Tag: output-based pricing system

Manitoba Releases Draft Framework for Output-based Carbon Pricing System for Large Industrial Emitters

In October 2017, the Manitoba government released its Made-in-Manitoba Climate and Green Plan (the Plan) and announced that it would be introducing a flat carbon tax of $25 per tonne of carbon dioxide equivalent (CO2e). One of the commitments set out by the Manitoba government in the Plan was the development an output-based pricing system (OBPS) for large industrial emitters. In July 2018, Manitoba fulfilled this commitment by releasing its Draft Regulatory Framework for a Made-in-Manitoba Output-based Pricing System (the Draft Framework) for public consultation.

The release of the Draft Framework follows the introduction of Bill 16 into the provincial legislature in March 2018. Bill 16, also known as The Climate and Green Plan Implementation Act – is expected to come into law in November 2018. Bill 16 provides the legislative authority for the Manitoba government to implement the Plan, along with the fiscal tools needed to introduce a carbon price in the province. Bill 16 also establishes the Industrial Greenhouse Gas Emissions Control and Reporting Act, which provides the government with the authority to develop an OBPS for industrial facilities competing in emissions intensive, trade exposed (EITE) sectors of the economy. Manitoba’s proposed OBPS is described in further detail below.

Overview of Manitoba’s Proposed OBPS

The Draft Framework describes the key elements to be considered in the design and implementation of the OBPS. Manitoba’s proposed OBPS is separate from the proposed federal OBPS. Manitoba’s OBPS will apply to large industrial emitters in the province, specifically those facilities with emissions of 50,000 tonnes or more of CO2e. At the moment, there are six large industrial emitters in Manitoba (representing approximately 6% of the province’s total emissions): Koch Fertilizer Canada, TransCanada Pipelines, Graymont, Canadian Kraft Papers, Husky Oil and Vale.

Manitoba plans to establish emission limits for covered facilities in the form of emissions intensity performance standards, or EIPS, which are expressed in tonnes of carbon dioxide equivalent (tCO2e). Covered facilities with emissions above their established limit will be required to pay the $25 per tCO2e emitted beyond their limit or meet their compliance obligations through another approved compliance option (e.g. emission offset credits). Covered facilities which emit less than their established emissions limit will be able to bank or sell emissions to other covered facilities up to their limit at a compliance price of $25 per tCO2e.

Manitoba’s OBPS will cover emissions from the following on-site sources: stationary combustion, on-site transportation, industrial processes and product use, waste and wastewater, flaring, and some venting and fugitive sources.

The Manitoba government is considering three options for setting EIPS:

  1. Facility-specific Standards – an EIPS is set at the individual facility level based on a facility’s historical GHG performance.
  2. Sector-level Standards – an EIPS is set at a designated percentage below the production-weighted average emissions intensity of similar facilities within the same sector.
  3. Best-in-class Standards – an EIPS is set at the emissions intensity of the best-performing facility within a sector, globally, nationally, regionally, or provincially.

The Draft Framework notes that there are industrial facilities in the province with multiple product/activity lines that may warrant establishing multiple emissions-intensity performance standards (one for each product/activity). The emissions limit for these facilities will be based on the sum of the limits for each product/activity. A covered facility’s compliance obligation will be based on the following formula:

Compliance Obligation (tCO2e) = Facility’s Total Emissions – Facility’s Emissions Limit

In order to facilitate continuous improvement in GHG performance, the stringency of EIPS will increase over time. It is proposed that each EIPS be subject to an annual 2% declining cap factor. The declining cap factor would apply to all emissions included in the emissions intensity standard, with the exception of industrial process emissions.

Covered industrial facilities will receive an OBPS registration certificate that enables them to purchase carbon tax-free natural gas and solid fuels and receive a full rebate on the carbon tax paid throughout the calendar year on all other fuel types. The first compliance period would begin in January 2019 and reporting would be required as of January 1, 2019. However, performance standards would not be set until June 2019 given the time constraints for implementation.

For compliance purposes, covered facilities must compensate for excess emissions by: (a) remitting an emissions performance credit at a rate of one credit for each tonne of greenhouse gas emissions in excess of the limit; (b) paying a levy at a rate of $25 for each tonne of greenhouse gas emissions in excess of the limit; or (c) a combination of both (a) and (b). The Manitoba government will issue performance credits to facilities for each tCO2e below their emissions limit. Under the OBPS, the following types of emission credits will be available:

  • Performance Credits – issued to an industrial operation whose emissions in a compliance period are below the limit that applies in that period.
  • Manitoba Offset Credits – under the regulations, an emissions offset credit system may be established for projects in Manitoba that reduce emissions or remove emissions from the atmosphere.
  • Agreements with Other Jurisdictions – the minister may enter an agreement respecting recognition of credits issued by the other jurisdiction.

