Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act: SOR/2021-195

Canada Gazette, Part II, Volume 155, Number 18

Registration
SOR/2021-195 August 12, 2021

GREENHOUSE GAS POLLUTION PRICING ACT

P.C. 2021-864 August 11, 2021

Whereas the Governor in Council, in accordance with subsection 189(2) of the Greenhouse Gas Pollution Pricing Actfootnote 1, has taken into account, as the primary factor, the stringency of provincial pricing mechanisms for greenhouse gas emissions;

Whereas pursuant to subsection 194(1) of that Act an order made under section 189 of that Act may have effect earlier than the day on which it is made if it so provides and it gives effect to measures referred to in a notice published by the Minister of the Environment;

And whereas, the Minister of the Environment published the Notice of intent to amend the Output-Based Pricing System Regulations and to make an order under section 189 of the Greenhouse Gas Pollution Pricing Act on December 23, 2020 to announce the intent to make an order under section 189 of that Act to delete the name of certain provinces from Part 2 of Schedule 1 to that Act;

Therefore, Her Excellency the Governor General in Council, on the recommendation of the Minister of Environment, pursuant to section 189 of the Greenhouse Gas Pollution Pricing Act footnote 1, makes the annexed Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act.

Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act

Amendments

1 Item 1 of Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Actfootnote 1 is repealed.

2 Item 2 of Part 2 of Schedule 1 to the Act is repealed.

Coming into Force

3 (1) This Order, except section 2, comes into force on January 1, 2022.

(2) Section 2 is deemed to have come into force on January 1, 2021.

REGULATORY IMPACT ANALYSIS STATEMENT

(This statement is not part of the Order.)

Issues

The Greenhouse Gas Pollution Pricing Act (GGPPA or the Act) received royal assent on June 21, 2018. The GGPPA provides the legal framework and enabling authorities for the federal carbon pollution pricing system in Canada. This system consists of two parts: a regulatory charge on fossil fuels (the fuel charge), and an output-based pricing system (OBPS) for industrial facilities that is enabled by the Output-Based Pricing System Regulations (OBPSR or the Regulations).

The GGPPA provides the Governor in Council with the authority to determine where the federal carbon pricing system applies by amending Schedule 1 to the Act to add or delete the names of provinces and territories. The federal system acts as a backstop in any jurisdiction that requests it or does not implement a carbon pricing system that meets minimum national stringency standards (the federal benchmark). The federal OBPS applies in the jurisdictions listed in Part 2 of Schedule 1 to the GGPPA.

The OBPSR took effect on January 1, 2019, in Ontario, New Brunswick, Manitoba and Prince Edward Island, and partially in Saskatchewan. In Yukon and Nunavut, the OBPSR took effect on July 1, 2019. Following the implementation of the Regulations, the Government of New Brunswick and the Government of Ontario each proposed their own provincial OBPS for large industrial emitters. Each proposal is intended to replace the federal OBPS in the specific province and would establish a unique system that is applicable to large emitters undertaking designated industrial activities in that province. For the federal OBPS to not apply in Ontario or New Brunswick, the name of the respective province needs to be deleted from Part 2 of Schedule 1 to the GGPPA.

Background

The Government of Canada has committed to taking action on climate change and is working in partnership with the international community. In December 2015, the international community, including Canada, adopted the Paris Agreement, an accord intended to reduce greenhouse gas (GHG) emissions, to limit the rise in global average temperature to less than two degrees Celsius (2°C) above pre-industrial levels and to aim to limit the temperature increase to 1.5°C. As part of its commitments made under the Paris Agreement, Canada pledged to reduce national GHG emissions by 30% below 2005 levels by 2030.

On July 12, 2021, the Minister of the Environment (the Minister) formally submitted Canada's enhanced nationally determined contribution (NDC) to the United Nations, committing Canada to reduce national GHG emissions by 40% to 45% below 2005 levels by 2030. The Government of Canada has also committed to achieving net-zero GHG emissions by 2050 in its strengthened climate plan called A Healthy Environment and a Healthy Economy. To meet these commitments, the federal government is implementing a series of measures, including continuing to put a price on carbon pollution.

