Canada: Emissions Trading And Climate Change Bulletin - Western Climate Initiative

Last Updated: August 18 2008

The Western Climate Initiative ("WCI") is a multijurisdictional voluntary collaboration launched in February 2007 to develop regional strategies to address climate change. WCI partners include Arizona, California, Montana, Oregon, Utah, New Mexico, Washington, with Manitoba, British Columbia1, Quebec and Ontario (the "Partner(s)"), and Saskatchewan, Alaska, Colorado, Idaho, Kansas, Nevada, Wyoming, Baja California, Chihuahua, Coahuila, Nuevo Leon, Sonora, and Tamaulipas as observers. WCI goals include setting regional emissions reduction goals, developing a registry to track and manage emission reductions and offset credits and designing a multi-jurisdictional market-based cap and trade system.

WCI Partners released their "Draft Design of the Regional Cap-and-Trade Program" on July 23, 2008 (the "Draft Design")2 which sets out an outline of the proposed cap and trade system (the "Proposed Cap and Trade System"). The final design recommendations for the Proposed Cap and Trade System is scheduled to be released in mid-September. Highlights of the Draft Design include:

  • emissions of all of the six greenhouse gases3 ("GHGs") covered by the Kyoto Protocol will be capped;

  • regional caps equal to the Partners allowance budgets will be enforced in compliance periods from 2012 to 2020 with each compliance period being three years long;

  • allowances will be issued to covered entities and facilities4 by each Partner in its own jurisdiction;

  • covered entities and facilities will be required to surrender sufficient allowances at the end of each compliance period;

  • the Proposed Cap and Trade System is scheduled to take effect on January 1, 2012 for large electrical generators, industrial fuel burners and industrial process emitters and with coverage for smaller commercial and industrial emitters commencing in 2015;

  • entities or facilities with 25,000 metric tons of CO2e will have a regulatory compliance obligation under the Proposed Cap and Trade System;

  • entities and facilities with over 10,000 tonnes of CO2e will be required to begin monitoring emissions in 2010 and reporting them in 2011;

  • starting in 2009, the WCI will coordinate to review, develop and approve protocols for offset projects;

  • offsets projects located in Canada, the United States and Mexico may be approved and certified by the WCI;

  • a limit not greater than 10% of the covered entity or facility's compliance obligation can be met by offset credits; and

  • specific project types have been prioritized for participation in the offset system: agriculture (soil sequestration and manure management); forestry (afforestation / reforestation, forest management, forest preservation / conservation, forest products); and waste management (land fill gas and waste water management).

Scope

The Draft Design sets out details of the sectors that fall under the cap; the emission sources that fall under the cap; the GHGs that fall under the cap and point of regulation where the cap will be enforced. As mentioned above, the six GHGs under the Kyoto Protocol will be covered. The emissions to be covered include:

  • electricity generation (including emissions from electricity imported into WCI jurisdictions from non-WCI jurisdictions);

  • combustion at industrial and commercial facilities;

  • industrial process emission sources including oil and gas emissions;

  • residential, commercial and industrial fuel combustion at facilities below the WCI thresholds (upstream), coverage will begin in the second compliance period; and

  • transportation fuel combustion from gasoline and diesel (emissions covered upstream); coverage will begin in the second compliance period.

Carbon dioxide emissions from the combustion of biomass and biofuel will not included in the Proposed Cap and Trade System which creates an incentive for the use of such fuels.

The point of regulation on the entity or facility with the compliance obligation is as follows:

  • industrial sources –both process and combustion with emissions above the threshold at point of emission;

  • electricity – if generated within WCI jurisdictions at the point of emission; if generated outside the WCI at the point of first distribution within a WCI jurisdiction;

  • residential, commercial and industrial fuel combustion at facilities with emissions below the threshold; where the fuels enter commerce in the WCI jurisdiction; generally point of distribution (upstream regulation);

  • transportation fuel combustion; where the fuels enter commerce in the WCI Partner's jurisdiction; exact point to be determined; and

  • co-generation facilities – still under consideration

Regional Caps

The Draft Design outlines hard caps on industrial emissions and follows a cap and trade model. An initial cap for the WCI region as well as Partner allowances budgets will be set through 2020. The regional cap will be equal to the sum of the Partner allowance budgets.

The 2012 cap will be set at the best estimate of actual emissions for services covered in the initial year of the program. In 2015, expected actual emissions from transportation fuels and residential, commercial and industrial fuels will be added to the cap. In 2020, the cap will be set so that reductions achieved by the cap plus reductions from other GHG reduction policies, such as the British Columbia carbon tax; will achieve the WCI regional goal. Post 2020 caps will be set by the Partners not less than three years in advance.

Regional caps will decline from 2012-2020. The caps will be based on projected population, electricity consumption and production and economic activity and other factors. Once established the regional caps for each compliance period will not be adjusted except to account for changes in WCI membership; changes in scope or thresholds or errors in data used to determine the cap.

Allowances

According to the Draft Design, Partner allowance budgets will be calculated by the fall of 2009. Once established, Partner allowances will not be adjusted except to account for changes in WCI membership; changes in scope or thresholds or errors in date used to determine the cap. Once the Partner allowances have been established the Partners will be able to issue allowances within their own jurisdictions.

A minimum percentage of value of allowances (through set asides or distribution of revenues from auctioning of allowances or other means) may be dedicated to one or more of the following public purposes:

  • energy efficiency and renewable energy incentives;

  • research, development, demonstrations, deployment with particular reference to carbon capture and sequestration, and renewable energy; and

  • promoting emission reductions and sequestration in agriculture and forestry.