The Manitoba government plans to establish an emissions registry to track the issuance, trading, and use of emissions performance credits. Each registered facility will be required to create an account with the registry once it becomes available.

In addition, registered facilities will be required to quantify emissions using a prescribed methodology. Consideration is being given to requiring third-party review of facility reports verified by a certified third-party accredited to ISO 14065 by the Standards Council of Canada or the American National Standards Institute.

The Manitoba government is also considering an opt-in provision for industrial facilities that do not meet the 50,000 tCO2e eligibility threshold, but may experience competitiveness pressures due to the carbon tax. Facilities that meet both of the following criteria would be eligible to opt-in:

  • Have annual emissions between 10,000 and 50,000 tCO2
  • Compete in an EITE sector/sub-sector of the economy.

The Manitoba government will hold workshop and information sessions for stakeholders throughout fall 2018, and will issue registration certificates to covered facilities in December 2018. The OBPS would be implemented in January 2019, followed by the establishment of EIPS in June 2019. The opt-in for qualified entities would commence in January 2020.

The Manitoba government has invited interested parties to provide written comments/feedback on the proposed regulatory framework to Manitoba Sustainable Development by September 30, 2018. Comments may be submitted in writing to the following address or email:

Sustainable Development Climate Change and Energy Branch

12-155 Carlton St., Winnipeg, MB, R3C 5R9

Email: ccinfo@gov.mb.ca

Federal Government Adjusts Output-Based Carbon Pricing System for Industrial Emitters

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:

  1. 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
  2. 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:

  1. 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.
  2. 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.
  3. 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:

  1. cement
  2. iron and steel manufacturing
  3. lime
  4. 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.

A Closer Look at the Canadian Federal Carbon Pricing Backstop

In October 2016, the federal government announced plans for a pan-Canadian carbon price, which represents a pricing benchmark and central component of the Pan-Canadian Framework on Clean Growth and Climate Change (the Framework, released in December 2016). Under the Framework, each province and territory will be required to implement a carbon price starting at $10 per tonne of CO2e in 2018 (eventually rising to $50 per tonne by 2022), either in the form of direct pricing or a cap and trade program. The benchmark provides for a federal carbon pricing backstop system that will apply in any province or territory that does not have a carbon pricing system in place by 2018 that aligns with the benchmark. The Technical Paper sets out the proposed design principles of the federal carbon pricing backstop.

Backstop Instrument

The federal government is planning to introduce new legislation and regulations to implement the carbon pricing backstop that will be applied in jurisdictions which do not have carbon pricing systems in place that meet the requirements of the federal system. In particular, all elements of the backstop will apply in each jurisdiction that does not have a carbon pricing system in place.  It should be noted that the backstop is also meant to top up systems that do not fully meet the benchmark – for example, the backstop could expand the sources covered by provincial carbon pricing or it could increase the stringency of the jurisdiction’s carbon price.

According to the Technical Paper, the backstop will comprise two key elements:

A) a carbon levy on fossil fuels (whether in liquid, gaseous or solid form); and

B) an output-based pricing for industrial facilities with emissions above a specific threshold, as well as opt-in possibility for smaller facilities emitting below the threshold.

Scope of the Carbon Levy

Carbon levy rates will initially be set for the period from 2018 to 2022 – rates for each fuel subject to the levy will be established in such a way that they are equivalent to $10 per tonne of CO2e in 2018 and increase by 10 per tonne annually until it reaches $50 per tonne in 2022. The Technical Paper sets out the rates for liquid fuels, gaseous fuels and solid fuels over the initial 5-year period. In generally, the carbon levy will apply to fuels that are used in a backstop jurisdiction, irrespective of whether the fuels were produced in, or brought into, the backstop jurisdiction. It is anticipated that the carbon levy will be applied early in the supply chain of each fuel, and will be payable by the producer or distributor. The proposed system differentiates among four categories of persons along the supply chain:

