This Climate Change Bulletin is part of a series that is prepared periodically by BLG's Climate Change Group to alert our clients to emerging issues and initiatives that are relevant to their businesses and strategic interests. Future Climate Change Bulletins and Alerts will review and consider issues facing various provinces as well as different industrial sectors. Comments and questions are always welcome and should be directed to Adam Chamberlain.
On September 23, 2008, the Western Climate Initiative ("WCI") released its design recommendations for its North American market-based cap-and-trade system for greenhouse gas ("GHG") emissions ("Design Recommendations"). This WCI initiative is an important component of a comprehensive regional effort to reduce the pollution that causes global warming to 15% below 2005 levels by 2020. The WCI partner provinces and states: British Columbia, Manitoba, Ontario, Quebec, Arizona, California, Montana, New Mexico, Oregon, Utah and Washington ("WCI Partners"), will use the Design Recommendations to further develop a cap-and-trade system with the objective of taking the steps necessary to implement the program within their respective jurisdictions.
Many organizations operating in British Columbia, Manitoba, Ontario and Quebec should be aware of the key elements of the Design Recommendations and how this proposal could affect their operations. Organizations affected include: (i) electricity generators, (ii) electricity transmitters and distributors involved in importing electricity from other jurisdictions, (iii) industrial and commercial facilities that generate large measurable emissions through combustion or industrial processes, and (iv) operators of fuel distributors, final blenders, or terminal racks that handle fuels eventually meant for residential, commercial, industrial or transportation related consumption.
Highlights Of The Cap-And-Trade Program
The Design Recommendations propose a multi-sector GHG cap-and-trade program covering six of the major greenhouse gases: carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, perfluorocarbons and hydrofluorocarbons. These non-CO2 gases are commonly considered as carbon dioxide equivalent or "CO2e".
The program will be implemented in a phased approach, based on 3-year compliance periods with:
- emissions reporting beginning in 2011 for emissions that occur in 2010;
- the cap-and-trade program beginning on January 1, 2012 for industrial and electricity sector emitters; and
- the program being extended to include transportation fuels and residential, commercial and industrial fuels beginning in 2015.
Carbon dioxide emissions from the combustion of (1) biomass that is determined by each WCI Partner to be carbon neutral, and (2) pure biofuels (or a proportion of emissions from a blended fuel) are not included in the cap-and-trade program, except for the purposes of reporting. However, each WCI Partner may in the future assess whether, and how, to include upstream emissions from biofuel and fossil fuel production.
Mandatory CO2e reporting of 2010 emissions will begin in early 2011 for entities and facilities with annual emissions greater than or equal to 10,000 metric tons of CO2e. Some entities that are not caught by the Canadian Federal Government's current CO2e reporting regime, which applies to entities that emit more than 100,000 metric tons of CO2e, will have to report under the new WCI cap-and-trade program. In addition, the reporting threshold will apply to entities (such as fuel distributors and blenders) based on the expected combustion emissions from the fuels distributed through their facilities because the point of regulation for fuel combustion emissions is proposed to be upstream from the point of emissions.
Each jurisdiction will require third party verification of reported emissions, and nothing in the WCI program design limits the discretion of any WCI Partner to require reporting earlier, at lower thresholds, or reporting by entities and facilities not covered by the proposed cap-and-trade program.
Initial Compliance Period
During the initial 3-year compliance period, beginning in 2012, the program will cover the following emissions by targeting specific points of regulation that exceed a particular threshold requirement:
Second Compliance Period
During the second 3-year compliance period, beginning in 2015, the program will expand to cover several new sources of emissions by targeting upstream points of regulation that handle fuels which, when combusted, exceed a particular threshold requirement:
A Regional Cap And Local Allowances
The WCI cap-and-trade program relies on the creation and allocation of a regional cap amongst the WCI Partners to create local allowance budgets. In general, the aggregate WCI regional cap for the program will (i) equal the sum of the WCI Partners' jurisdictions allowance budgets, (ii) include annual caps with 3-year compliance periods, and (iii) decline at a modified straight line trajectory to 2020.
