Canada: Western Climate Initiative Issues Draft Design For Regional Cap And Trade System

Last Updated: August 7 2008
Article by Perkins Coie And Fasken Martineau

Originally published July 31, 2008

On July 23, 2008, the Western Climate Initiative ("WCI") issued the Draft Design for its regional greenhouse gas ("GHG") cap and trade program. The Draft Design reflects stakeholder feedback to WCI's previous draft recommendations, which our recent update discussed (WCI Cap and Trade Recommendations).

What's New

The Draft Design provides detail that was previously lacking on the proposed design for the WCI cap and trade program; it also contains some surprises:

  • The cap and trade program for large electric generators, industrial fuel burners and industrial process emitters will launch in January 2012. Transportation and other smaller commercial and industrial emitters will not be covered until January 2015.

  • Entities and facilities that emit 10,000 metric tonnes of carbon dioxide equivalents (CO2e) or more annually must measure and monitor GHG emissions from 2010 and report 2010 emissions in early 2011. GHG measurement, monitoring and reporting protocols are under development.

  • The initial regional cap will be set at 100% of the sum of each member jurisdiction's actual expected 2012 emissions and will decline on a straight line basis thereafter to 2020.

  • WCI has agreed that carbon offsets will play a limited role in its cap and trade program. WCI is considering a requirement that offsets should account for no more than 10% of the compliance units a regulated entity or facility must surrender to cover its GHG emissions. The remaining units used to document compliance with a GHG cap would have to be comprised of allowances.

  • If WCI requires that each Partner auction a portion of its allowances, the auctions will be regional.

  • WCI plans to establish a regional administrative organization to track emissions, monitor and report on market activity, and serve as a forum for Partners to update one another on program progress.

OTHER NEWS

  • Ontario is the fourth Canadian province to join WCI, after British Columbia, Manitoba and Québec. These four regions produce 73% of Canada's GDP and include two-thirds of Canada's population.

  • The Regional Greenhouse Gas Initiative (RGGI), representing ten northeast and mid-Atlantic states, will hold its first CO2e allowance auction on September 25, 2008. The auction will allocate allowances to emit 12.5 million short tons of CO2e for regional power generators to apply toward their 2009 RGGI compliance obligations. Further information on the RGGI auction can be found here.

Overall Design Features

WCI's cap and trade program will commence January 1, 2012 and, at least under the current design, will remain in effect through 2020. The program will require regulated entities and facilities to remit allowances or offset credits equal to their GHG emissions during each compliance period. Compliance periods will be in successive three-year intervals (2012-2014, 2015-2017 and 2018-2020).

The initial regional cap will be 100% of the actual GHG emissions that regulated entities and facilities are expected to emit in 2012. At the start, WCI will set out successive annual caps through 2020 so that the reductions required are predictable.

In 2015, the overall regional cap will be adjusted to reflect the additional sources that are to be covered by the program at that time – i.e. transportation, residential, commercial, and industrial fuels.

The annual cap will decline on a straight line basis to reach the regional GHG emissions cap established for 2020. The regional cap for 2020 will be established so that expected reductions achieved by the cap and trade program plus reductions resulting from other climate change initiatives will reach WCI's goal of reducing regional GHG emissions to 85% of 2005 levels by 2020.

Emission Thresholds

WCI's cap and trade program will apply to entities and facilities that annually emit 25,000 metric tonnes of CO2e or more.

WCI may adjust this emissions threshold in response to future monitoring or competitiveness issues (e.g. different participating jurisdictions may have the same industry but with different sized sources). However, WCI anticipates few adjustments after the program starts.

Regulated Emissions

In 2012, WCI's cap and trade program will cover the following sources ("large" means annual CO2e emissions in excess of 25,000 tonnes per year, as reported at each facility):

  • Large electricity generators, to include emissions attributable to the generation of electricity produced elsewhere then imported into WCI;

  • Combustion at large industrial and commercial facilities; and

  • Large industrial process emission sources, including oil and gas process emissions.