  • Registered Fuel Distributors – will generally include producers of fuel, large wholesale distributors of fuel, and natural gas retailers.
  • Registered Fuel Importers – will generally include entities that cannot become Registered Fuel Distributors and that import fuel from outside Canada at a location in a backstop jurisdiction, or that bring fuel into a backstop jurisdiction from another jurisdiction in Canada.
  • Registered Fuel Users – will generally include persons that cannot become Registered Fuel Distributors and that are required to report on fuel used in a backstop jurisdiction and, in certain circumstances, may be required to pay the carbon levy or be entitled to claim relief from the levy where it has already been paid. The following entities will be required to become Registered Fuel Users: commercial carriers (including operators of transport trucks, rail transportation, marine transportation, and air carriers), operators of facilities whose emissions are covered under the output-based pricing system, certain businesses that burn waste that is subject to the carbon levy, and certain businesses that use fuel as a raw material, dilulent or solvent in a manufacturing process that does not produce heat or energy.
  • Non-Registered Persons – will generally include retailers (other than natural gas retailers) and end-users, including individuals and business consumers.

The carbon levy will generally be payable when a Registered Fuel Distributor uses fuel in a backstop jurisdiction or delivers fuel to a person in the backstop jurisdiction that is not a Registered Fuel Importer. However, there are certain exemptions from the carbon levy, including fuel that is used at industrial facilities that are subject to output-based pricing, or fuel used in farming activities by registered farmers.

Overview of Administrative Requirements

Registered Fuel Distributors, Registered Fuel Importers and Registered Fuel Users will be required to register with the Canada Revenue Agency (CRA) file monthly returns. Furthermore, Registered Fuel Distributors and Registered Fuel Importers will be required to provide information on fuel amounts produced, brought into and imported into every jurisdiction as well as fuel amounts used and delivered in or outside a jurisdiction. Registered persons will also need to calculate the total amount of carbon levy payable for each backstop jurisdiction and remit that amount to the Receiver General of Canada.

Requirements with Respect to Inter-Jurisdictional Commercial Transportation

It should be noted that commercial carriers (that transport passengers, freight or both) that operate in a backstop jurisdiction and in at least one other jurisdiction, will be required to register with the CRA as Registered Fuel Users. For commercial road and rail transportation, the carbon levy will apply to only the fuel that is used within a backstop jurisdiction, meaning that the levy will apply to both fuel that is used during an intra-jurisdictional journey (i.e. one that starts and ends in the same jurisdiction) and to fuel that is used during the portion of an inter-jurisdictional or international journey that occurs in a backstop jurisdiction. For fuels used in commercial marine transportation, the carbon levy will only apply to fuel used in intra-jurisdictional travel. In the aviation sector, it is anticipated that the carbon levy will only apply to fuel used in intra-jurisdictional travel; however the federal government sees the introduction of the backstop pricing mechanism as an opportunity for federal and provincial/territorial governments to develop a nationally consistent approach to aviation emission as it relates to inter-jurisdictional commercial air transportation.

Designing an Output-based Carbon Pricing System

The output-based system will apply the carbon price to the portion of a covered source’s emissions that exceed those allowed by the emissions-intensity standard for the regulated activity. In terms of scope, the system will apply the carbon price to industrial facilities with annual emissions of 50,000 tonnes or more of CO2e. However the system will apply to facilities in certain sectors including buildings (e.g. hospitals, schools, municipal buildings) as well as waste and wastewater, regardless of the amount of emissions. The proposed output-based system will provide facilities with annual emissions below 50,000 tonnes of CO2e the ability to “opt-in” to the system. If a facility emits less than its regulatory limit, it will be able to earn surplus credits that it can sell to other regulated entities.

If a facility emits more than its regulatory limit in a given year, it can choose one or a combination of the following compliance options:

– Payment based at the carbon price that will be set in the backstop legislation ($10 per tonne in 2018, increasing to $50 per tonne in 2022)

– Use of eligible carbon offset credits (the proposed system could include foreign compliance units)

– Use of surplus credits that are issued to facilities with emissions below their annual limits.

In terms of administration, each regulated facility will be required to prepare and submit an annual compliance report on its emission levels and annual emissions limit.

Looking Ahead

As noted above, the federal government is in the process of finalizing the details of the carbon pricing backstop mechanism. The carbon levy will come into effect in 2018, while it is anticipated that the output-based pricing system will not come into effect before January 1, 2019.  Until the output-based pricing system comes into force, the carbon levy will apply fully to fuels used by all industrial facilities.