For 2012, each WCI Partner allowance budget will be set at the best estimate of expected actual emissions for sources covered in the initial compliance period in the cap-and-trade program in that jurisdiction, based upon the best available data and by accounting for expected changes. For 2015, each WCI Partner's allowance budget will be set by adding the best estimate of expected actual emissions in 2015 from transportation fuels and residential, commercial and industrial fuels to the emissions trajectory for the sources first included in the program in 2012.
Similar to the regional cap, the trajectory for each WCI Partner annual allowance budget for covered sectors will decline at a straight line from the year of initial coverage (2012 for some sources, 2015 for other sources) to 2020.
Once the allowance budget has been established for each WCI Partner, that jurisdiction can then decide how to issue allowances within its own jurisdiction. Each allowance will be equal to one metric ton of CO2e, and a WCI Partner jurisdiction must allocate or retire all of the allowances in its allowance budget by the end of the applicable 3-year compliance period.
Early Actions, Banking, Offsets And Other GHG Systems
Each WCI Partner may issue "Early Reduction Allowances" for certain emissions reductions at covered entities and facilities within its jurisdiction that are achieved after January 1, 2008 and before January 1, 2012. By the end of 2009, the WCI Partners will jointly establish criteria to determine which early reductions will be eligible for Early Reduction Allowances.
All Early Reduction Allowances will be issued by a WCI Partner jurisdiction in 2012, will be in addition to the jurisdiction's 2012 allowance budget, and will be treated like any other allowances in the cap-and-trade program. While a WCI Partner jurisdiction has the discretion to recognize early action or otherwise set aside allowances for distribution that do not meet the mutually agreed to criteria for Early Reduction Allowances, such recognition or set-asides will come from within the cap and will be deducted from the jurisdiction's allowance budget.
Purchasers, covered entities or facilities, and parties who otherwise obtain allowances will be allowed to bank allowances for use during future compliance periods; however, borrowing of allowances from future compliance periods will not be allowed.
Finally, the program will include a rigorous offsets system for: 1) offsets created within the WCI Partner jurisdiction which meet pending criteria to ensure that projects qualifying for offsets result in a CO2e reduction, removal or avoidance that is real, additional, verifiable and permanent; or 2) for offset projects located throughout the United States, Canada, and Mexico that are subject to a comparably rigorous standard. The WCI Partner will limit the use of all offsets and allowances from other emissions trading systems to no more than 49% of the total emissions reductions from 2012-2020 in order to ensure that a majority of emissions reductions occur at WCI covered entities and facilities.
Over the next weeks and months, the provinces and states that have signed on as WCI Partners will be taking the steps necessary to implement the WCI cap-and-trade program. As each province and state works to bring the Design Recommendations into law in their respective jurisdictions, a number of questions remain:
- Ontario and Quebec signed a Memorandum of Understanding ("MOU") on June 2, 2008 committing the two provinces to establish a joint GHG emissions cap-and-trade regime. While the obligations of each under the MOU have already been met by the provinces' respective memberships in the WCI, it is unclear whether the MOU is meant to signal an intent by Ontario and Quebec to work cooperatively in implementing the Design Recommendations in their respective jurisdictions.
- British Columbia introduced legislation to implement a revenue-neutral carbon tax based on greenhouse gas emissions from fossil fuel combustion, which came into effect July 1, 2008. It is unclear how the WCI Partner jurisdictions will integrate the cap-and-trade program with the BC carbon tax, although they have set a deadline for doing so by 2012.
- The draft regulations under the Canadian Federal Government's Regulatory Framework for Industrial Greenhouse Gas Emissions are, while expected to be released this Fall, subject to delays due to the federal election on October 14, 2008. It is unclear how the Federal emissions intensity regime will work in conjunction with the provincial initiatives without excessive regulatory overlap, but what is clear is that, at this early stage, many organizations will fall within the scope of both regimes.
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.