Canada: A Hard Push To The Left: Alberta's Proposed Carbon Competitiveness Regulation

Alberta's Climate Change Advisory Panel has provided a Climate Leadership Report to the Minister recommending, among other things, that Alberta introduce a complicated Carbon Competitiveness Regulation that will cover an estimated 78 to 90% of the province's carbon emissions with carbon pricing at $30 per tonne of carbon dioxide equivalent (tCO2e). Changes to regulation of the oil and gas, oilsands, refining, electrical generation, transportation and heating fuels sectors are at the heart of the recommendations.

Although a draft of the proposed Carbon Competitiveness Regulation has not yet been released, the Climate Leadership Report to the Minister (Report) recommends, among other things, rewarding the top quartile of large emitters and penalizing the remaining 75%, accelerating the phase out of coal power, subsidizing renewable power and reducing methane emissions.

The recommendations also largely address the elephant in the room under existing policy, namely that consumers will be required for the first time to pay a carbon levy of $30 tCO2e for the gasoline and diesel burned in their cars and for the natural gas that heats their homes and businesses. Part of the money raised will be redistributed to the poor.

The province has largely accepted the recommendations and added a legislated cap on absolute emissions from the oilsands of 100 mega tonnes (MT) per year.

The Alberta Climate Change Panel (Panel) was tasked with advising the Government of Alberta to inform the development of a comprehensive provincial climate change strategy.

WHERE WE WERE

Alberta's existing carbon pricing system only covers large emitters, which make up nearly half of Alberta's total emissions. Specifically, the Specified Gas Emitters Regulation (SGER) is a hybrid carbon pricing system based on rewarding emissions intensity reductions. It has elements similar to both a carbon tax and a cap-and-trade system.

The SGER currently requires facilities that emit 100,000 tonnes of CO2e or more per year to reduce their emissions intensity by 12% below a historical baseline. This reduction requirement will increase under policy previously announced in June 2015 to 15% in 2016 and to 20% in 2017.

Facilities unable to meet their annual intensity target may comply by retiring emission performance credits (EPCs) purchased from other firms who have met and exceeded their emission reduction targets or which have been banked from previous years, purchasing emissions offsets, paying a carbon levy into a government-run technology fund, or by combining these three compliance mechanisms.

The price per tonne emitted above this baseline will increase under previously announced policy from $15 per tCO2e in 2015 to $20 in 2016 and to $30 in 2017.

WHERE WE ARE GOING

Carbon Pricing of Fuels

Central to the Panel's recommendations is creating a broad-based carbon price of $30 per tCO2e. Specifically, the proposed Carbon Competitiveness Regulation will require distributors of transportation and heating fuels to acquire and retire EPCs or offsets or make payments into a technology fund at a rate of $30 per tCO2e in recognition that emissions are created when their fuel products are combusted by their customers. On-site combustion of fuels in oil and gas operations, such as the use of fuel gas at a battery, will be subject to the same requirements as transportation and heating fuels starting January 1, 2023.

To give one a sense of this change, the Panel expects Albertans will pay an additional 7¢ per litre of gasoline and $1.68 per GJ for natural gas, comparable to current prices in BC. The Panel presented no evidence that increasing the price of fuels will dampen demand in Alberta or that actual emissions will fall due to the price increase. Emissions from flaring at oil and gas wells and facilities and emissions from landfills will also be required to acquire EPCs or offsets or to make technology fund payments at the same $30 tCO2e rate.

In June 2015 the province announced that the technology fund compliance option will rise to $30 tCO2e by 2018, and therefore $30 tCO2e will effectively be the market ceiling price for EPCs and offsets. Transportation and heating fuel distributors will undoubtedly collect these costs from their customers. The proposed treatment of emissions from transportation and heating fuels, with emission requirements imposed at the distribution level, is similar to the systems in Quebec and California and the system proposed for Ontario.

Carbon pricing for such fuels is to be phased in starting at $20 tCO2e in 2016 and 2017 and is to reach $30 tCO2e by 2018. The Panel also recommends that the pricing increase over time in real terms and has suggested annual increases equal to the rate of inflation plus 2% as long as Alberta's carbon price does not significantly exceed prices in comparable and competitive jurisdictions or exceed any future national carbon pricing standard.