Federal carbon pollution pricing benchmark

The Pan-Canadian Approach to Pricing Carbon Pollution was published in 2016 and sets out minimum national stringency standards for provincial and territorial carbon pricing systems known as the federal benchmark.footnote 2 The carbon pricing systems of all provincial and territorial governments in Canada were first assessed against the federal benchmark in the fall of 2018 and continue to be assessed annually. Provinces and territories may implement a carbon pricing system that makes sense for their circumstances, either an explicit price-based system or a cap-and-trade system, as long as the system meets or exceeds the minimum national stringency standards of the federal benchmark. This flexibility makes it possible for a province or territory to transition from the federal carbon pricing system, in whole or in part, by establishing its own system. The exact timing of a transition depends on multiple operational considerations.

In A Healthy Environment and a Healthy Economy, a strengthened federal climate plan published in December 2020, the Government of Canada indicated that it would review the federal benchmark with a view towards strengthening it and further aligning carbon pricing systems across Canada for the post-2022 period. On July 12, 2021, after engagement with provincial and territorial governments and Indigenous organizations in the winter of 2021, the Government of Canada confirmed that the minimum price on carbon pollution will increase by $15 per tonne each year starting in 2023 through to 2030 and that it has updated the federal benchmark for the 2023–2030 period to make sure it is fair, consistent and effective.footnote 3

Federal carbon pricing backstop system

Part 1 of the GGPPA establishes the fuel charge, which is generally paid by fuel producers or distributors and generally applies to fossil fuels produced, delivered or used in a backstop jurisdiction, brought into a backstop jurisdiction from another place in Canada, or imported into Canada at a location in a backstop jurisdiction. The fuel charge is administered by the Canada Revenue Agency (CRA). Part 2 of the GGPPA provides the legal framework and authorities to establish the federal OBPS, a regulatory trading system for industrial facilities that is administered by the Department of the Environment (the Department).

The objective of the Regulations is to ensure there is a price incentive for emissions-intensive and trade-exposed (EITE) facilities to reduce GHG emissions per unit of output, while mitigating risks to domestic competitiveness and of carbon leakage to other jurisdictions due to carbon pricing. The Regulations define the facilities to which the federal OBPS applies (“covered facilities”) and specify output-based or emissions per unit of output (emissions intensity) standards. The OBPS covers facilities carrying out certain industrial activities in backstop jurisdictions that emit 50 kilotonnes (kt) or more of carbon dioxide equivalent (CO2e) per year. In addition, facilities located in backstop jurisdictions that emit 10 kt or more of CO2e per year, and that either undertake an industrial activity identified by the Regulations or operate in an industrial sector considered to be at significant risk of decreased competitiveness and carbon leakage as a result of carbon pricing, may apply to become voluntary participants in the OBPS.

Covered facilities generally do not pay the fuel charge on the fuel they use at their facilities; instead, they are required to provide compensation on an annual basis for any GHG emissions exceeding their respective emissions limit. A covered facility's emissions limit, which is measured in tonnes of CO2e, is determined by multiplying the facility's production by the applicable output-based standard. A covered facility with GHG emissions below its limit receives surplus credits issued by the Minister for the difference between its GHG emissions and its limit. Surplus credits can either be sold or used by a covered facility to meet a future compliance obligation.

Covered facilities have a number of options regarding how they choose to provide compensation for excess emissions. First, they may make excess emissions charge payments to the Receiver General for Canada.footnote 4 Second, they may use compliance units, each representing one tonne of CO2e, which include (i) surplus credits issued by the Minister to covered facilities or that have been acquired through trade from other covered facilities; (ii) eligible provincial or territorial offset credits formally recognized by the Minister under the Regulations as compliance units; and (iii) offset credits issued by the Minister.footnote 5 Covered facilities may also use a combination of excess emissions charge payments and compliance units to provide compensation.

Objective

The objective of the Order Amending Part 2 of Schedule 1 to the Greenhouse Gas Pollution Pricing Act (the Order) is to avoid regulatory duplication and support the implementation of provincial carbon pricing systems for industry in Ontario and New Brunswick that meet the minimum national stringency standards of the federal benchmark applying to the 2019–2022 period.

Description

The Order deletes the names of New Brunswick and Ontario from Part 2 of Schedule 1 to the GGPPA, such that the federal OBPS no longer applies in New Brunswick beginning with the 2021 compliance period, and in Ontario beginning with the 2022 compliance period.

Regulatory development

Consultation

Provinces and territories had to provide information to the Department by September 1, 2018, describing how they intended to meet the federal benchmark, if applicable. After the review of each provincial and territorial system, the federal government implemented the federal backstop system, in whole or in part, starting on January 1, 2019, in any province or territory that requested it or did not have a carbon pricing system in place in 2018 that aligned with the federal benchmark. The assessment process considers the stringency of provincial and territorial carbon pricing systems and evaluates how these systems align with the federal benchmark.

