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Ontario proposes its own carbon-pricing system

by Lidia Lubka
EcoLog, 2/15/2019 12:06:00 PM

While its legal challenge to the federal government’s carbon tax is being decided by the courts, Ontario has proposed its own carbon-pricing system that, in its words, would encourage the industrial sector to reduce greenhouse gas emissions while maintaining the competitiveness of Ontario businesses. 

The federal carbon tax, slated to come into effect April 2019, will be imposed on provinces that haven’t developed their own carbon-pricing mechanisms. 

Under the Ontario proposal, “Making Polluters Accountable: Industrial Emission Performance Standards”, industries will have to meet annual emission levels or else pay for ‘compliance units’ proportionate to their emissions in excess of the limit. The price for these compliance units would start at $20 per tonne in 2019 and increase $10 per year to a maximum of $50 per tonne in 2022. 

Facilities that emit less than their annual allotment would receive compliance units they could then sell to companies that over-emitted. 

Although at first glance the proposed system appears as cap-and-trade under a different name, unlike cap-and-trade systems, the Ontario proposal does not set an emissions cap on the province as a whole, but sets annual emission levels for individual facilities or industry sectors, and bases them on facilities’ ‘emission intensity’ — the amount of carbon dioxide equivalent emitted per unit of product produced. 

The proposed scheme would be implemented through an Emissions Performance Standard Regulation. The government hopes to have the system in place by the summer of 2019; it would apply to emissions as of January 1, 2019. 

It would regulate the same sectors that will be covered by the federal output-based pricing system. Ontario is still considering whether to establish a mandatory emissions threshold of 25,000 or 50,000 tonnes per year and allowing smaller facilities with emissions between 10,000 tonnes and whatever the mandatory threshold will be to participate in the scheme voluntarily. A lower threshold on a megawatt hour basis is being considered for the electricity sector. 

The proposal, which has been published for public comment on the Environmental Registry of Ontario until March 29, 2019, contemplates a number of different methods of calculating a facility’s annual emission limits, based on its or its sector’s characteristics. 

The basic performance standard would be sector-based, and use the sector’s average emission intensity as the basis for setting the annual emission limits. 

An approach based on emission intensity, however, would not work for all sectors. Different means of determining performance standards are needed for utilities such as electricity generation, cogeneration, and thermal energy supply. For instance, because emissions from electricity generation are predominantly from generators fired by natural gas, the performance standard for this entire sector would be based on what is achievable by natural gas generators. The performance standard for thermal energy supply (e.g., steam) would take into consideration what is achievable with a natural-gas-fired boiler operating at a high level of efficiency. 

A sector-based approach would not be usable in instances where there is only one regulated facility or where it is difficult to establish product-based performance standards. Facility-specific emission intensity would be based on the emission intensity of a single facility rather than on the average emission intensity of multiple facilities. 

In cases where product-based performance standards are not feasible, the government is proposing to use energy use intensity instead, i.e., the performance standard would be based on the amount of fuel (e.g., natural gas) that is used at a facility. 

In still other, though rare, cases, emission limits would be based on a facility’s historical emissions, and would not be tied to facility production changes or to energy use. 

In summary, the different performance standards being proposed to address different types of sector situations are as follows:

  1. sector average performance standard
  2. fossil fuel-based electricity generation, thermal energy supply, and cogeneration performance standard
  3. facility-specific emission intensity
  4. energy use intensity
  5. historical absolute facility average emissions. 

The proposal specifies more precisely how annual emission levels would be calculated under each of these five performance standards. 

Apart from using emission intensity in the calculation of annual emission levels, the government also proposes to use something it calls a ‘stringency factor’ to further adjust an annual emission level. The stringency factor takes into consideration that emissions from certain sources are more difficult to reduce than those from other sources. 

‘Fixed process’ emissions, which are the result of chemical or physical reactions (but not due to combustion) that are essential to the production process, are usually difficult to reduce, while emissions from non-fixed processes — combustion, fugitive emissions from equipment leaks and unintentional losses, and on-site mobile sources — are reduced more easily. A stringency factor multiplier of less than one (e.g., 0.95) is applied to the emission intensity of non-fixed processes to lower the annual emission level, to incent industry to reduce these ‘low-hanging’ emissions. 

Finally, the proposal intends to address the possible hazard of ‘carbon leakage’ in different industry sectors. Carbon leakage occurs when a facility or even an entire sector moves production out of a jurisdiction with stringent emission standards to one where the standards are lower or non-existent, in order to remain competitive. Global emissions are thereby not reduced, but simply transferred to another jurisdiction. 

The two main situations where carbon leakage may become a hazard are:

  • a sector is emissions-intensive and faces high compliance costs due to absence of low-cost abatement opportunities, including the availability of low-carbon fuels
  • a sector is unable to pass the costs of compliance with high performance standards to its consumers because it produces goods for a highly competitive, exposed market and would lose market share. 

Although the proposal outlines a multi-level method for assessing the risk of carbon leakage within sectors, it leaves the question of how carbon leakage is to be prevented up to public discussion. 

The other questions the proposal seeks public input on are:

  • What compliance options should industrial facilities have under Ontario’s system?
  • If facilities receive compliance units for greenhouse gas emission reductions beyond the standard for the facility, should they be eligible to trade or bank them indefinitely?
  • Which industrial facilities should be covered (e.g., industrial facilities with greenhouse gas emissions greater than 10,000 or 25,000 or 50,000 tonnes of carbon dioxide equivalent per year)?
  • Should Ontario harmonize with the federal reporting under the Greenhouse Gas Emissions Information Production Order (SOR/2018-214) (which sets out reporting and verification requirements) and the federal output-based pricing system (e.g., methods, threshold, verification)?
  • Should different stringency factors apply to fixed process and non-fixed process emissions?

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