Under the present SGER, annual payments to the technology fund averaged about $77 million over the last seven years. At a price of $30 tCO2e, the new expected revenue could exceed $3 billion per year by 2018 and $5 billion by 2030. The Panel proposes that $30 million be used to subsidize renewable energy and the balance used for energy-efficiency projects, municipal low-carbon initiatives such as public transit, new research and development and for general revenues. Rebates would also be provided to low-income consumers who spend a disproportionate share of their income on energy compared to wealthier Albertans.

Large Emitters

The Climate Change Advisory Panel has proposed that all facilities emitting more than 100,000 tCO2e per year will be allocated new emission permits in proportion to the facility's current or historical output. The emission permits will allow a facility to emit CO2 but on the basis that each permit is equivalent to the emissions intensity from the best 25% of emitters in that industry.

For instance, an oilsands plant that produces 150,000 barrels a day will be given permits allowing it to emit CO2 for up to what the best 25% of all the 250,000 barrel-a-day oilsands facilities emit. If the oilsands plant is not in the best 25% in terms of emissions, it will have more emissions than it will have permits. In such a situation, the facility will have to either reduce its actual emissions or acquire EPCs or Alberta-generated offsets or pay into a technology fund much like it presently does under the SGER.

The top-quartile facilities may have EPCs for sale, so this new program rewards the most efficient producers, but by definition 75% of the large emitters will face a new net compliance cost if they do not change their processes or relocate to other less regulated jurisdictions.

It is also proposed that over time the allocation of permits will be reduced 1 to 2% per year to reflect energy efficiency improvements.

Large final emitters will not be covered twice, meaning they will be able to exempt emissions from transportation and heating fuels for which a carbon price has already been applied at the point of distribution from the calculation of required EPCs or offsets or technology fund payments.

Finally, it is proposed that the Carbon Competiveness Regulation will allow facilities that emit less than 100,000 tCO2e/yr to opt into the large final emitter program if they find it more advantageous to do so than paying the $30 per-tonne cost for consuming fuel.

Coal Phase Out; Renewable Phase In

The recommendations include phasing out coal-fired power production in Alberta by 2030 and replacing at least 50 to 75% of the lost power capacity with renewables. The timing will be flexible and there will be consultation with the Alberta Electric System Operator to prevent unnecessary risks to the reliability of the grid.

Presently, federal coal regulations and Alberta air quality regulations are expected to lead to the shutdown of all but six coal-fired power plants in Alberta by 2030. The Panel recommends that an output-based allocation system be put in place for all power plants based on a good-as-best-gas standard.

This standard will require power plants, including coal power plants, to meet net emission performance standards equal to the emission performance of the best gas-fired plants. Those power plants that have emissions greater than the best gas-fired plants will have to meet these limits by the retirement of EPCs or offsets or payments to the technology fund.

These costs will erode the operating margins of coal plants and cause them to produce less throughout the year. If this, together with subsidizing renewables to make them competitive, air quality regulations and federal end-of-life performance standards, does not cause operators to close their coal-fired plants or convert them to gas, then the Panel recommends that any plants still operating in 2030 be closed by regulation even if it is before the end of their useful lives.

In addition to pursuing a regulated phase-out of coal power and replace the lost capacity, the Panel recommends a clean power call whereby the government will subsidize the renewables industry by making payments to renewable power projects to achieve an increase in renewable energy capacity in the province.

A clean power call is an open, competitive request for proposals from renewable power proponents for government financial support through the government acquiring renewable energy credits (RECs) from projects under long-term contracts. An annual procurement process would allow proponents to bid for such contracts with the government awarding contracts to the projects with the lowest levels of incremental support.

It is expected the subsidy will be in the order of $25 to $35 per megawatt initially, with no guarantee it will drop. To put this in context, the current price for power in the wholesale market as of November 24, 2015, is around $12 to $20 per MW. Projects supported through such REC purchases will not be eligible for incremental revenue from the sale of offset credits or the sale of RECs in other jurisdictions.

