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March 02, 2008

Summary of Canada’s Climate Change Regulatory Framework Announcement (March 10, 2008)

The Federal Government announced more details of its regulatory framework for climate change on March 10, 2008 with the publication of five documents:

1. Taking Action to Fight Climate Change http://www.ec.gc.ca/doc/virage-corner/2008-03/pdf/572_eng.pdf

2. Regulatory Framework for Industrial Greenhouse Gas Emissionshttp://www.ec.gc.ca/doc/virage-corner/2008-03/pdf/541_eng.pdf

3. Canada's Offset System For Greenhouse Gashttp://www.ec.gc.ca/doc/virage-corner/2008-03/pdf/526_eng.pdf

4. Canada's Credit for Early Action Program http://www.ec.gc.ca/doc/virage-corner/2008-03/pdf/527_eng.pdf

5. Detailed Emissions and Economic Modelling http://www.ec.gc.ca/doc/virage-corner/2008-03/pdf/571_eng.pdf

Overview

The government intends to stick more or less to its Turning the Corner plan released in 2007 – based on reducing emissions intensity, rather than absolute emission reductions. Provinces that set more stringent plans will be offered equivalency agreements – thus the federal plan, when and if implemented, will establish the minimum national standard.

Mandatory carbon capture and storage will apply to oil sands upgraders and coal plants but only to those that start operation in or after 2012.

This fall (2008) the government proposes to publish draft GHG intensity reduction regulations for consultation. The final regulations are intended to take effect in 2010. This is a slower timeframe than anticipated by the emissions trading industry.

The system will rely on compliance mechanisms including a technology fund, an offset system and use of the Kyoto Clean Development Mechanism. Early Action Credits will be allocated among regulated companies for GHG reductions from 1992 to 2006.

In spring 2008 companies needing to claim early action credit allocations (for GHG reductions between 1992 and 2006), will be invited to comment on the process. Submissions will be required in early 2009, with allocations to be awarded in July 2010.

Observers express uncertainty as to whether these regulations will be implemented. A number of factors contribute to this uncertainty, including: political and legal attempts to force the government to implement the Kyoto targets; the anticipation of a US Federal scheme based on fixed reductions (forcing Canada to meet the same standard for economic and trade reasons), the proactive steps taken by some provinces, and the potential impact of a federal election.

Despite these questions, a wide range of non-regulated industries will almost certainly be able to profit by creating and selling offset credits – whether under the federal or a provincial plan. Some form of regulation is inevitable, and the specific attributes of tradable credits are coming into focus. Now is the time for owners and managers of industrial facilities to position their companies to structure their GHG reductions to realize profits from doing so.

The following is a summary of the government’s position as stated in its Regulatory Framework document.

Turning the Corner: Regulatory Framework for Industrial Greenhouse Gas Emissions

Overview

The April 2007 Regulatory Framework for Air Emissions laid out the broad design of the regulations for industrial emissions of both greenhouse gases and air pollutants.

• This document sets out the final regulatory framework for industrial greenhouse gas emissions. It includes both an elaboration and a strengthening of the April 2007 regulatory framework.

• The federal government still intends to work to reach equivalency agreements with any interested provinces that set enforceable provincial emission standards that are at least as stringent as the federal standards.

• The final regulatory framework will contribute significantly to the commitment in the 2007 Speech from the Throne to implement a national strategy to reduce Canada's total greenhouse gas emissions by 20% below 2006 levels by 2020.

Strengthening of the April 2007 regulatory framework

Overview

  • The final regulatory framework strengthens the April 2007 regulatory framework in three key respects:
    • 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.
    • The federal government will establish a clean electricity task force to work with provinces and industry to meet an additional 25 Mt reduction goal from the electricity sector by 2020.
  • Elaboration of April 2007 regulatory framework: targets

    • All covered industrial sectors will be required to reduce their emissions intensity from 2006 levels by 18% by 2010, with 2% continuous improvement every year after that.

    • The target will be applied at the facility, sector, or corporate level, as determined after consultations with each sector.

    • Minimum thresholds will be set in five sectors to avoid imposing unreasonable administrative costs on small facilities.

    • Fixed process emissions will receive a 0% target. The definition of fixed process emissions will be based on technical feasibility.

    • To provide incentives to adopt the best available technologies for new facilities, whose first year of operation is 2004 or later, a target based on a cleaner fuel standard will be applied.

    • There will be an incentive until 2018 for facilities to be built carbon-capture ready.

    • A special incentive will be provided through the target structure for high-efficiency cogeneration.

    Elaboration of April 2007 regulatory framework: compliance mechanisms

  • Canada's domestic offset system:
    • The offset system will issue credits for incremental real, verified domestic reductions or removals of greenhouse gas emissions in activities outside the regulations.
    • Offset credits may be used by regulated firms for compliance with their targets.
    • The offset system will be administered in a cost–effective manner and will promote projects in as many sectors and for as many project types as practical.
    • Clean Development Mechanism:
      • Firms may use credits from the Kyoto Protocol's Clean Development Mechanism (with the exception of credits for forest sink projects) for up to 10% of their regulatory obligation.
    • Credit for Early Action Program:
      • Firms that took verified early action to reduce emissions will be eligible for a total one-time allocation of 15 Mt in credits. These credits will be bankable and tradable, and will be allocated based on clear criteria and a simple, transparent process.
    • Technology fund:
      • Subject to the conditions set out in the April 2007 regulatory framework, firms will be able to make contributions to a technology fund as a means of complying with the regulations.
      • The technology fund will take a portfolio approach to investing in a range of technology deployment and development projects; the technology fund will own the emission reductions resulting from its investment, based on the cost of the project.
      • Subject to conditions equivalent to those that apply to the technology fund, firms will be able to invest directly in pre-certified investment projects, drawing from a menu of projects established by the federal government.
      • In order to ensure that carbon capture and storage is in widespread use by 2018, firms in sectors that can make use of this technology may be credited for investments in pre-certified carbon-capture-and-storage projects up to 100% of their regulatory obligation through 2017.

      Emission reductions

      The regulatory framework is expected to achieve approximately 165 Mt in direct and indirect emission reductions from the industrial sector by 2020; that is, about a 37% reduction from projected levels or a 21% reduction below 2006 levels. This does not include the additional 25 Mt in targeted reductions from the electricity sector.

      Next steps

    • The regulatory framework for industrial greenhouse gas emissions will now be translated into regulatory language. Draft regulations are expected to be published in the Canada Gazette, Part I for public comment in fall 2008.
    • Final regulations are expected to be approved and published in the Canada Gazette, Part II in fall 2009. The greenhouse gas provisions of the regulations are to come into force, as planned, on January 1, 2010.
    • Air pollutant elements will be added to the draft regulations once the regulatory framework for air pollutants has been finalized in spring 2008.
  • Willms & Shier Environmental Lawyers LLP
    Environment, Energy & Resources Law