Originally published in Blakes Bulletin on Energy - Oil & Gas, July 2007
As the first province to introduce legislation requiring large emitters to reduce their greenhouse gas (GHG) emissions, Alberta is moving swiftly to implement its new regulatory regime. Approved by the provincial legislature in April 2007, Alberta’s Specified Gas Emitters Regulation (the Regulation) will come into force on July 1, 2007, requiring large emitters of GHG gases in the province to meet new intensity-based reduction targets. For facilities established prior to 2000, this means that as of July 1, 2007, they must have achieved emission reductions of 12% off their baseline emissions intensity (which is based on their average emissions intensity from 2003-2005). While there is no grace period for established facilities to achieve this 12% reduction, there will a ramp-up period for new facilities established after 2000. For more information on Alberta’s new regulatory regime for GHG emissions, please see our March 2007 Blakes Bulletin on Energy – Oil & Gas, Regulatory Update: Alberta First to Introduce Legislation to Reduce Greenhouse Gases.
What Are "Emissions Intensity" And "Intensity Targets"?
Emissions intensity is the ratio of GHG emissions to a measure of economic output:
Typically, emissions intensity is expressed as emissions per dollar of gross domestic product in the context of an entire economy. However, emissions can also be measured against barrels of oil, per million cubic feet of natural gas, per tonne of coal, or per megawatt hour of electricity. GHG intensity targets are policies that specify emission reductions relative to productivity or economic output. Intensity targets may be contrasted with absolute targets, which specify reductions (in metric tonnes) relative to a historical baseline.
Does The Regulation Apply To Your Business?
The Regulation applies to all industrial facilities in Alberta that emitted 100,000 tonnes or greater of CO2 equivalent (defined under the Regulation as the 100 year time horizon global warming potential of a specified gas expressed in terms of carbon dioxide (CO2) equivalency as set out in the Regulation) in 2003 or in any years since. In particular, the Regulation stipulates that a 12% intensity reduction will be applied to that facility’s average 2003-2005 baseline emissions intensity for established facilities. To ensure the most accurate calculation of a facility’s baseline, Alberta Environment (AENV) has made the distinction between established facilities and new facilities. "Established facilities" are those that completed their first year of commercial operation before January 1, 2000 or have completed eight years of commercial operation. "New facilities" are those that completed their first year of operation on December 31, 2000 or a subsequent year and have completed less than eight years of commercial operation. The baseline emissions intensity for new facilities will be established based on their third year of operation. Once the new facility’s baseline is established, that facility will be required to reduce emissions starting the fourth year of commercial operation by 2% and then by 2% every year after until the 12% reduction target has been achieved.
Facilities which do not meet the 100,000 tonne threshold can still participate by reducing their GHG emissions intensity and reporting their emissions under the government’s Specified Gas Reporting Program. In addition, these facilities can participate by creating emissions offset projects. Reductions that are generated by an emission offset project can generate credits, which can then be sold to facilities subject to the Regulation.
Baseline Application Process
If it is determined that the Regulation applies to a particular facility, the appropriate baseline application form must be completed. Guidance on how to prepare a baseline application form is set out in AENV’s Technical Guidance Document for Baseline Emissions Intensity Applications, issued in May 2007 (the Guidance Document). The establishment of a baseline is a fundamental step in the regulatory process because without a proper baseline, the ability of any facility to make meaningful emission reductions will be tempered by inaccurate information.
Two different baseline application forms are available – one for established facilities and one for new facilities. The following documents must be submitted to AENV on or before December 31, 2007 (pursuant to an Order in Council dated July 17, 2007, the baseline submission deadline was adjusted from September 1, 2007 to December 31, 2007):
- completed Baseline Emissions Application form and supporting documentation;
- signed Statement of Certification form;
- signed Statement of Qualification form;
- signed Statement of Verification form; and
- a Confidentiality Request (if selected by the applicant).
Additional supporting documentation may be requested by AENV. Once the baseline application is submitted, AENV will inform the facility in writing whether the baseline emissions intensity for the facility has been accepted or whether the Director has prescribed either a facility baseline or an audit.
Reporting Of Specified Gases
The Regulation applies to any facility that releases 100kt or more of CO2 equivalent based on the sum of direct emissions of carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFC), perfluorocarbons (PFC) and sulphur hexafluoride (SF6). Each reporting facility is required to disaggregate and report emissions of CO2, CH4 and N2P by the following source categories:
- stationary fuel combustion
- industrial process
- other fugitive emissions
- waste and wastewater
- on-site transportation
- raw gas
- CO2 emissions from biomass combustion.
It is worthy to note that under the Regulation, the term "facility" (any plant, structure or thing where an activity listed in section 2 of the Schedule of Activities to the Environmental Protection and Enhancement Act occurs) is defined narrowly to include all buildings, equipment, structures, machinery and vehicles that form an integral part of the facility’s activities. Essentially, this definition limits the calculation of emissions to a single process from any given facility, meaning that companies with multiple facilities can only calculate emissions from each individual facility and not from their facilities overall. Prior to reporting, companies will not be able to move the benefit of efficiencies achieved at one facility to another, less efficient, facility. However, once reporting is completed, a company may use any credits earned by one facility to offset against the total emissions of another facility (assuming that both facilities are located in Alberta). This will require companies to make process improvements at each facility and ensure that the facility is operating more efficiently over time.