New Brunswick officials began consultations with departmental officials on the development of New Brunswick's provincial OBPS in February 2019. The Government of New Brunswick released a publicly available plan of its system on June 13, 2019, and formally submitted the plan to the Department on July 23, 2019, for its federal benchmark assessment for 2020. This proposal requested a transition from the federal to the provincial OBPS retroactive to January 1, 2019.

The Government of Ontario published its own provincial industrial emission performance standards (“the EPS Regulations”) for large industrial emitters on July 4, 2019, and submitted information to the Department for assessment of its proposed approach against the federal benchmark on July 19, 2019. Discussions between departmental and Ontario officials began in August 2019 to review the details of Ontario's proposed system and obtain additional information required for the benchmark assessment.

The Government of Canada found that the proposed provincial carbon pricing systems for industry were sufficiently stringent to meet the current federal benchmark and a decision to transition from the federal OBPS in New Brunswick and Ontario was communicated to the two provinces in letters from the Minister dated September 20, 2020. The proposed systems meet the benchmark as they are each expected to

Departmental officials engaged with provincial officials in the fall of 2020 on the transition process to determine the earliest feasible date for a smooth transition from the federal OBPS that minimizes the risk of pricing coverage gaps, or of double pricing (i.e. a regulated facility having to pay both federal and provincial carbon prices). On December 23, 2020, a notice was published by the Minister on the Government of Canada's website announcing the intent to make an order under section 189 of the Act to delete the names of New Brunswick and Ontario from Part 2 of Schedule 1 to the GGPPA.footnote 6 Following discussions with the provincial governments, the Minister determined that the earliest possible transition date from the federal system to New Brunswick's OBPS would be January 1, 2021, while the earliest possible transition date from the federal system to Ontario's EPS Regulations would be January 1, 2022.

The Order was not published in the Canada Gazette, Part I, for public comment. The Government of Canada has already announced its intent to remove New Brunswick and Ontario from Part 2 of Schedule 1 to the GGPPA, as mentioned above, and the intended transition dates have already been communicated to the provinces.

It is likely that the carbon pricing systems for industry in New Brunswick and Ontario will require changes, such as increases in the stringency of output-based or performance standards, in order to align with the updated federal benchmark for 2023 and beyond. This potential issue was raised with both provincial governments in discussions regarding the federal benchmark in the winter of 2021.

All provinces and territories will have the opportunity to propose new or modified carbon pricing systems for the 2023–2030 period. Following assessments against the federal benchmark, the federal government will review all provincial and territorial systems in mid-2022 and decide where the federal backstop system will apply in 2023 and beyond. Existing provincial and territorial systems, including New Brunswick's OBPS and Ontario's EPS Regulations, will be able to continue to apply beyond 2022 so long as they meet the updated federal benchmark.

Modern treaty obligations and Indigenous engagement and consultation

The transition from the federal OBPS to the provincial OBPS in New Brunswick and to the EPS Regulations in Ontario is not expected to have any modern treaty implications. The Government of Canada continues to work with Indigenous organizations to ensure that the federal approach to pricing carbon pollution considers the unique circumstances and priorities of Indigenous peoples.

Instrument choice

The Order is required to delist New Brunswick and Ontario from Part 2 of Schedule 1 to the GGPPA. It is a necessary step to avoid regulatory duplication and support the implementation of carbon pricing systems for industry in these two provinces that meet the minimum national stringency standards of the federal benchmark applying to the 2019–2022 period.

Regulatory analysis

Assessment of impacts

The Government of Canada's approach to pricing carbon pollution recognizes the flexibility of provinces and territories to implement the type of carbon pricing system that makes sense for their circumstances as long as they align with the minimum national stringency standards set out in the federal benchmark. The benchmark assessment process has been designed to recognize the range of possible approaches to carbon pollution pricing and enable cooperation between the federal, provincial and territorial governments in this regard. The Government of Canada has determined that the carbon pricing systems for industry in New Brunswick and Ontario meet the federal benchmark applying to the 2019–2022 period. In keeping with this, the following analysis reports the estimated impacts of the Order but does not attempt to evaluate the decision to delist based on an assessment of net impacts. The analysis is considered sufficient in this context, given that the Governor in Council's decision to delete the names of these two provinces from Part 2 of Schedule 1 to the GGPPA shall take into account as the primary factor the stringency of provincial pricing mechanisms for GHG emissions.

