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Federal carbon pricing: the rest of the story

by Mark Sabourin
EcoLog, 7/5/2019 1:34:00 PM

The federal government has pulled back the curtain on the remaining pieces of its national carbon pricing backstop and its new Clean Fuel Standard.

A final regulation imposing output-based pricing on large emitters will be published soon in the Canada Gazette and will further ease the compliance burden on industries that face tough international competition. A separate policy paper outlines the factors that will be considered when a facility applies to opt-in to output-based pricing.

The government has released a proposed regulatory approach to implementing the planned Clean Fuel Standard that will require fossil fuel suppliers to reduce the lifecycle carbon intensity of fuels. And it has released a discussion paper on the design of a federal greenhouse gas (GHG) offset system.

Below is a brief summary of these new developments, with links for further information.

The output-based pricing regulation

This is the system that will require emitters of 50 kt or more of GHG equivalent to reduce their carbon intensity (emissions per unit of production) or pay a price. This regulation has gone through several iterations, the most recent of which gives a big break to certain sectors of the economy. Under the final regulation, the baseline stringency remains 80%, meaning that industry sectors will receive a rebate of their carbon taxes for emissions that are up to 80% of the national average for their sector.

The list of exceptions, however, has grown. In 2018, four sectors assessed to be at high competitive risk saw their stringency baseline raised to 90%, iron and steel manufacturing, lime and nitrogen fertilizers.

In the final regulation, 11 sectors have seen their output-based standards adjusted to 90% stringency: base melting smelting of copper, lead, and zinc; iron ore flux pellets; metal tube production; petroleum refining; production of lubricant basestock; standalone hydrogen production; furnace (carbon) black; 2-methylpentamethylenediamine (MPMD); and brick. Another eight have had their baseline adjusted to 95%: nitric acid; ammonia production; iron and steel integrated steel (coke-making, iron, BOF steel, and EAF steel); and iron and steel mini mills (rolled steel and cast steel).

A late change to the standard for electricity from gaseous fuels appears to have caught the industry by surprise. For new gas-fired electricity generators, the standard will ramp down from

370 tonnes of COe/GWh to 0 tonnes of COe/GWh in 2030 to build an incentive toward lower-emitting electricity generation.

“Aside from some of our members’ concerns with the rules themselves, [the Canadian Electricity Association] is disappointed that [Environment and Climate Change Canada] did not undertake consultations on these last-minute changes,” said Francis Bradley, president and CEO of the association, in a statement.

Use of Proceeds from the Federal Output-Based Pricing System” seeks advice on how best to return proceeds from output-based pricing to the jurisdictions from which they were collected. For provinces and territories that have voluntarily adopted the federal backstop, the federal government will return funds directly to the provincial/territorial treasury. For the others, it remains an open question. 

Opting in

Facilities that are not required to participate in output-based pricing may apply to participate in it. For instance, facilities under the 50 kt compliance threshold may find themselves at a competitive disadvantage, as they will pay the full carbon tax without any prospect of rebate. Similarly, facilities in sectors not covered by output-based pricing may find it to their advantage to close shop in Canada and move to a jurisdiction without carbon pricing unless they obtain a measure of relief from carbon cost.

The government is proposing an opt-in threshold of 10 kt. Facilities that have reported emissions over 10 kt, or that are undergoing expansion, or that are projected to emit 10 kt or more following a planned expansion or retrofit, may apply to join.

Each application will be assessed on its merits on a case-by-case basis. 

The Clean Fuel Standard

The Clean Fuel Standard is intended to deliver 30 mt of emissions reduction by 2030, making it the second most important contributor to emissions reduction, after carbon pricing. According to federal background documents, by 2030, the carbon intensity of such fuels as gasoline and diesel will be 10% to 12% lower than in 2016. Fuel suppliers will achieve compliance through a variety of means: reducing emissions anywhere along a fuel’s lifecycle, supplying low-carbon-intensity fuels, switching to cleaner sources of energy, or purchasing credits from low-carbon-intensity fuel producers and other participants in the marketplace.

The regulatory approach document includes several new elements that were not part of the regulatory design paper published earlier in 2019, including:

  • annual carbon intensity reduction requirements for the liquid fuel class
  • sustainability and land-use change criteria
  • new credit creation opportunities
  • fund contributions as a compliance mechanism
  • credit clearance mechanism
  • verification, reporting, measurements and records requirements. 

The federal GHG offset system

The federal government is proposing a GHG offset system that will support the creation of offset credits in all provinces and territories, but with a focus on provinces and territories without existing offset systems. The government believes this will create an incentive to reduce emissions from sources not covered by carbon pricing and increase the supply of compliance units available.

Environment and Climate Change Canada will oversee the program’s ongoing operation, oversee offset protocol development and approval, register offset projects, issue and retire offset credits, and provide for compliance and enforcement. 

When do these measures take effect?

At present, the output-based pricing regulation is in effect retroactive to January 1, 2019 in Ontario, New Brunswick, Manitoba, Prince Edward Island, and for two sectors in Saskatchewan (electricity and natural gas transmission pipelines), and as of July 1, 2019 in Yukon and Nunavut.

The Clean Fuel Standard is scheduled to take effect in 2022 for liquid fuels and in 2023 for gaseous and solid fuels.

Proceeds from output-based pricing will not be known before late 2020. Presumably, a scheme for returning those proceeds should be in place by then. The government has not published a deadline for implementing its offset system.

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