Transportation and residential fuels, and smaller commercial and industrial facilities (annual CO2e emissions in excess of 10,000 tonnes) will be covered from 2015, the beginning of the second three-year compliance period. These sources will be regulated at the point their fuels first enter into commerce in a WCI participating jurisdiction (e.g. at the distributor level).

Some jurisdictions may use other fiscal measures to reduce GHG emissions from transportation, residential, commercial and industrial fuels. For example, British Columbia recently introduced a Carbon Tax. By 2012, WCI will determine how to integrate its cap and trade program with such fiscal measures.

BRITISH COLUMBIA CARBON TAX

Effective July 1, 2008, British Columbia introduced a "revenue neutral" carbon tax on all fossil fuels, such as gasoline, diesel, natural gas, heating fuel, propane and coal, and on peat and tires used to produce energy or heat, sold or used within the province.

Taxes on different fuels reflect an imputed tax rate of $10 per tonne CO2e emitted increasing to $30 per tonne over the next five years.

By law, the revenue raised by the carbon tax must be offset by reduced revenues from other areas, such as new tax credits or reduced provincial income tax rates.

Certain uses of fuel are exempt from the carbon tax, including fuel used for interjurisdictional transportation.

Apportionment of Allowances

Each Partner's annual allowance budget will come from the total regional GHG cap. Annual Partner allowance budgets for each year through 2020 will be set prior to the launch of the program in 2012. WCI Partners must use their entire allowance budget within each three-year compliance period; no jurisdiction may hold allowances past the compliance period for which they are apportioned.

The method for apportioning the overall regional cap among individual jurisdictions is yet to be determined. By Fall 2008, WCI intends to propose an apportionment methodology that will be based on factors such as production and consumption of electricity, projected population growth and economic activity, among other factors.

Allocation of Allowances

Once each Partner's allowance budget is fixed, each Partner will distribute its allowances within its jurisdiction using its own discretion.

Each Partner may allocate a portion of its allowance budget to public policy goals (e.g. support renewable energy or energy efficiency) but each Partner will allocate its remaining allowance budget to regulated entities and facilities.

Partners may reward early action by allocating allowances to entities or facilities that previously reduced GHG emissions voluntarily. But any credit for early action will come from within the cap and will not be added to or be on top of each Partner's allowance budget. The 2020 goal of 85% of 2005 emissions implicitly recognizes voluntary actions taken between 2005 and 2012.

If the WCI requires Partners to allocate a percentage of allowances via auction, such auctions will be region-wide. A decision is expected on this issue by Fall 2008.

Offsets and Allowance Trading

Regulated entities and facilities within WCI will be able to acquire allowances issued to other WCI regulated entities or facilities, carbon offsets, and approved non-WCI allowances to meet all or a portion of their compliance obligations under the WCI cap and trade program.

WCI Partners have identified forestry, agriculture and waste management as priority sectors from which offsets will be sourced. Partners have emphasized that they will coordinate efforts to review, develop, and approve - as appropriate - protocols for offset projects. WCI will begin to develop these protocols in 2009.

Whereas allowances issued by any Partner will be duly recognized in every other WCI jurisdiction, the use of offsets to meet a regulated entity's or facility's compliance obligations will be limited.

Furthermore, WCI may limit or impose additional requirements on the use of offsets and allowances approved in other jurisdictions, including offset credits derived from Clean Development Mechanism (CDM) and Joint Implementation (JI) mechanisms set out in the Kyoto Protocol.

More information on carbon offsets and the offset project development process can be found in our recent bulletin: Carbon Offsets in the Western Climate Initiative: Emerging Business Opportunities.

Conclusion

By mid-September, the WCI anticipates the release of final design recommendations as well as an outline of activities and milestones for the WCI through 2009. At this time, WCI cap and trade design proposals are not regulations.

These proposals have no effect unless they are adopted by individual member jurisdictions. Significant political and economic negotiations, within and between jurisdictions, will be required before the WCI cap and trade program is adopted. While not definitive, the Draft Design provides business with a much more detailed picture of the kind of reporting and compliance obligations that may lie ahead.

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