The federal government remains steadfast in its commitment to implement a price on carbon in 2019. As a cost effective way to reduce emissions while incentivizing clean innovation, carbon pricing is a key policy tool in the fight against climate change.
The federal carbon pricing backstop, which will come into force on January 1, 2019, is made up of two components: (1) a charge on fossil fuels that will generally be paid by fuel producers or distributors, and (2) a separate pricing system for industrial facilities that are emissions intensive and trade-exposed, known as the output-based pricing system (OBPS).
Following stakeholder consultations in spring 2018, Environment and Climate Change Canada (ECCC) released its preliminary competitiveness assessment on July 27, 2018. Based on its assessment and feedback received from emissions intensive and trade-exposed industries, the federal government announced that it is updating its proposed approach to setting output-based standards. In particular, ECCC will adjust the benchmark under the proposed OBPS from 70% to 80% of an industry’s average emissions, and from 70% to 90% for producers of cement, iron and steel, lime and nitrogen fertilizer. This means that emissions generated above these benchmarks will be subject to the carbon price. The federal carbon pricing backstop will be imposed on provinces that do not have a carbon pricing system that meets the federal benchmark. The tax is set for $20 a tonne in 2019, and will increase by $10 each year until it reaches $50 in 2022. The federal government has said that it will release a detailed paper on the draft OBPS regulations for public comment in fall 2018.
Overview of the OBPS
In January 2018, ECCC released the draft regulatory framework for the OBPS, which set the benchmark at 70% of an industry’s average emissions performance. The OBPS is designed to incentivize companies to reduce their greenhouse gas (GHG) emissions and spur innovation, while maintaining competitiveness and protecting against carbon leakage.
Instead of paying the charge on fuels that they purchase, industrial facilities subject to the OBPS will face a carbon price on the portion of their emissions that are above a limit, which will be determined based on relevant output-based standards (emissions per unit of output). The OBPS will apply to industrial facilities located in jurisdictions where the federal carbon pricing system applies and that emit 50,000 tonnes of carbon dioxide equivalent (CO2e) or more per year; smaller facilities (emitting 10,000 tonnes of CO2e or more) will have the choice to opt in voluntarily. Facilities that emit less than their annual limit will receive surplus credits from the federal government for the portion of their emissions that are below their limit. A facility can trade surplus credits it earns, creating an incentive for facilities to reduce emissions below the limit when cost effective to do so. In May 2018, ECCC released additional details on the proposed compliance options under the output-based pricing system.
Summary of Preliminary Competitiveness Analysis
As noted above, the January 2018 regulatory framework proposed that output-based standards be set at 70% of an industrial sector’s average greenhouse gas emissions intensity, with the possibility to adjust the standard based on an assessment of the potential impacts of carbon pricing on sector competitiveness and to carbon leakage. In the framework, ECCC identified two factors by which the competitiveness of industrial sectors or specific facilities within a sector may be impacted by carbon pricing:
- the carbon emissions intensity associated with the production of the products of the sector or facility (the carbon emissions per unit of net output is representative of the cost exposure of the sector or facility to carbon pricing); and
- the extent to which facilities in the sector are able to pass on the costs of carbon pricing without significant loss of market share, an indicator of which is its degree of trade-exposure.
As part of its assessment, ECCC is undertaking a three-phased approach to determine the level at which the output-based standards are set for a given sector:
- Phase 1 consists of a “static” test that considers historical data at the national level to calculate sector-level estimates of emissions intensity and trade exposure. These metrics are then combined to provide an indication of competitiveness risk due to carbon pricing. This approach is similar to the quantitative tests used in several other jurisdictions with carbon pricing, including Alberta, Québec and California.
- Phase 2 is a “dynamic” test using economic modeling that uses projected emissions and economic data to evaluate the same emissions intensity and trade exposure metrics as phase 1, for the year 2022.
- In Phase 3, stakeholders are invited to submit additional supporting information and analyses on aspects of competitiveness to supplement the results of Phases 1 and 2.
Phase 1 and 2 preliminary assessments have been completed for the following sectors: base metal smelting and refining, cement, petroleum refining, bitumen and heavy oil upgrading, upstream oil and gas, oil sands and heavy oil, natural gas pipelines, iron and steel manufacturing, lime, pulp and paper, nitrogen fertilizers, ethanol, food processing, potash, mining, and iron ore pelletizing.
Based on its findings from the Phase 1 and 2 analyses, ECCC is making the following two adjustments to the output-based standards:
Four sectors were assessed to be in a high competitive risk category and will have their output-based standard adjusted to 90%of the sector’s average GHG emissions intensity:
- cement
- iron and steel manufacturing
- lime
- nitrogen fertilizers
The starting point for all remaining industrial sectors is revised from 70% to 80% of the sector’s average GHG emissions intensity.
With Phase 3 of ECCC’s analysis now under way, stakeholders have been invited to submit additional supporting information (e.g. evidence of significant facility-level impacts, domestic or international market considerations, and a consideration of indirect costs on sectors associated with carbon pricing). ECCC has said that further sectors or sub-sectors may see adjustments to their output-based standards based on the results of the Phase 3 analysis. Once Phase 3 of the analysis is complete, ECCC will release draft OBPS regulations for public comment.