The remaining allowances may be allocated by the Partners as they see fit but the Draft Design suggests that Partners may consider objectives such as reducing consumer impacts especially for low income consumers; providing worker transition and green jobs; providing transition assistance to industries; adaption to climate change impacts; recognizing early actions and promoting economic efficiency.

Partners must allocate or retire all allowances budgeted by the end of the three year compliance period and cannot hold allowances beyond the end of the compliance period. Each Partner will have the discretion to give credit for early actions but any credit for early action will come out of the individual Partner's allowance budget. Allowances may be traded across the WCI jurisdictions. If Partners decide to auction allowances, they will do so through a coordinated regional auction process where each Partner auctions the allowances and receives the proceeds of the auctions.

To address competitiveness issues between jurisdictions, WCI Partners will consider standardizing the distribution of allowances over time in the following manner:

  • treating similar emission intensive industries operating in more than one jurisdiction the same (e.g., aluminum, steel, cement, lime, pulp and paper, and oil refining);

  • harmonizing allowance distribution to similar industries such as the electricity sector, and

  • providing a level playing field for new emission sources.

Covered entities or facilities will be allowed to bank allowances without limitation except to the extent that restrictions on the number of allowances any one party may hold that are necessary to prevent market manipulation. The borrowing of allowances from future compliance periods will not be allowed.

Every covered entity or facility will be required to surrender sufficient allowances after the end of each compliance period. If a covered entity or facility does not have sufficient allowances to cover its emissions for the previous compliance period, it will be required to surrender three allowances for every one ton not covered by allowances. This does not preclude any other penalties under state or provincial laws.

Offsets And Allowances From Other Systems

According to the Draft Design the WCI will develop a rigorous offset system. The WCI Partners have suggested a limit on the use of offsets of not greater than 10% of an individual entity's or facility's compliance obligation. The WCI will develop protocols for offset projects. The WCI will use standardized offset protocols to the extent possible and make use of or adapt existing protocols. The WCI will also develop a process to coordinate the review and approval of other project types proposed by project developers.

The WCI may allow individual regulated entities or facilities to use tradable units (allowances) from other government regulated GHG emission trading systems that are viewed as meeting rigorous criteria for environmental integrity. These would be subject to the 10% limit.

The Draft Design suggests that WCI may allow the use of CDM and JI credits in the Proposed Cap and Trade System if they meet added criteria to ensure rigor to WCI offset approval certification rules.

The WCI does not intend to regulate or restrict the existing voluntary market in offsets, or restrict the sale of offsets from projects located within WCI states and provinces.

Reporting, Monitoring And Quantification

The WCI is currently developing regional administrative organizations to coordinate regional auctions of allowances, track emissions, monitor market activity, coordinate the review and adaptation of protocols for offsets, the issuing of offsets and provide criteria to accredit service providers to deliver validation and verification services. Partners will be required to put in place accounting systems to prevent using allowances, tradable units and offsets more than once for compliance.

Mandatory measurement and monitoring for all six GHG's will commence in January 2010 for all entities and facilities subject to reporting. Reporting of 2010 emissions will begin in early 2011. Entities and facilities subject to reporting include those with annual emissions equal to or greater than 10,000 metric tons of CO2e. In some limited instances the threshold will be based on other parameters such as capacity or throughput. All Partners will be able to view data collected from entities and facilities.

The Draft Design suggests that the WCI will develop linkages with The Climate Registry ("TCR") and other international reporting programs. The Draft design also suggests that the WCI will employ TCR quantification protocols and reporting systems and services.

Partners may require third party verification or may carry out government audit programs. Each WCI jurisdiction will retain and/or enhance its regulatory and enforcement authority to enforce the Proposed Cap and Trade System.

Role Of Other Policies

The WCI acknowledge that Partners may use other GHG reducing policies to achieve the 2020 reduction goal. The other policies will work in concert with the Proposed Cap and Trade System. The Draft Design acknowledges the WCI jurisdictions may use measures other than the Proposed Cap and Trade System to achieve emission reductions and internalize the price of carbon for transportation and residential /commercial fuels. The Draft Design acknowledges the British Columbia carbon tax and states that the Partners will determine a mechanism for integrating the Proposed Cap and Trade System with the British Columbia carbon tax.

Effective July 1, 2008, the British Columbia government introduced a "revenue-neutral carbon tax" under The Carbon Tax Act which is applied to the purchase or use of fossils fuels including gasoline, diesel, jet fuel, natural gas, propane and coal. The initial tax rates are based on a $10 per tonne of CO2e increasing by $5 per tonne each year to $30 per tonne in 2012. The $10 per tonne of CO2e is converted into tax rates for different types of fuel since different fuels generate different amounts of GHG. In 2008, the rate for gasoline is 2.34 cents per litre. The additional costs paid in the form of the carbon tax will be offset by reductions in income tax.5

Footnotes

1. See the British Columbia Greenhouse Gas Reduction (Cap and Trade) Act which enables the implementation of a cap and trade system in conjunction with regional partners.

2. http://www.westernclimateinitiative.org/ewebeditpro/items/O104F18808.PDF

3. Carbon dioxide, methane, nitrous oxide, hydro fluorocarbons, perfluorocarbons and sulphur hexafluoride.

4. The term entity is generally used when the point of regulation is upstream of the point of emissions, to describe a company that has an obligation to surrender allowances to cover the carbon content of the fuel the company is moving through commerce. When the point of regulation is at the point where the emissions occur, the term facility is generally used.

5. For a discussion of British Columbia's carbon tax see its Climate Action Plan released in June 2008: http://www.livesmartbc.ca/plan/index.html

The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.

© Copyright 2008 McMillan LLP

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