Canada: Rounding Out The Climate Plan: Manitoba Supplements Carbon Levy With Proposed Output-Based Carbon Pricing System For Large Emitters

Manitoba recently released its Draft Regulatory Framework for a Made-in-Manitoba Output-based Pricing System (the Draft OBPS Framework), which meets the commitment made by the Manitoba government in its 2017 Made-in-Manitoba Climate and Green Plan to develop an output-based pricing system (OBPS) for large industrial emitters. The Draft OBPS Framework follows the introduction of Bill 16 (The Climate and Green Plan Implementation Act), which is expected to pass by the end of the fall 2018 legislative session.

Bill 16 provides the legislative authority to implement the mandate set out in the Made-in Manitoba Climate and Green Plan, along with the fiscal tools needed to implement emission reduction initiatives in the province, including a fixed carbon price of $25 per tonne of carbon dioxide equivalent (CO2e) which was announced in October 2017. Bill 16 also establishes the Industrial Greenhouse Gas Emissions Control and Reporting Act, which provides the Manitoba government with authority to develop an OBPS for industrial facilities operating in emissions intensive, trade exposed (EITE) sectors of the economy. The Draft OBPS Framework provides the basis for discussion on issues that stakeholders must consider in the design and implementation of the OBPS. Manitoba's proposed OBPS is separate from the proposed federal OBPS, which is discussed in more detail in our earlier blog.

Key Elements of Manitoba's OBPS

Manitoba's OBPS will apply to large industrial emitters in the province, i.e. those facilities emitting 50,000 tonnes or more of CO2e. Currently, there are six large industrial emitters in Manitoba: Koch Fertilizer Canada, TransCanada Pipelines, Graymont, Canadian Kraft Papers, Husky Oil and Vale. Emissions from these facilities represent approximately 6% of the province's total emissions.

Emissions limits for regulated facilities will be established in the form of emissions intensity performance standards (EIPS), expressed in tonnes of carbon dioxide equivalent (tCO2e). Regulated facilities which emit above their established emissions limit will be required to pay $25 per tCO2e emitted beyond their limit or meet their compliance obligations through another approved compliance option (i.e. emissions offset credits). Covered facilities which emit less than their established emissions limit will be able to bank or sell emission performance credits to other regulated facilities up to their limit at a compliance price of $25 per tCO2e.

Manitoba's OBPS will cover emissions from the following on-site sources: stationary combustion, on-site transportation, industrial processes and product use, waste and wastewater, flaring, and some venting and fugitive sources. Emissions associated with electricity generation off-site and other indirect emissions sources will not be subject to pricing under the OBPS.

Three options for establishing emissions intensity performance standards are under consideration:

  1. Facility-specific Standards – an EIPS set at the individual facility level based on a facility's historical GHG performance.
  2. Sector-level Standards – an EIPS set at a designated percentage below the production-weighted average emissions intensity of similar facilities within the same sector.
  3. Best-in-class Standards – an EIPS set at the emissions intensity of the best-performing facility within a sector, globally, nationally, regionally, or provincially.

A regulated facility's emissions limit will be determined by multiplying the established EIPS for the facility's covered product/activity by the facility's production of the covered product/activity.

The Manitoba government has acknowledged that there are industrial facilities in the province with multiple product/activity lines that may warrant establishing multiple EIPS (one for each product/activity). The emissions limit for these facilities will be based on the sum of the limits for each product/activity. A regulated facility's compliance obligation will be based on the following formula:

Compliance Obligation (tCO2e) = Facility's Total Emissions – Facility's Emissions Limit

In order to encourage continuous improvement in emissions performance, the stringency of EIPS will increase over time. Manitoba is considering subjecting each EIPS to an annual 2% declining cap factor. The declining cap factor would apply to all emissions included in the emissions intensity standard, with the exception of industrial process emissions.

Regulated industrial facilities will receive an OBPS registration certificate which enables them to purchase carbon tax-free natural gas and solid fuels and receive a full rebate on the carbon tax paid throughout the calendar year on all other fuel types (as per Section 5 of Bill 16). The first compliance period would begin in January 2019 and reporting would be required as of January 1, 2019, however performance standards would not be set until June 2019. Several options for compliance periods are being considered, including annual and multi-year periods.

To meet their compliance obligations, regulated facilities will be required to compensate for excess emissions by: (a) remitting an emissions performance credit at a rate of one credit for each tonne of greenhouse gas emissions in excess of the limit; (b) paying a levy at a rate of $25 for each tonne of greenhouse gas emissions in excess of the limit; or (c) a combination of both (a) and (b). The Manitoba government will issue performance credits to facilities for each tCO2e below their emissions limit.

Under the OBPS, the following types of emission credits will be available for compliance purposes:

  • Performance Credits – issued to an industrial operation whose emissions in a compliance period are below the limit that applies in that period.
  • Manitoba Offset Credits – under the regulations, an emissions offset credit system may be established for projects in Manitoba that reduce emissions or remove emissions from the atmosphere.
  • Agreements with Other Jurisdictions – the minister may enter an agreement respecting recognition of credits issued by the other jurisdiction.

The Draft OBPS Framework notes that specific consideration is required for industrial facilities that do not meet the 50,000 tCO2e eligibility threshold, but may experience competitiveness pressures due to the carbon levy. To address this issue, an opt-in provision for facilities that meet both of the following criteria is being considered:

  • have annual emissions between 10,000 and 50,000 tCO2e; and
  • compete in an EITE sector/sub-sector of the economy.[1]

In terms of timing, the Manitoba government will hold workshop and information sessions for stakeholders throughout fall 2018, with registration certificates to be issued to regulated facilities in December 2018. The OBPS would then come online in January 2019, followed by the establishment of emissions intensity performance standards in June 2019. The opt-in for eligible entities would commence in January 2020.

Manitoba Sustainable Development is accepting written comments/feedback on the proposed regulatory framework until September 30, 2018.

Footnotes

1 Appendix A of the Draft OBPS sets out a Preliminary List of EITE sectors/subsectors, which includes the following: nitrogen fertilizer, lime, chemicals (ethanol), pulp and paper, iron and steel, mining, base metal smelting and refining, natural gas transmission, and food/beverage processing.

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