing legislation. Notably, a mandatory automotive fuel efficiency standard for the 2011 model year is envisioned. It is to be published by the end of 2008 following stakeholder consultation. Similarly, new regulations are proposed for the federal Energy Efficiency Act, 1992 to raise existing efficiency standards for appliances and to introduce regulation for a variety of other commercial appliances.
The Way Forward
The Regulations are no longer politically linked to Bill C-30, the “Clean Air Act.” Should there be an early election and a change in government, the regulatory process proposed in the Technical Paper may be interrupted or possibly even halted. This program might be perceived as giving industry some degree of certainty on what will be expected of them and the cost of carbon emissions. However, with a minority government in power and all opposition parties taking the public position that the Kyoto absolute reduction targets should be met, it is by no means clear that this program will ultimately be implemented. Osler has significant experience in all regulatory and transactional aspects of the clean air and emissions trading regimes in Canada. For specific questions related to your business, please contact either of the Co-Chairs of the Environmental Law Group -- Shawn Denstedt in Calgary and Dan Kirby in Toronto.