Estimating Your Emissions
AENV has identified four methods for estimating emissions, which are described below in order of accuracy:
- Monitoring or direct measurement , which uses emission monitoring systems, predictive emission monitoring (correlations developed between measured emission rates and process parameters) or source testing (e.g., stack sampling).
- Mass balance , which determines emission from the difference in the input and output of a unit operation, where the accumulation and depletion of a substance is included in the calculations.
- Emission factor , which is a value that relates the rate or quantity of a specified gas release with an activity associated with the release of that specified gas.
- Engineering estimates , which use: engineering principles, knowledge of the chemical and physical processes involved, the design features of the source, or an understanding of the applicable physical and chemical laws.
While the methodologies selected to calculate emissions do not need to be identical to those used by other facilities in the industry, AENV has indicated in the Guidance Document that the methodologies must be: (i) widely accepted by the industry to which the facility belongs; or (ii) consistent with the guidelines approved for use by the United Nations Framework Convention on Climate Change on the Preparation of National Greenhouse Gas Emissions Inventories by Annex 1 Parties (Decision 18/CP.8).
In future years, facilities must use the same methodologies that were used for the establishment of the baseline emissions intensity in order to properly determine compliance. However, changes in methodology may be warranted as a result of changes in the characteristics of a source, which will likely result in the need to restate the facility’s baseline emission intensity.
Third Party Verification
AENV has not pre-approved third parties who are qualified to perform verification under the Regulation. However, minimum qualifications are set forth in section 18 of the Regulation, which requires third party auditors to be registered in a province or territory of Canada (or otherwise approved by AENV in a jurisdiction outside of Canada) as (i) a professional engineer, (ii) a chartered accountant, or (iii) a member of a profession that has substantially similar competence requirements as a profession referred to in (i) and (ii) above. In the Baseline Application form, the applicant will need to identify how the third party satisfies the requirements of the Regulation.
Literature on the topic of greenhouse gas emissions typically uses the term "verification" to describe the process by which an objective third party reviews an assertion (such as a regulatory submission) and provides an opinion or conclusion on that assertion. While AENV uses the term verification in its regulations, it also uses the term "assurance" in relation with audit and audit-related processes. In the Guidance Document, AENV distinguishes between two basic types of conclusions that can be provided through assurance service providers: (i) audit; and (ii) review. Audit, also known as positive assurance, offers the highest level of assurance because the conclusion of the third party reviewer is structured as a direct factual statement expressing the opinion of the reviewer.
In particular, the reviewer provides a high (though not absolute) level of assurance through procedures such as inspection, observation, enquiry, confirmation, recalculation, re-performance and analytical procedures. A review, also known as a negative assurance, provides a more limited level of assurance because the conclusion of the third party reviewer is based on the identification of anomalies rather than the confirmation of the assertion. Review level of assurance can be obtained through enquiry, analytical procedures and discussion. Not surprisingly, the level of effort required to complete verification rises with the level of assurance.
AENV states in the Guidance Document that it requires a review level of assurance for the Baseline and Annual submissions. In addition, AENV has identified the following review standards as appropriate for ensuring a consistent level of quality in the review process:
- ISO 14064 Part 3 – Greenhouse Gases: Specification with guidance for the validation and verification of greenhouse gas assertions.
- Standards for Assurance Engagements, Canadian Institute of Chartered Accountants (CICA) Handbook – Assurance Section 5025.
- International Standard on Assurance Engagements (ISAE) 3000 – Assurance Engagements Other Than Audits or Reviews of Historical Financial Information.
In establishing an initial materiality level for errors, omissions or misreporting, third party auditors should take note that AENV has stated that an error, omission or misreporting over 5% of the reported value is material. If the Director is not satisfied with the baseline emissions intensity submitted by any facility, he or she may prescribe an audit of the facility.
Falling Short Of Your Reduction Targets
For those facilities unable to meet their intensity reduction targets through improvements in operational efficiencies, the following compliance tools are available:
- Payment of $15 per tonne of CO2 (also known as Fund Credits) into the Climate Change and Emissions Management Fund;
- Purchase offsets (also known as Emission Offsets) generated from Alberta-based projects by facilities not subject to the Regulation (these projects must have taken place after January 1, 2002); or
- Purchase credits from facilities that reduced their emissions intensity below target. These so-called Emission Performance Credits may be banked or traded to other Alberta facilities.
AENV continues to consult with stakeholders on the province’s climate change initiatives, particularly in respect of the protocols for offset programs and use of the technology fund. As the first one out of the gate in Canada, there are many watching Alberta to see what lessons can be learned from its experience with intensity-based targets. In the short to medium-term, observers will likely see significant efforts by companies to increase efficiency in their individual production processes, particularly because facilities have been defined so narrowly. As the anticipated federal climate change initiatives come online over the next few years, it is anticipated that the provincial and federal authorities will work together to harmonize standards and ensure that companies are not burdened by the requirements of two competing regulatory systems.
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.