Order Amending Schedule 3 to the Greenhouse Gas Pollution Pricing Act: SOR/2022-210
Canada Gazette, Part II, Volume 156, Number 22
SOR/2022-210 October 11, 2022
GREENHOUSE GAS POLLUTION PRICING ACT
P.C. 2022-1056 October 7, 2022
Her Excellency the Governor General in Council, on the recommendation of the Minister of the Environment, makes the annexed Order Amending Schedule 3 to the Greenhouse Gas Pollution Pricing Act under subsection 190(1) of the Greenhouse Gas Pollution Pricing Act footnote a.
Order Amending Schedule 3 to the Greenhouse Gas Pollution Pricing Act
Global Warming Potential
|24||HFC-365mfc, dont la formule moléculaire est CH3CF2CH2CF3|
Global Warming Potential
Global Warming Potential
|25||PFC-14 (Perfluoromethane), which has the molecular formula CF4||6,630|
|26||PFC-116 (Perfluoroethane), which has the molecular formula C2F6||11,100|
|27||PFC-c216 (Perfluorocyclopropane), which has the molecular formula c-C3F6||9,200|
|28||PFC-218 (Perfluoropropane), which has the molecular formula C3F8||8,900|
|29||PFC-318 (Perfluorocyclobutane), which has the molecular formula c-C4F8||9,540|
|30||PFC-31-10 (Perfluorobutane), which has the molecular formula C4F10||9,200|
|31||PFC-41-12 (Perfluoropentane), which has the molecular formula n-C5F12||8,550|
|32||PFC-51-14 (Perfluorohexane), which has the molecular formula n-C6F14||7,910|
|33||PFC-91-18 (Perfluorodecalin), which has the molecular formula C10F18||7,190|
Coming into Force
4 This Order comes into force on January 1, 2023.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the orders.)
Amendments to Schedule 4
Climate change poses an urgent global threat, with impacts and costs projected to increase over time if left unchecked. Recognizing the need to take action, Canada has implemented the Pan-Canadian Approach to Pricing Carbon Pollution, and will continue to increase the carbon price to 2030 to incentivize further reductions in greenhouse gas (GHG) emissions, which are primary contributors to climate change. Schedule 4 to the Greenhouse Gas Pollution Pricing Act (the Act) sets out the excess emissions charge for large industrial emitters under the Output-Based Pricing System (OBPS). The excess emissions charge is currently set at $50 per tonne of carbon dioxide equivalent (CO2e) for 2022 and would remain at that price if no update is made. This would not align with the minimum national carbon pollution price schedule for the 2023–2030 period, set out in the minimum national stringency standards, referred to as the federal benchmark, which all carbon pricing systems across Canada must meet. The fuel charge, enabled under Part 1 of the Act, is being updated by the Department of Finance to reflect the minimum national carbon pollution price for 2023 to 2030.
Amendments to Schedule 3
Schedule 3 to the Act lists the GHGs covered under Part 2 of the Act and sets out the global warming potential (GWP) values associated with each GHG. GWPs enable the standardized quantification of GHGs in tonnes of CO2e. Knowledge of GWPs has evolved since the publication of the Act. As a signatory to the United Nations Framework Convention on Climate Change (UNFCCC) and as a Party to the Paris Agreement, Canada has an international reporting obligation to update GWPs starting with the 2024 edition of its National Inventory Report (NIR), which covers the reporting years 1990 to 2022, in accordance with UNFCCC Decision 18/CMA.1.footnote 1 This decision refers to the GWP values identified in the Fifth Assessment Report (AR5) (PDF) of the Intergovernmental Panel on Climate Change (IPCC) for a 100-year period.
Subsection 190(1) of the Act allows the Governor in Council, when making an order to add GHGs or amend GWPs, to take into account any factors that the Governor in Council considers appropriate. This includes any changes to the reporting requirements under the UNFCCC. Amendments to Schedule 3 are necessary to replace the existing GWP values with those from the AR5, to ensure that GHG emissions and GHG emission reductions quantified under Part 2 of the Act are estimated using up-to-date scientific knowledge, and are aligned with Canada’s NIR.
Amendments to Schedule 4
Federal climate initiatives
In December 2015, the international community, including Canada, adopted the Paris Agreement, an accord intended to reduce GHG emissions, to limit the rise in global average temperature to less than two degrees Celsius (°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. Canada has also committed to achieving net-zero GHG emissions by 2050 under the Canadian Net-Zero Emissions Accountability Act. To meet these obligations, the federal government is implementing a series of measures, including continuing to put a price on carbon pollution.
Pan-Canadian Approach to Pricing Carbon Pollution
The Pan-Canadian Approach to Pricing Carbon Pollution (the Pan-Canadian Approach), published in 2016, is one of the four main pillars of the Pan-Canadian Framework on Clean Growth and Climate Change (PCF). Building on the actions in the PCF, the 2030 Emissions Reduction Plan (ERP) outlines how Canada will meet its enhanced Paris Agreement target. The ERP, published in 2022, is the first plan issued under the Canadian Net-Zero Emissions Accountability Act.
The Pan-Canadian Approach sets out minimum national stringency standards known as the federal benchmark. 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 regularly. The goal of the federal benchmark is to make sure that all carbon pollution pricing systems across Canada are comparable in terms of stringency and effectiveness.
Provinces and territories may implement carbon pricing systems that make sense for their circumstances, either explicit price-based systems or cap-and-trade systems, as long as these systems meet or exceed the stringency criteria of the federal benchmark. The federal carbon pollution pricing backstop system (the federal backstop) applies in provinces and territories that do not have carbon pricing systems that meet the federal benchmark (called “backstop jurisdictions”). The federal backstop contains two parts: a regulatory charge on fossil fuels (the fuel charge), and a regulatory trading system for industrial facilities in sectors at significant risk of competitiveness impacts and carbon leakage resulting from carbon pricing, known as the OBPS.
For 2019, 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. The assessment process considered the stringency of provincial and territorial carbon pricing systems and evaluated how these systems aligned with the federal benchmark. After the assessment of each provincial and territorial system, the federal government implemented the federal backstop system, in whole or in part, starting in 2019, in any province or territory that requested it or that did not have a carbon pricing system in place in 2019 that aligned with the federal benchmark.
In 2022, British Columbia, Newfoundland and Labrador, New Brunswick, Nova Scotia, Quebec, and the Northwest Territories fully implement their systems. In 2022, the federal backstop system applies in full in Yukon, Nunavut, and Manitoba; and partially in Alberta (fuel charge), Saskatchewan (fuel charge and partial OBPS), Ontario (fuel charge), and Prince Edward Island (OBPS).
In 2021, the Government of Canada updated the federal benchmark for the 2023–2030 period, including the minimum national price on carbon pollution that will increase by $15 per tonne each year starting in 2023 through to 2030. A process is currently underway to assess provincial and territorial submissions against the updated federal benchmark criteria for this period.footnote 2
Federal carbon pricing backstop system and the Output-Based Pricing System
The Act, which received royal assent on June 21, 2018, provides the legal framework and enabling authorities for the two parts of the federal backstop system. Part 1 of the Act establishes the federal 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 Canada Revenue Agency (CRA) administers the fuel charge. Part 2 of the Act provides the legal framework and authorities to establish the OBPS that is administered by the Department under the Output-Based Pricing System Regulations (the OBPS Regulations). The OBPS applies in the jurisdictions listed in Part 2 of Schedule 1 to the Act and covers facilities carrying out certain industrial activities in these backstop jurisdictions that emit 50 kilotonnes (kt) or more of CO2e per year. In addition, facilities in backstop jurisdictions that emit or, in the case of new, retrofitted or expanded facilities, are projected to emit a minimum of 10 kt of CO2e per year, and that either undertake an industrial activity identified by the OBPS Regulations or operate in an industrial sector considered to be at significant risk of competitiveness impacts and carbon leakage resulting from carbon pricing,footnote 3 may voluntarily apply to become participants in the OBPS.
Facilities subject to the OBPS (covered facilities) must provide compensation for GHG emissions that exceed their respective facility emissions limit. They have three 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. Second, a covered facility may use compliance units, each representing one tonne of CO2e, which include (i) surplus credits that have been issued by the Minister to that covered facility or that have been acquired through trading with other covered facilities; (ii) eligible provincial or territorial offset credits formally recognized by the Minister under the OBPS Regulations as compliance units; and (iii) offset credits issued by the Minister under the Canadian Greenhouse Gas Offset Credit System Regulations (the Offset Regulations). Third, covered facilities may use a combination of excess emissions charge payments and compliance units to provide compensation. However, starting with the 2022 compliance period, a minimum of 25% of each facility’s compensation obligation must be provided through payment of the excess emissions charge. When the GHG emissions of a covered facility are under its emissions limit, the Minister will issue surplus credits to the covered facility that it can either sell or use to meet a future compensation obligation.
Amendments to Schedule 3
Each GHG has a unique atmospheric lifetime and heat-trapping potential. GWPs allow for the conversion of different GHGs to a common GHG emission metric of CO2e. Informed by the IPCC, GWPs are based on the ability of each GHG to trap heat in the atmosphere compared to carbon dioxide (CO2) over a specified time horizon.
The GHGs and GWPs currently listed in Schedule 3 to the Act are the same as those that have been used for reporting in the Department’s NIR. As a signatory to the UNFCCC and Party to the Paris Agreement, Canada has an obligation to report GHG emissions in its NIR using the GWP values agreed to by the Parties to the Paris Agreement at the UNFCCC Conference of the Parties. Aligning the NIR and Schedule 3 to the Act is important to ensure accurate pricing of GHG emissions and crediting of GHG emission reductions.
The objectives of the Order Amending Schedule 4 to the Greenhouse Gas Pollution Pricing Act (the Amendments to Schedule 4) and the Order Amending Schedule 3 to the Greenhouse Gas Pollution Pricing Act (the Amendments to Schedule 3) are described below.
Amendments to Schedule 4
The objective of the Amendments to Schedule 4 is to strengthen the incentive for covered facilities to take action to reduce GHG emissions per unit of output, contributing to Canada’s 2030 and 2050 emissions reduction targets. They will do so by aligning the excess emissions charge with the updated carbon price trajectory under the Pan-Canadian Approach, which serves as the basis for the minimum national carbon pollution price for explicit price-based systems required by the updated federal benchmark, and for the federal fuel charge.
Amendments to Schedule 3
The objective of the Amendments to Schedule 3 is to ensure that GHG emissions and GHG emission reductions quantified under Part 2 of the Act are estimated using up-to-date scientific knowledge, in line with Canada’s UNFCCC obligations for GHG reporting, and with Canada’s official GHG inventory, the NIR.
Amendments to Schedule 4
The Amendments to Schedule 4 update the excess emissions charge for calendar years 2023 to 2030. The excess emissions charge is increased to $65 per tonne of CO2e in 2023 and increases by $15 per calendar year until 2030, resulting in an excess emissions charge of $170 per tonne of CO2e for 2030 and beyond.
Amendments to Schedule 3
The Amendments to Schedule 3 replace the GWP values from the IPCC’s Fourth Assessment Report (AR4) (PDF) with those from the IPCC’s Fifth Assessment Report (AR5), for the GHGs listed in Schedule 3. CO2 will maintain its GWP value of 1, as it serves as the reference gas. The Amendments to Schedule 3 also clarify the names of perfluorocarbons in Schedule 3 by adding their acronyms, in addition to their molecular formulas, as is currently the case for hydrofluorocarbons (HFCs).
Amendments to Schedule 4
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. In early 2021, Canada conducted bilateral engagement with provincial and territorial governments and Indigenous organizations on the proposed carbon price trajectory for the 2023–2030 period, including the proposed trajectory for the excess emissions charge. Provinces and territories were given an opportunity to provide feedback along with detailed modelling of the potential economic impacts of the increase to the carbon price trajectory. After this engagement, the Government of Canada confirmed, on July 12, 2021, that the minimum national carbon pollution price under the Pan-Canadian Approach will increase by $15 per tonne of CO2e each year starting in 2023 through to 2030. The Government of Canada also confirmed in August 2021 the update to the federal benchmark for the 2023–2030 period.footnote 4
The Amendments to Schedule 4 are exempt from prepublication in the Canada Gazette, Part I. The Government of Canada has already determined and announced the carbon price trajectory following provincial and territorial consultation, as discussed above. As a result, these amendments are being published in the Canada Gazette, Part II, with no additional consultation.
Amendments to Schedule 3
No consultation has been conducted on these amendments. The changes to the GWP values, as detailed in the AR5, are already publicly available, having been agreed upon by the IPCC. The process to update the GWP values for AR5 included consultations with the international scientific community assessing the science related to climate change, and the updated values represent the consensus reached among that community.
The Amendments to Schedule 3 are exempt from prepublication in the Canada Gazette, Part I. They are linked to an international obligation for reporting of GHG emissions under the UNFCCC. These changes also support and enhance alignment between the requirements related to the reporting of GHG emissions under the Part 2 of the Act and the corresponding requirements under the Canadian Environmental Protection Act, 1999 for the NIR.
Modern treaty obligations and Indigenous engagement and consultation
An assessment examined the geographical scope and subject matter of the amendments in relation to modern treaties in effect, and did not identify, at this time, potential modern treaty implications. The amendments respect the Government of Canada’s obligations in relation to rights protected by section 35 of the Constitution Act, 1982 and modern treaties, and international human rights obligations. The Government of Canada continues to work with Indigenous organizations on the federal approaches to the pricing of carbon pollution and the return of proceeds so they consider the unique circumstances and priorities of Indigenous peoples.
Amendments to Schedule 4
The Amendments to Schedule 4 are needed to fully implement Canada’s decision to update the carbon price trajectory under the Pan-Canadian Approach that applies over the 2023–2030 period. If these amendments were not implemented, the excess emissions charge would remain at the 2022 level of $50 per tonne of CO2e and would not be aligned with the updated federal benchmark and the new carbon price trajectory for the federal fuel charge.
Compared to potential alternatives, such as technology-based regulations or subsidizing investment in certain clean technologies, there is a broad consensus among economists and experts that carbon pricing is one of the most efficient ways to lower GHG emissions and stimulate investments in clean innovation. Pricing carbon pollution from facilities in sectors at significant risk of competitiveness impacts and carbon leakage, through the federal OBPS, provides economic incentives to industrial emitters to reduce their emissions while mitigating cost impacts resulting from carbon pricing and offering compliance flexibility. Emitters can choose to make investments in technology or operational changes to lower their GHG emissions, to purchase eligible compliance units from facilities or projects that reduce emissions, or to continue to emit the same quantity of GHGs and provide compensation for excess emissions, depending on which option is most cost-effective in their circumstances.
Amendments to Schedule 3
As a signatory to the UNFCCC and as a Party to the Paris Agreement, the Government of Canada has an international reporting obligation to update the GWP values starting with the 2024 edition of its NIR, which covers the years 1990 to 2022, in accordance with UNFCCC Decision 18/CMA.1.footnote 1 This decision refers to the GWP values identified in the AR5 for a 100-year period.
The Amendments to Schedule 3 are needed to reflect up-to-date scientific knowledge on GWPs and to be consistent with the Department’s reporting in the NIR to the UNFCCC for the 2022 and future reporting years. Without these amendments, the regulations under Part 2 of the Act (i.e. the OBPS Regulations and the Offset Regulations) would continue to apply the GWP values from the AR4 (PDF) to the GHGs listed in Schedule 3, and would be inconsistent with Canada’s future reporting obligations under the UNFCCC.
The Act allows the Governor in Council to make an order to amend Schedule 3. The Governor in Council may take into account any factors that it considers appropriate, including any changes to the reporting requirements under the UNFCCC. The Amendments to Schedule 3 are linked to an international obligation under the UNFCCC for the reporting of GHG emissions and GHG emission reductions. Moreover, under the OBPS Regulations and the Offset Regulations, it is important to maintain consistency in terms of the quantification of GHG emissions and GHG emission reductions in order to maintain the integrity of the emissions trading market.
Benefits and costs
Amendments to Schedule 4
The new carbon price trajectory for the excess emissions charge is strongly interconnected with the proposed Regulations Amending the Output-Based Pricing System Regulations and the Environmental Violations Administrative Monetary Penalties Regulations (the proposed Amendments to the OBPS Regulations) that are being developed concurrently by the Department. These amendments would include the implementation of annual tightening rates (annual increases in stringency) applied to the output-based standards (OBSs) for activities undertaken by covered facilities in the federal OBPS. The combined policy intent and objective of the Amendments to Schedule 4 and the proposed Amendments to the OBPS Regulations is to maintain a price on carbon pollution that creates an incentive for covered facilities to reduce their emissions per unit of output, while mitigating risks of competitiveness impacts and carbon leakage. Achieving this overarching goal is contingent on both policies moving forward. As a result of this interconnectedness, the regulatory impact analysis for the Amendments to Schedule 4, including the analytical framework and formal modelling and analysis, is presented in the Regulatory Impact Analysis Statement (RIAS) accompanying the proposed Amendments to the OBPS Regulations, which will be published in their entirety in the Canada Gazette, Part I.
The RIAS for the proposed Amendments to the OBPS Regulations includes a baseline scenario in which both the Amendments to Schedule 4 and the proposed Amendments to the OBPS Regulations (the set of amendments) are not made by the Governor in Council. The costs and benefits summarized here are attributable to the implementation of the set of amendments. The results are based on the scope of application at the time of this publication, with the federal OBPS currently applying in 2022 in Yukon, Nunavut, Manitoba and Prince Edward Island, and partially in Saskatchewan. As noted above, a process is currently underway to assess provincial and territorial submissions against the updated federal benchmark criteria for the 2023 to 2030 period.footnote 2
Between 2023 and 2030, there are cumulative GHG emission reductions of 5.8 million tonnes (megatonnes) of CO2e attributable to the set of amendments, which are projected to result in decreases in Canadian household welfare that could range between $513 million and $855 million, with an average estimate of $684 million. These GHG emission reductions are achieved at an estimated societal cost between $89 and $149 per tonne of CO2e reduced, with an average estimate of $119 per tonne of CO2e. To evaluate the results, a break-even analysis was conducted, comparing the societal cost per tonne of the set of amendments to the Department’s value of the social cost of carbon (SCC) published in 2016, and to more recently published estimates of the SCC value found in the academic literature of approximately $52 to $443 per tonne of CO2. These SCC values represent the benefits of GHG emission reductions, as measured by the avoided cost of damages related to climate change. Given that there is a range of updated estimates of the SCC that mostly exceed the estimated societal cost per tonne resulting from the set of amendments, the Department concludes it is likely that the monetized benefits of the set of amendments would exceed their costs over the 2023–2030 period.
In the event that the Amendments to Schedule 4 were not approved by the Governor in Council, the excess emissions charge would remain at $50 per tonne of CO2e. The federal OBPS would not be aligned with the updated federal benchmark. Output-based pricing systems for industry in Canada, including the federal system, must be designed to maintain a marginal price signal across all covered emissions equivalent to the minimum national price on carbon pollution. The marginal price signal reflects the market price of compliance units, including surplus credits that are generated by facilities emitting less than their emissions limit. Without these amendments, there would be no incentive for covered facilities to pursue emissions reduction opportunities that cost more than $50 per tonne. This is because covered facilities emitting more than their respective emissions limit could always choose to provide compensation to the Government of Canada for their excess emissions in the form of excess emissions charge payments at the rate of $50 per tonne of CO2e. Therefore, it is expected that lower levels of GHG emission reductions would be incentivized and ultimately achieved in this case, relative to the case in which the Amendments to Schedule 4 and the proposed Amendments to the OBPS Regulations are implemented concurrently.
Amendments to Schedule 3
The Amendments to Schedule 3 are necessary to enable the use of the GWP values from the AR5 under Part 2 of the Act for the GHGs listed in Schedule 3. Applying a common metric, by means of GWP values, allows for the conversion of the quantity of each gas into CO2e and for quantities of gases to be summed together in terms of CO2e. The amendments, which are shown in Table 1 below, reflect up-to-date scientific knowledge on the GWPs of GHGs.
|Item||Gas (molecular formula in parentheses)||Global warming potential from AR5 (new)||Global warming potential from AR4 (old)|
|1||Carbon dioxide (CO2)||1||1|
|3||Nitrous oxide (N2O)||265||298|
|4||Sulfur hexafluoride (SF6)||23 500||22 800|
|5||Nitrogen trifluoride (NF3)||16 100||17 200|
|6||HFC-23 (CHF3)||12 400||14 800|
|9||HFC-43-10mee (CF3CHFCHFCF2CF3)||1 650||1 640|
|10||HFC-125 (CHF2CF3)||3 170||3 500|
|11||HFC-134 (CHF2CHF2)||1 120||1 100|
|12||HFC-134a (CH2FCF3)||1 300||1 430|
|14||HFC-143a (CH3CF3)||4 800||4 470|
|18||HFC-227ea (CF3CHFCF3)||3 350||3 220|
|19||HFC-236cb (CH2FCF2CF3)||1 210||1 340|
|20||HFC-236ea (CHF2CHFCF3)||1 330||1 370|
|21||HFC-236fa (CF3CH2CF3)||8 060||9 810|
|23||HFC-245fa (CHF2CH2CF3)||858||1 030|
|25||PFC-14; Perfluoromethane (CF4)||6 630||7 390|
|26||PFC-116; Perfluoroethane (C2F6)||11 100||12 200|
|27||PFC-218; Perfluoropropane (C3F8)||8 900||8 830|
|28||PFC-31-10; Perfluorobutane (C4F10)||9 200||8 860|
|29||PFC-318; Perfluorocyclobutane (c-C4F8)||9 540||10 300|
|30||PFC-41-12; Perfluoropentane (n-C5F12)||8 550||9 160|
|31||PFC-51-14; Perfluorohexane (n-C6F14)||7 910||9 300|
|32||PFC-91-18; Perfluorodecalin (C10F18)||7 190||7 500|
|33||PFC-c216; Perfluorocyclopropane (c-C3F6)||9 200||17 340|
The changes to GWP values that are expected to have the most impact are those to methane (a higher GWP) and nitrous oxide (a lower GWP). Not including CO2, industrial facilities typically emit methane and nitrous oxide more frequently and in larger quantities relative to other GHGs.
The updating of GWP values in Schedule 3 will have implications on the quantification of GHG emissions for covered facilities under the OBPS Regulations. First, the OBSs have been calculated using historical GHG emissions per unit of output from facilities using the previous GWP values. Therefore, the Department proposes to make consequential amendments, where the changes in GWPs would have a material impact to the OBSs for industrial activities set out in Schedule 1 to the OBPS Regulations when taking into account the revised GWP values. Moreover, the updating of GWP values could lead to changes in the quantification of a covered facility’s total GHG emissions. It could also lead to changes in the determination of a covered facility’s emissions limit, which is expressed in tonnes of CO2e and equal to the sum of the facility’s production for each specified industrial activity multiplied by the applicable OBS.
In addition, the updating of GWPs in Schedule 3 will have implications on the quantification of GHG reductions for proponents under the Offset Regulations, also made under the Act. These Regulations establish a federal offset credit system for projects to which a federal offset protocol applies and that reduce GHGs set out in Schedule 3, either by preventing GHGs from being emitted or by removing GHGs from the atmosphere. The federal offset credit system further extends the carbon pollution price signal and incentivizes activities that lead to GHG emission reductions that are not required under existing law or covered by carbon pollution pricing systems. The Offset Regulations allow the Minister to issue offset credits to proponents for GHG reductions from projects meeting eligibility criteria and that are implemented in accordance with the regulations and applicable protocol. An offset credit represents one tonne of CO2e. GWPs identified in Schedule 3 are used to quantify the GHG reductions from projects operating in the federal offset system.
The Amendments to Schedule 3 reflect up-to-date scientific knowledge on GWPs; therefore, they are not anticipated to have significant impacts for the OBPS system as a whole. However, in some cases, these amendments could have an impact on the quantification of GHG emissions and GHG emission reductions, which may have an impact on the number of credits that would have otherwise been issued to facilities or proponents, or the compensation obligation of covered facilities. These amendments are linked to an international obligation for the reporting of GHG emissions under the UNFCCC. To meet this commitment, the Department is required to use the updated GWP values for the reporting of GHGs in the NIR starting with the 2022 reporting year.
The Department administers a credit and tracking system used for the federal OBPS and the federal offset credit system that will have to be updated to reflect the Amendments to Schedule 4 and the Amendments to Schedule 3; however, administrative costs to the federal government as a result of these updates are expected to be negligible.
Small business lens
The federal OBPS is designed to allow non-mandatory facilities in backstop jurisdictions that may be small businesses to voluntarily apply to participate in the OBPS. Key considerations in determining whether a facility should be permitted to voluntarily participate in the OBPS (“voluntary participant”) include whether the facility is carrying out an activity listed in Schedule 1 to the OBPS Regulations, or is in a sector at significant risk of carbon leakage and competitiveness impacts from carbon pricing, and emits or, in the case of a new, retrofitted or expanded facility, is projected to emit a minimum of 10 kt of CO2e per year.footnote 5
The Amendments to Schedule 4 and the Amendments to Schedule 3 are not anticipated to lead to impacts for small businesses. No facilities in existing backstop jurisdictions that must participate in the OBPS (“mandatory participants”) are considered small businesses, and no voluntary participants are considered small businesses, based on information available for the 2022 compliance period. As the incentive to participate in the OBPS will increase with the new carbon price trajectory, there is a greater chance over the 2023–2030 period that the potential benefits of participating in the OBPS will outweigh the associated costs for a facility subject to the federal fuel charge or a provincial or territorial carbon tax or charge. However, since the OBPS has been in place for a number of years, and in general facilities have an incentive to voluntarily participate, most eligible facilities have likely already applied to participate in the OBPS. Therefore, given the current scope of application of the OBPS, no new entrants, including small businesses, are anticipated as a result of these amendments.
The one-for-one rule does not apply in this case. The Amendments to Schedule 4 introduce new values for the excess emissions charge over the 2023–2030 period, but these values will not change the way in which covered facilities calculate their excess emissions charge payments. Similarly, the Amendments to Schedule 3 introduce new GWP values; however, they will not change the way in which covered facilities and proponents calculate their GHG emissions and GHG emission reductions. Therefore, these amendments are not expected to lead to administrative burden costs to businesses. Furthermore, these amendments make no changes in terms of federal regulatory titles.
Regulatory cooperation and alignment
Canada is working in partnership with the international community to implement the Paris Agreement, in support of the goal of limiting the rise in the global average temperature to less than 2 °C above pre-industrial levels and pursuing efforts to limit the temperature increase to 1.5 °C. As part of its commitments made under the Paris Agreement, Canada had previously pledged to reduce national GHG emissions by 30% below 2005 levels by 2030. On July 12, 2021, the Minister formally submitted Canada’s enhanced NDC to the United Nations, committing Canada to reduce national GHG emissions by 40% to 45% below 2005 levels by 2030. To meet these commitments, the federal government is implementing a series of measures, including continuing to put a price on carbon pollution.
The Amendments to Schedule 4 will increase the incentive for industrial facilities subject to the OBPS to reduce their GHG emissions per unit of output. These amendments are also required for the OBPS to contribute — at the level outlined in Canada’s 2030 ERP — to the overall emission reductions needed to reach Canada’s 2030 GHG emissions target, and to further incentivize industrial innovation to help meet Canada’s target of net-zero GHG emissions by 2050. The Amendments to Schedule 3 will ensure that GHG emissions and GHG emission reductions quantified under Part 2 of the Act are calculated using up-to-date scientific knowledge on GWPs that is consistent with quantification methods used for Canada’s official GHG inventory, the NIR, and with Canada’s international reporting obligations for GHGs under the UNFCCC.
The Act enables the exchange of credits with other carbon markets, whether domestic or international. Canada, along with other Parties to the UNFCCC, is engaged in discussions concerning credits from other countries, officially referred to as internationally transferred mitigation outcomes, and non-market approaches to advance development of the guidance to implement the Paris Agreement. Once developed, this guidance would facilitate the exchange of credits and linkages with carbon pricing systems outside of Canada.
Strategic environmental assessment
Both amendments will contribute to the objectives of the Pan-Canadian Approach. The Department conducted strategic environmental assessments (SEAs) in 2017, 2018, 2019, and 2021 for elements of its carbon pollution pricing policies, including the Pan-Canadian Approach, in accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals (PDF).
Based upon these SEAs, both amendments will contribute to efforts to meet Canada’s new, more ambitious 2030 GHG emissions reduction target and to achieve net-zero GHG emissions by 2050 by supporting the implementation of the federal OBPS and the federal offset credit system, two key components of Canada’s carbon pollution pricing approach, for the years 2023 to 2030 and beyond. The SEA conducted in 2021 on the federal carbon pricing system noted that this system is expected to result in important, positive environmental effects, such as reductions in GHG emissions and the emissions intensity of energy production and use, by promoting the adoption of clean technology and the transition to a low-carbon economy. Both amendments also align with Canada’s 2022–2026 Federal Sustainable Development Strategy, particularly with the following Sustainable Development Goals (SDGs): Good health and well-being (SDG 3); Affordable and clean energy (SDG 7); Industry, innovation and infrastructure (SDG 9); Sustainable cities and communities (SDG 11); Responsible production and consumption (SDG 12); Climate action (SDG 13); and Partnerships for the goals (SDG 17).
Gender-based analysis plus
Climate change has far-reaching health, economic and environmental impacts on all Canadians, but these effects are expected to be felt most acutely by those segments of the population that are already vulnerable owing to geography, gender, age, Indigenous identity, minority status or disability. Addressing climate change could have a positive impact on many quality-of-life domains. Vulnerable groups who are disproportionately affected by climate change, including northern and coastal regions and communities, Indigenous Peoples, individuals with disabilities or existing health conditions, infants and children, the elderly, women, and low-income communities, may feel these positive impacts.
As previously described in the “Regulatory analysis” section, there is a strong connection between the new carbon price trajectory for the excess emissions charge introduced by the Amendments to Schedule 4 and the implementation of annual increases in the stringencies applied to the OBSs for covered facilities in the federal OBPS. Given this relationship, the Department has considered the cumulative gender-based analysis plus (GBA+) impacts related to the Amendments to Schedule 4 and the proposed Amendments to the OBPS Regulations, which are being developed concurrently by the Department, in the RIAS accompanying the proposed Amendments to the OBPS Regulations.
The GBA+ did not identify significant impacts related to the Amendments to Schedule 3, given that these changes reflect up-to-date scientific knowledge.
Implementation, compliance and enforcement, and service standards
The Amendments to Schedule 4 will come into force on the day on which they are registered. No operational changes are necessary for the implementation of these amendments. As with previous compliance periods (calendar years) in the federal OBPS, persons responsible for covered facilities must provide compensation for excess emissions in respect of a given compliance period. This compensation includes any excess emissions charge payments that must be made at the applicable rate, or charge per tonne of CO2e of excess emissions, as prescribed in Schedule 4 to the Act.
The Amendments to Schedule 3 updating the GWPs associated with GHGs come into force on January 1, 2023. Persons responsible for facilities subject to the federal OBPS will use the updated GWP values in their annual reports for the 2023 and future compliance periods under the OBPS Regulations. Proponents in the federal offset credit system will use the updated GWPs starting with their first respective reporting period under the Offset Regulations.
The Department will communicate these amendments through email correspondence with regulated parties and will update the Government of Canada’s Output-Based Pricing System web page and Canada’s Greenhouse Gas Offset Credit System web page to provide information on the requirements of these amendments.
Compliance and enforcement
Departmental officials will undertake actions to implement and enforce the Amendments to Schedule 4 and the Amendments to Schedule 3, as necessary, in accordance with the Department’s compliance and enforcement policies.footnote 6 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 will choose the appropriate enforcement action based on the policies.
Industrial Greenhouse Gas Emissions Management Division
Carbon Pricing Bureau
Environmental Protection Branch
Department of the Environment
351 Saint-Joseph Boulevard
Regulatory Analysis and Valuation Division
Economic Analysis Directorate
Strategic Policy Branch
Department of the Environment
200 Sacré-Cœur Boulevard