The Report predicts that by 2030 renewables will replace between 50 and 75% of the coal generation capacity lost and will increase the overall share of renewables in Alberta's generation mix to 30%. However, in addition to the subsidies taken from consumers at the gas pump, electricity prices due to the province's carbon plan could increase 20% by 2030.

Other than renewables, the balance of the power lost due to shutting down coal-fired generation will have to come from natural gas-fired power plants, which makes sense given Alberta's huge natural gas reserves and the fact that natural gas is the cleanest-burning fossil fuel. Given these attributes and the current shrinkage of Alberta's oil and gas industry, it is unfortunate that natural gas has not been given a larger role in Alberta's carbon plans.

A carbon price based on a good-as-best-gas standard is expected to have only a limited effect on new or existing gas plants. However, facilities that have higher heat rates or are otherwise not as efficient as the best gas plants will incur higher marginal costs.

Cogeneration

Presently, cogeneration is provided credits that approximate the emissions saved through enhanced efficiency, by comparing actual emissions from a facility with cogeneration with a calculated hypothetical level of emissions that would have occurred had heat and power been generated separately using natural gas. This will no longer be the case. The Panel recommends that facilities with cogeneration be treated the same as facilities without cogeneration. If the application of cogeneration leads to lower total emissions, then the facility obtains that benefit.

Methane Management

Methane emission reduction in the oil and gas industry is also a key to Alberta's new carbon plan. The Panel has made two recommendations in this regard. First, new design specifications would be put in place for facilities as well as standards for key equipment and operational best practices. Fugitive emission standards would also be included in the regulations and would require raising current standards for performance, monitoring, measurement and reporting.

Second, it is recommended that regulators, industry, independent experts and environmental groups collaborate to develop and oversee a multi-year plan for updating or retrofitting equipment in existing facilities before the end of the equipment's useful life. The plan's specifics have obviously not yet been worked out, but the work would be aimed at creating an offset trading system whereby operators who take early action can be rewarded.

The Panel recommends that at the end of five years, or longer if there is evidence of cost effectiveness, the government should mandate the replacement of such equipment at facilities that have not participated in the offset program before the end of the equipment's life. The alternative to such equipment replacement will be to prematurely shut in and abandon the well or facility.

Absolute Cap on Oilsands Emissions

The oilsands industry will be subject to the same proposed output-based allocations process as other large final emitters and as such oilsands industry compliance costs will double by 2018.

Curiously, the Climate Change Advisory Panel's recommendations did not suggest an absolute cap on emissions from the oilsands industry. However, the Alberta government has announced it will create a legislative cap on oilsands emissions of 100 MT per year. Presently, the oilsands sector emits about 70 MT per year.

The 100 MT cap is a significant change that will undoubtedly negatively affect future oilsands investment decisions. Given that some approved projects are not yet operating, it is not clear how tight to the 100 MT limit the oilsands sector will be in the future or how long it may take to reach the cap. It is also not clear what the penalty will be if the 100 MW cap is exceeded or if and how it will be distributed among oilsands operators.

No details on the analysis of how a 100 MT limit was decided upon have been released.

Norton Rose Fulbright Canada LLP

Norton Rose Fulbright is a global legal practice. We provide the world's pre-eminent corporations and financial institutions with a full business law service. We have more than 3800 lawyers based in over 50 cities across Europe, the United States, Canada, Latin America, Asia, Australia, Africa, the Middle East and Central Asia.

Recognized for our industry focus, we are strong across all the key industry sectors: financial institutions; energy; infrastructure, mining and commodities; transport; technology and innovation; and life sciences and healthcare.

Wherever we are, we operate in accordance with our global business principles of quality, unity and integrity. We aim to provide the highest possible standard of legal service in each of our offices and to maintain that level of quality at every point of contact.

Norton Rose Fulbright LLP, Norton Rose Fulbright Australia, Norton Rose Fulbright Canada LLP, Norton Rose Fulbright South Africa (incorporated as Deneys Reitz Inc) and Fulbright & Jaworski LLP, each of which is a separate legal entity, are members ('the Norton Rose Fulbright members') of Norton Rose Fulbright Verein, a Swiss Verein. Norton Rose Fulbright Verein helps coordinate the activities of the Norton Rose Fulbright members but does not itself provide legal services to clients.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions