Alberta to Restrict Compliance Options for Large Industrial Emitters: Smart Policy or Government Windfall?
On March 3, 2017, Alberta Environment and Parks (AEP) released a policy decision (Decision) affecting industrial facilities (Facilities) that emit more than 100,000 tonnes of greenhouse gas (GHG) per year.
The Decision follows the Alberta government’s Climate Leadership Plan (Plan), which was released in November 2015 (see our November 2015 Blakes Bulletin: Just Like Any Good Recipe, Alberta’s Climate Leadership Plan Has a Little Bit of Everything). The Plan addresses a variety of matters, the most newsworthy of which have been the transition from, and elimination of, GHG emissions from coal-fired power plants by 2030, and a broad-based carbon levy. It also outlines the transition, as of January 1, 2018, from the current Facility-specific emissions reductions under the Specified Gas Emitters Regulation (SGER), in which a Facility must make annual reductions in GHG emissions in comparison to its historical baseline emissions, to one that is predicated upon a product-specific or output-based emissions reductions regime pursuant to a proposed carbon-competitiveness regulation (CCR).
AEP’s Decision provides additional detail regarding the transition from the SGER to the CCR. The Decision will severely restrict Facilities’ ability to use emissions offsets or emissions performance credits for GHG emissions compliance purposes. More importantly, the Decision may disincentivize the development and construction of emissions offset projects.
EXISTING LARGE INDUSTRIAL EMITTER FACILITY REGIME
In order to understand the Decision’s significance, it is necessary to first understand the existing GHG regime. Under the SGER, Facilities are required to become more efficient over time as compared to their respective baseline emissions intensities. In 2015, the emissions intensity efficiency requirement for a Facility vis-à-vis its baseline was 12 per cent. That requirement increased to 15 per cent in 2016 and 20 per cent in 2017. The practical impact of the increased emissions intensity efficiency requirements is that in order to remain in compliance with the SGER, a Facility must only emit 80 per cent of its baseline GHG emissions for the same unit of production (i.e., must become 20 per cent more emissions intensity efficient). Because each Facility must become more efficient in comparison to a baseline that is unique to it, two Facilities in the same sector, producing similar or identical products, often have different emissions reduction obligations.
If a Facility is unable to meet its emissions intensity reduction requirements, it can otherwise meet its emissions reduction obligations under the SGER by undertaking one or more of the following actions:
- Purchase and use emission performance credits (EPCs)
- Purchase and use Alberta-based carbon offset credits (Offsets)
- Contribute to Alberta’s Climate Change and Emissions Management Fund (Fund)
EPCs are generated by Facilities that have exceeded their SGER emissions intensity reduction requirements by implementing operational or energy efficiency changes. For example, if a Facility achieved an efficiency reduction of 25 per cent in 2017 as compared to its baseline, the difference between the 25 per cent and the 20 per cent required reduction under the SGER can be calculated and sold as EPCs.
Similarly, Offsets are generated by facilities that are not otherwise subject to the SGER and produce a product via a process that emits less GHGs than the average production process for that same product. For example, the production of electricity by means of renewable energy involves the emissions of less GHGs per kilowatt hour of electrical production than the provincial average. The difference between the two numbers can be calculated and sold as Offsets.
The final SGER compliance option involves the payment of a certain amount per tonne of GHG emissions into the Fund. Alongside the Plan, the AEP issued a ministerial order that increased the cost of contributing to the Fund from C$15/tonne of GHG emissions in 2015 to C$20/tonne in 2016 and C$30/tonne as of January 1, 2017.
The practical effect of the increased efficiency requirements coupled with the increased cost of Fund contributions has been a greater focus by Facilities on achieving compliance through the use of EPCs and Offsets. That stated, the increased efficiency reduction requirements that all Facilities are subject to has resulted in less EPCs being available, such that Offsets are often the only practical viable alternative to the Fund. Indeed, many companies pride themselves on the fact that they have fully “offset” all of their GHG emissions. There are no restrictions on the purchase or use of EPCs or Offsets under the SGER.
PROPOSED CCR REGIME
Under the CCR, a Facility’s emission intensity reductions will no longer be compared to its Facility-specific baseline. Rather, GHG emissions intensity at a Facility will be compared to GHG emissions intensities from other similar Facilities. Effectively, any Facility that emits more GHGs than the “best in class” Facilities for a particular product sector will be required to become more efficient. Accordingly, two Facilities in the same sector will be subject to the same emissions reduction benchmark and will have similar emissions reduction obligations regardless of their original baseline emissions. The expectation is that inefficient Facilities will either leave the market or shut down because their compliance costs will become too expensive, or dramatically retrofit their operations and become more efficient.
Under the CCR, each Facility will be allocated a certain number of emissions credits free of charge. These “free” emissions will be determined based on a product-specific emissions benchmark, which is expected to become more stringent each year. Benchmarks will be set relative to high-performing industry peers or best-in-class operators, who produce the same or similar products. After undertaking operational improvements, if a Facility emits less than the amount of performance credits it is allocated, and is therefore more efficient than the best-in-class operators, the difference becomes a CCR emissions performance credit (CCR EPC). Conversely, if a Facility emits more than its allocated credits, and is therefore less efficient than the best-in-class operators, it can otherwise meet its emissions reduction obligations by undertaking, in a manner similar to what is currently undertaken pursuant to the SGER, one or more of the following actions:
- Purchase and use CCR EPCs
- Purchase and use Offsets
- Contribute to the Fund
At least until March 2, 2017, there was no indication that any restrictions would be placed on a Facility’s ability to purchase and use either CCR EPCs or Offsets to meet its compliance obligations. That all changed with the issuance of the Decision.
Pursuant to the Decision, the Alberta government confirmed that all EPCs and Offsets created under the SGER will remain valid under the CCR. However, the Decision also confirmed that any Facility that emits more GHGs than its allocated credits will be limited in its use of CCR EPCs and Offsets to only 30 per cent of its compliance obligations (Compliance Restriction).
Alberta issued the Decision on March 3, 2017. The timing is surprising in light of Alberta’s ongoing engagement with industry, academia and environmental groups regarding options for the development, transition and implementation of the CCR, pursuant to which the Alberta government agreed to receive comments from stakeholders until March 31, 2017.
No justification was provided for the Compliance Restriction. Restricting the use of EPCs and Offsets to 30 per cent of a Facility’s compliance obligations will disrupt existing contractual arrangements between Facilities and the providers of EPCs or Offsets. For example, any Facility that has proactively arranged to fully meet its 2018 compliance obligations through the purchase of EPCs or Offsets may now have to sell any amounts greater than 30 per cent. Limiting the use of Offsets to 30 per cent of a Facility’s compliance obligation will also preclude a Facility from being able to assert that it has fully “offset” all of its GHG emissions. Indeed, other than potentially incentivizing a resale market for EPCs and Offsets, the Compliance Restriction appears to be of little benefit to industry, since the third compliance option of contributing to the Fund remains.
Alberta currently has approximately 35 different approved Offset project protocols. If the Decision had promoted rather than restricted the use of Offsets and restricted contributions to the Fund, Alberta could have sent a strong supportive message to the Offset project sector. Instead, the Decision serves as a missed opportunity and a dis-incentive for the construction of future Offset projects. Of course, with no analysis provided to justify the limitations on the use of Offsets or the impact that a potential 70 per cent restriction on the demand for Offsets will have on the development and construction of future Offset projects, the quantum of lost opportunity costs may never be known.
Finally, by not placing any restriction on Fund contributions, the Decision ensures that every non-compliant Facility will inevitably contribute to the Fund. Ironically, the money from the Fund is used to invest in a variety of projects, including Offsets. As such, the Decision sends an inconsistent message regarding the benefits and value of Offsets.
With no obvious benefit associated with the Decision other than potentially more money being added to the government of Alberta coffers, one is left to wonder if the Decision is merely meant to create a government windfall.
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