Benefits and costs

Analytical framework

This analysis assesses the impacts (benefits and costs) of a regulatory scenario in which the Governor in Council makes the Order relative to a baseline scenario in which this has not occurred. The analytical framework for the Order is similar to the one used to analyze the OBPSR, described in the Regulatory Impact Analysis Statement (RIAS) accompanying the publication of the Regulations in the Canada Gazette, Part II.footnote 7 Nonetheless, this analysis has the following unique features:

Overview of impacts

The application of New Brunswick's OBPS and Ontario's EPS Regulations, instead of the federal OBPS, is anticipated to lead to decreases in the costs of carbon pollution pricing for industrial facilities in these two provinces, as well as to foregone GHG emission reductions, since the two provincial carbon pricing systems for industry are each less stringent than the federal system. Potential welfare benefits resulting from the decreases in the costs of carbon pollution pricing are estimated to be $130 million. The foregone emission reductions attributable to the Order are projected to be 1.8 million tonnes or megatonnes (Mt) of CO2e over the 2021–2022 period. Based on the Department's current estimates of the social cost of GHGs, the costs associated with these foregone GHG emissions could possibly range between $92 million and $391 million. The net impacts of the Order are, therefore, estimated to range from net benefits of $38 million to net costs of $261 million.

Modelling of impacts

The baseline scenario and the regulatory scenario have been modelled using EC-PRO, the Department's peer-reviewed, multi-region, multi-sector, provincial-territorial computable general equilibrium (CGE) model of climate change policies. EC-PRO is able to assess the variables of interest, including GHG emissions, the economic welfare of households, who are assumed to be the owners of factors of production (labour and capital), gross domestic product (GDP) and gross value added (GVA). EC-PRO simulates the Canadian economy and calculates the impacts of New Brunswick's OBPS and Ontario's EPS Regulations by calculating the new set of prices and variables that will return the economy to equilibrium. The incremental impacts of these provincial systems can be estimated by comparing the CGE equilibrium results in the regulatory scenario with those in the baseline scenario. A key input into this EC-PRO modelling was the Department's 2019 GHG Reference Case.footnote 8 Additional details on the EC-PRO model can be found in the RIAS accompanying the publication of the OBPSR in the Canada Gazette, Part II.footnote 7

Benefits

New Brunswick's OBPS and Ontario's EPS Regulations have been modelled to apply to the same industrial sectors and facilities as those regulated by the federal OBPS. However, the two provincial carbon pricing systems for industry are anticipated to lead to decreases in the costs of carbon pollution pricing and foregone GHG emission reductions in New Brunswick and Ontario, relative to the baseline scenario, since they are each less stringent than the federal system. In the federal OBPS, the output-based standards have generally been set at a fraction of 80% of the historical (2014–2016) national, production-weighted average emissions intensity. Some output-based standards were adjusted upwards from the fraction of 80% based on an assessment of the potential competitiveness and carbon leakage risks due to carbon pricing. In each provincial system, the output-based standards have generally been set using less stringent (i.e. higher) fractions of historical (2015–2017) provincial, production-weighted average emissions intensities.

The two provincial carbon pricing systems are expected to lower the aggregate costs associated with GHG pollution pricing for industrial facilities. The cost savings that are attributable to the application of New Brunswick's OBPS and Ontario's EPS Regulations, instead of the federal OBPS, are considered in this analysis to be transfer payments from the federal government to industrial facilities in these two provinces. Transfer payments are financial payments that do not involve the exchange of goods or services, and they are typically netted out of a cost-benefit analysis because payment costs are offset by equal but opposite benefits. Therefore, these impacts are not included in this analysis.

However, in each province, the cost savings realized by industrial facilities may allow for increased domestic production. Higher levels of production could in turn increase the disposable income of households, who are assumed to be the owners of the factors of production, labour and capital, through increases in the wages earned by workers and the profits earned by firms (facilities). Households may choose to allocate increases in disposable income to higher levels of consumption of goods and services to maximize their welfare.

A recommended measure of welfare in general equilibrium models, such as EC-PRO, is equivalent variation (EV), which is based on the concept of willingness-to-pay, or the maximum amount a household would pay for a particular good or service given its budget constraint.footnote 9 The change in EV from the baseline scenario to the regulatory scenario represents the additional amount of money that households in New Brunswick and Ontario would require in the baseline scenario to make themselves as well off as they would be with the implementation of New Brunswick's OBPS and Ontario's EPS Regulations.footnote 10,footnote 11 This amount can be considered equivalent to the change in welfare that households derive from the increase in consumption under the regulatory scenario.

Table 1 below presents the potential welfare benefits attributable to the Order. The cumulative benefits are estimated to be $130 million.

Table 1: Potential welfare benefits (in millions of dollars) from the application of New Brunswick's OBPS and Ontario's EPS Regulations, instead of the federal OBPS in these two provinces
Changes in welfare 2021 2022 Cumulative changes in welfare (2021–2022)
New Brunswick 28 42 70
Ontario – 60 60
Total
(both provinces)		 28 102 130

In addition, the Order will, in effect, remove the administrative requirements (i.e. the quantification, reporting and verification requirements) of the Regulations starting with the 2021 compliance period in New Brunswick and with the 2022 compliance period in Ontario. Despite the benefit of not incurring administrative costs associated with the OBPSR, New Brunswick's OBPS and Ontario's EPS Regulations each have their own corresponding administrative obligations that apply to industrial facilities. For this reason, this analysis assumes that the net administrative impacts of the Order are minimal.

Costs

As assessed against the federal benchmark, both provincial carbon pricing systems for industry are expected to drive incremental GHG emission reductions from the covered sources over and above what would be expected with no pricing system in place. However, the two provincial systems are each less stringent than the federal system to a certain extent and, relative to emission levels in the baseline scenario, they are anticipated to lead to foregone GHG emission reductions. Since facilities face lower total costs due to carbon pricing in the regulatory scenario, there may be a reduced risk that they will shift their production to other jurisdictions. In the modelling conducted for this analysis, facilities in New Brunswick and Ontario are expected to respond to lower costs with higher domestic production and fewer actions that reduce emissions (e.g. fuel switching and implementation of energy-efficient technologies). This is anticipated to result in fewer reductions in domestic GHG emissions relative to those in the baseline scenario. These foregone emission reductions are projected to lead to social costs in the form of future climate damages.

EC-PRO was used to estimate the changes in GHG emissions resulting from the application of New Brunswick's OBPS and Ontario's EPS Regulations, instead of the federal OBPS in these two provinces. Table 2 presents the foregone GHG emission reductions, measured in Mt of CO2e, in the regulatory scenario relative to the baseline scenario. Overall, the change in GHG emissions stemming from the Order is projected to be 1.8 Mt of CO2e over the 2021–2022 period.

Table 2: Foregone GHG emission reductions (in Mt of CO2e) from the application of New Brunswick's OBPS and Ontario's EPS Regulations, instead of the federal OBPS in these two provinces
Changes in GHG emissions 2021 2022 Cumulative changes in GHG emissions (2021–2022)
New Brunswick 0.5 0.7 1.2
Ontario – 0.6 0.6
Total
(both provinces)		 0.5 1.3 1.8

The analysis makes use of the Department's existing estimates of the social cost of GHGs, which were published in 2016, to monetize the costs of the expected changes in domestic GHG emissions realized in the regulatory scenario relative to the baseline scenario.footnote 12 The social cost of GHGs is a measure of the incremental damages incurred as a result of an increase in GHG emissions; these damages are considered to be distributed globally. There are two unique aspects to climate change that justify the use of global values to estimate the benefits of reductions in GHG emissions or, in this case, the costs of foregone GHG emission reductions: (i) it involves a global externality, where emissions anywhere in the world contribute to global damages; and (ii) the only way to effectively address climate change is through global action. The Department uses the social cost of carbon (SCC), the social cost of methane (SCCH4) and the social cost of nitrous oxide (SCN2O) to estimate the monetary value of changes in emissions of carbon dioxide, methane and nitrous oxide, respectively.

For this analysis, the Department's existing estimates of the social costs of GHGs for 2021 and 2022 have been converted to 2020 Canadian dollars. In the case of 2022, the estimates have been discounted by 3% to 2021 to obtain present value estimates of the social cost of GHGs. The central value, which is assumed in this analysis to be a lower bound estimate (for reasons mentioned below), has been calculated to be about $52 per tonne of CO2e for both 2021 and 2022. The 95th percentile value (an upper bound estimate) has been calculated to be approximately $220 per tonne of CO2e for both 2021 and 2022.

Table 3 below shows the projected costs of the foregone GHG emission reductions from the application of New Brunswick's OBPS and Ontario's EPS Regulations. These values are obtained by multiplying the Department's present value central estimate of the social cost of GHGs by the estimated changes in GHG emissions. The lower bound of the cumulative social costs of the Order is thus estimated to be $92 million.

Table 3: Costs of foregone GHG emission reductions (in millions of dollars) from the application of New Brunswick's OBPS and Ontario's EPS Regulations, instead of the federal OBPS in these two provinces, using the Department's existing central estimates of the social cost of GHGs
Costs of changes in GHG emissions 2021 2022 Cumulative costs of changes in GHG emissions (2021–2022)
New Brunswick 27 36 63
Ontario – 29 29
Total
(both provinces)		 27 65 92

Table 4 below presents a possible upper bound of the costs attributable to the changes in GHG emissions. These values are obtained by multiplying the Department's present value 95th percentile estimate of the social cost of GHGs by the projected changes in GHG emissions. The upper bound of the cumulative social costs of the Order is thus estimated to be $391 million.

Table 4: Costs of foregone GHG emission reductions (in millions of dollars) from the application of New Brunswick's OBPS and Ontario's EPS Regulations, instead of the federal OBPS in these two provinces, using existing 95th percentile estimates of the social cost of GHGs
Costs of changes in GHG emissions 2021 2022 Cumulative costs of changes in GHG emissions (2021-2022)
New Brunswick 115 151 266
Ontario – 125 125
Total
(both provinces)		 115 276 391

The projected costs of the changes in GHG emissions depend significantly on the estimates of the social cost of GHGs that are used. The Department is in the process of updating its existing estimates to ensure that its methodology aligns with the latest international climate science and economic modelling. When they are finalized, the Department expects that its new estimates will be greater, in real terms, compared to its current estimates of the social cost of GHGs, given revisions (increases) in estimates of future damages associated with carbon pollution.footnote 13 Therefore, the value of the social cost of GHGs used in this analysis as a lower bound estimate (i.e. the Department's current central value) may in fact underestimate the lower bound of the possible range of costs associated with the projected foregone GHG emission reductions.

Impacts related to surplus credits

Amendments have been made to the OBPSR to maintain the incentive to reduce GHG emissions in the federal OBPS by suspending and limiting the use of surplus credits issued to facilities in a jurisdiction that is no longer in the OBPS. Surplus credits issued to facilities in a province or territory where the OBPS no longer applies may not be used to meet compensation obligations for the compliance periods in which the OBPS does not apply to that province or territory. The Minister may also suspend surplus credits issued to facilities in a province or territory where the OBPS no longer applies. The addition of these rules to the Regulations will help prevent a significant decrease in the price of surplus credits that could arise from a sudden decrease in the demand relative to the supply of credits.

These new rules will limit the period of time during which certain surplus credits may be used in the federal OBPS. Covered facilities will be able to use surplus credits generated in a province or territory that is no longer in the OBPS to meet compensation obligations for the compliance periods in which that province or territory was listed in Part 2 of Schedule 1 to the GGPPA. In the case of the Order, these rules mean that

With respect to the 2019 compliance period, 189 covered facilities owed a total compensation obligation of 8.3 Mt of CO2e. The Department issued surplus credits corresponding to approximately 0.91 Mt of CO2e to 36 facilities. Nonetheless, the vast majority of compensation across backstop jurisdictions was provided by means of excess emissions charge payments (8.05 Mt of CO2e or 97% of the total obligation), while the remainder was provided in the form of surplus credits (0.25 Mt of CO2e or 3% of the total obligation). Preliminary data relating to the 2020 compliance period indicate that the total compensation obligation and the total amount of surplus credits issued for 2020 are comparable in magnitude to the values for 2019. This information suggests that facilities will have opportunities to use surplus credits generated in New Brunswick to meet 2020 compensation obligations and surplus credits that were generated in Ontario to meet 2020 or 2021 compensation obligations.footnote 15

The new rules could result in covered facilities in New Brunswick selling their surplus credits at a maximum price of $30 per tonne of CO2e (the excess emissions charge in 2020), and covered facilities in Ontario selling their surplus credits at a maximum price of $40 per tonne of CO2e (the excess emissions charge in 2021). If these facilities had banked their surplus credits for the maximum five-year eligibility period instead, they may have been able to sell their credits at higher prices.footnote 16 However, the behaviour of market participants depends on a number of factors, potential future value being one of them. Based on the data presented above, 27% of the surplus credits generated in 2019 were used for compliance that year, which indicates that not all facilities generating surplus credits choose to bank them for sale in future years when the carbon price is higher.

These new rules have been put in place to help prevent a significant reduction in the price of surplus credits that could arise from an excess supply of banked credits, which could occur when the federal OBPS no longer applies in a province or territory. Any potential loss of value for credit holders must also be considered with the risk that the price of surplus credits could fall when there is an excess supply of banked credits.

Statement of impacts

The results of this analysis are summarized in Table 5 below.

Table 5: Statement of benefits and costs
  2021 2022 2021–2022 (total)

Monetized impacts (millions of dollars)

Benefits
Changes in welfare 28 102 130

Costs

Foregone GHG emission reductions
Lower bound 27 65 92
Upper bound 115 276 391
Net benefits
Upper bound 1 37 38
Lower bound −87 −174 −261
Quantified impacts
Foregone GHG emission reductions (Mt of CO2e) 0.5 1.3 1.8
Other impacts considered
  • New Brunswick's OBPS and Ontario's EPS Regulations meet the minimum national stringency standards of the federal benchmark applying to the 2019–2022 period.
  • These two carbon pricing systems for industrial facilities will likely require changes in order to align with the updated federal benchmark for 2023 and beyond.

Small business lens

The federal OBPS has been designed to allow smaller facilities located in backstop jurisdictions to voluntarily participate in the system. A key component of this approach is that facilities choosing to voluntarily participate in the OBPS (“voluntary participants”) should have or, in the case of new, retrofitted or expanded facilities, expect to have annual emissions of 10 kt or more of CO2e.footnote 17 No facilities in backstop jurisdictions that must participate in the federal OBPS (“mandatory participants”) are considered small businesses; however, it is possible that some voluntary participants are small businesses.

Since the Order does not introduce any new regulatory requirements, it is unlikely to result in increased costs for voluntary participants, including smaller facilities that also happen to be small businesses. New Brunswick's OBPS and Ontario's EPS Regulations each have a flexible approach for voluntary participants similar to the one established in the federal system, including the same annual emissions threshold of 10 kt or more of CO2e to determine eligibility. Smaller facilities participating in the provincial carbon pricing systems for industry could benefit from cost savings given that these two systems are each less stringent than the federal OBPS.

One-for-one rule

The one-for-one rule only applies to mandatory participants. The costs incurred by voluntary participants do not represent compulsory costs due to the Regulations, as the persons responsible for the facilities have the discretion to choose between a charge on fossil fuels and participation in the federal OBPS.

While New Brunswick's OBPS and Ontario's EPS Regulations each have their own administrative (i.e. quantification, reporting and verification) requirements, the corresponding administrative obligations imposed by the OBPSR do not apply to industrial facilities in New Brunswick starting with the 2021 compliance period, and in Ontario starting with the 2022 compliance period. The Order is thus considered an “OUT” under the one-for-one rule, as there is a decrease in the administrative burden costs imposed by federal regulations that are administered by the Department. The Order makes no change in terms of federal regulatory titles.

The average administrative impacts for a mandatory participant under the OBPSR are approximately 184 hours per facility per year. The administrative burden removed by the Order is estimated to be around $305,000 in annualized average costs when allocated over the original 10-year period used to assess the administrative cost impacts of the Regulations (2019–2028).footnote 18 This corresponds to the removal of about $2,500 in annualized average costs per facility for 95 mandatory participants.footnote 19

Regulatory cooperation and alignment

The federal government is committed to ensuring that the provinces and territories have the flexibility to design their own carbon pricing policies and programs, while ensuring that pricing applies to a broad set of GHG emission sources across Canada with increasing stringency over time. The Order, which is the result of federal-provincial cooperation under the Pan-Canadian Approach to Pricing Carbon Pollution, will avoid regulatory duplication and support the implementation of provincial carbon pricing systems for industry in New Brunswick and Ontario.

The federal government's approach to pricing carbon pollution from large industrial emitters is comparable to other systems in Canada and in other countries. Most systems in Canada and around the world are designed to put a price signal on pollution while minimizing competitiveness impacts for industries vulnerable to carbon leakage, either within the design of the system itself, or in how revenue generated by the system is recycled.

Strategic environmental assessment

The objective of the Regulations is to retain a price on carbon pollution that creates an incentive for EITE facilities to reduce their GHG emissions per unit of output, while mitigating risks to domestic competitiveness and of carbon leakage to other jurisdictions due to carbon pricing. Given that New Brunswick's OBPS, Ontario's EPS Regulations and the OBPSR all share the same environmental objective, a preliminary scan concluded that a strategic environmental assessment is not required, in accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals.

Gender-based analysis plus

New Brunswick's OBPS and Ontario's EPS Regulations have each been designed in a similar manner as the federal OBPS. As a result, no significant gender-based analysis plus (GBA+) impacts have been identified in association with the Order. It is expected that these two provincial carbon pricing systems for industry will provide a small amount of additional economic relief to EITE facilities operating in the respective province. The implementation of these provincial systems could thus have minor positive impacts on employment levels, which may indirectly benefit more men than women, as men typically represent a higher proportion of the labour force in EITE industries.

Implementation, compliance and enforcement, and service standards

Implementation

The Order deletes New Brunswick from Part 2 of Schedule 1 to the GGPPA retroactively as of January 1, 2021. The transition process in relation to New Brunswick does not require regulatory or operational steps to integrate the provincial OBPS with the federal fuel charge because there is a provincial carbon levy in place of the federal fuel charge.

Persons responsible for industrial facilities located in New Brunswick need to comply with the requirements of OBPSR that apply up to December 31, 2020, including providing compensation for excess emissions from the 2020 compliance period. These persons are also required to notify the Minister if they become aware of any error or omission in their annual reports submitted for the 2019 or 2020 compliance period within five years of the submission of the annual report; maintain an account in the federal OBPS credit and tracking system; and update their registration information if it changes.

The Order deletes Ontario from Part 2 of Schedule 1 to the Act as of January 1, 2022. The federal fuel charge will continue to apply in Ontario. An additional regulatory step at the federal level and a multi-step registration process to integrate industrial facilities subject to Ontario's EPS Regulations into the federal fuel charge regime are necessary to prevent these facilities from being priced under both federal and provincial systems. These regulatory and operational steps need to be satisfied before the transition process to the EPS Regulations in Ontario is complete. The Department will work with Ontario's Ministry of the Environment, Conservation and Parks on communications material for facilities subject to Ontario's EPS Regulations regarding the steps they need to take, and the time frames in which they need to take these steps, in order to avoid having to meet requirements in both the federal system and the provincial system.

Persons responsible for industrial facilities located in Ontario need to comply with the requirements of the OBPSR that apply up to December 31, 2021, including reporting on GHG emissions for the 2021 compliance period, and providing compensation for excess emissions from the 2020 and 2021 compliance periods. These persons are also required to notify the Minister if they become aware of any error or omission in their annual reports submitted for the 2019, 2020 or 2021 compliance period within five years of the submission of the annual report; maintain an account in the federal OBPS credit and tracking system; and update their registration information if it changes.

To support persons responsible for facilities that transition from the federal OBPS to either New Brunswick's OBPS or Ontario's EPS Regulations in meeting the requirements of the OBPSR, the Department will communicate directly with them via targeted compliance promotion emails. The Department will also update the Government of Canada's Output-Based Pricing System webpage on a regular basis to provide helpful information on regulatory requirements.

Compliance and enforcement

Departmental officials will undertake actions to implement and enforce the Order and the Regulations, as necessary, in accordance with the Department's compliance and enforcement policies.footnote 20 Enforcement officers will apply the principles found in the compliance and enforcement policies when verifying compliance. These policies set out the range of possible enforcement responses to alleged violations. If an enforcement officer discovers an alleged violation following an inspection or investigation, the officer would choose the appropriate enforcement action based on the policies.

Contacts

Katherine Teeple
Director
Industrial Greenhouse Gas Emissions Management Division
Carbon Markets Bureau
Environmental Protection Branch
Department of the Environment
351 Saint-Joseph Boulevard
Gatineau, Quebec
K1A 0H3
Email: tarificationducarbone-carbonpricing@ec.gc.ca

Matthew Watkinson
Director
Regulatory Analysis and Valuation Division
Economic Analysis Directorate
Strategic Policy Branch
Department of the Environment
200 Sacré-Cœur Boulevard
Gatineau, Quebec
K1A 0H3
Email: RAVD.DARV@ec.gc.ca