Laying The Foundation For Cap-And-Trade: WCI Releases Final Essential Requirements Of Mandatory Reporting

Copyright 2009, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Environmental/CleanTech, July 2009

On July 15, 2009, the Western Climate Initiative (WCI) issued the first version of its Final Essential Requirements of Mandatory Reporting (ERMR). The WCI is a collaboration of seven U.S. states and four Canadian provinces including British Columbia (B.C.), Manitoba, Ontario and Quebec participating as partners, along with Saskatchewan as an observer. The ERMR establishes general provisions for greenhouse gas (GHG) reporting, requirements for third-party verification and quantification methodologies for the following source categories:

• general stationary combustion;

• refinery fuel gas combustion;

• electricity generation;

• electricity imports;

• primary aluminum manufacturing;

• cement manufacturing;

• coal storage;

• hydrogen production;

• iron and steel manufacturing;

• lime manufacturing;

• petroleum refining;

• pulp and paper manufacturing;

• soda ash production;

• petrochemical production; and

• adipic acid manufacturing.

Reportable GHGs include carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulfur hexafluoride. The WCI continues to work on the development of additional quantification methodologies for other source categories including zinc production, lead production, copper and nickel production, glass production, electronics manufacturing, coal mine fugitive emissions, gas processing plants, transportation fuel suppliers, residential/commercial/industrial fuel suppliers, upstream oil and gas production, and natural gas distribution. The WCI plans to issue draft methodologies for these categories later this year.

Responding to Stakeholder Concerns

The ERMR incorporates changes made in response to stakeholder comments on previous versions of the ERMR issued in January 2009 and May 2009. In its "Response to Stakeholder Comments", the WCI notes that one overarching concern of stakeholders is the potential for inconsistency with U.S. and Canadian national reporting requirements. As a result, the WCI has identified "alignment with national reporting programs in order to minimize the burden on facilities subject to both WCI and federal reporting requirements" as a key principle in the development of the Regional Emissions Database that will serve as the repository for data submitted under the ERMR. Stakeholders also raised concerns about other issues including later reporting deadlines, the need for uniform thresholds throughout the region, the desire for a higher reporting threshold (or a phase-in for lower thresholds), and whether third-party verification should be required at all.

Highlights of the ERMR

The following provides an overview of the ERMR's main provisions (more detailed information is available on WCI's website: http://www.westernclimateinitiative.org ).

• Reporting Entities. GHG emissions reporting requirements and related monitoring, recordkeeping and verification requirements of the ERMR will apply to the owner/operator of a facility that emits 10,000 metric tons of carbon dioxide equivalent (CO₂e) or more per year in combined emissions from one or more of the source categories in any calendar year starting in 2010.

• Future Applicability to Other Sectors. The ERMR includes references to requirements for reporting emissions from electricity imports and the combustion of residential, commercial and industrial fuels. The requirements for these sectors have not yet been completed by the WCI and will not go into effect for the 2010 reporting year. The WCI advises that WCI member jurisdictions may omit these references until the rules in such jurisdictions are amended to include reporting requirements for these sectors. Once this happens, reporting requirements will apply to: (i) all importers of electricity, including both retail providers and marketers (the definition of electricity importers is pending); (ii) any supplier within the WCI which distributes transportation fuels in quantities that when combusted would emit 10,000 metric tons of CO₂e per year or more in any calendar year starting in 2010 (pending the future determination of point of regulation for transportation fuels); and (iii) any supplier that distributes within the WCI region residential, commercial and industrial fuels in quantities that when combusted would emit 10,000 metric tons of CO₂e or more per year in any calendar year starting in 2010 (pending the future determination of point of regulation for these fuels).

• Annual Reporting. Owner/operators subject to mandatory reporting will be required to submit an annual GHG emissions report to the relevant authority in their jurisdiction by April 1 of each year for emissions in the previous calendar year.

• Reporting by Existing Entities. A reporting entity that commenced operation before January 1, 2010 will be required to report emissions beginning in 2011 for GHGs emitted in calendar year 2010.

• Reporting by New Entities. A new reporting entity that commences operation on or after January 1, 2010 will be required to report emissions for the first calendar year in which the facility operates, beginning with the first operating month and ending on December 31 of that year. Each subsequent annual report must cover emissions for the calendar year, beginning on January 1 and ending on December 31.

• Verification Requirements. Reporting entities emitting 25,000 metric tons of CO₂e or more per year in combined emissions from one or more of the source categories listed above in any calendar year starting on or after 2010 will be required to obtain annual verification of their GHG emissions data reports.

• Verification Deadlines. The verification process, including the submission of a verification statement to the relevant authority, will need to be completed: (i) for reporting years 2010 through 2011, by September 1 of the year following the reporting year; and (ii) for reporting years 2012 and later, on a date to be determined.

• Recordkeeping. Reporting entities will be required to retain GHG reporting documentation for a period of seven years following submission of each emissions data report.

• Designated Representative (U.S. only). The ERMR contains a rule which will apply only to reporting entities located in U.S. member jurisdictions. Under this rule (WCI.7), each fuel supplier, electricity importer and owner/operator of a facility that is subject to the ERMR is required to select a designated representative who is responsible for certifying and submitting GHG emission reports. The designated representative will be authorized by a certificate of representation agreement that is signed by the designated representative and owner/operator of a facility. The designated representative must be an individual having responsibility for the overall operation of the facility or activity (for example, the plant manager or superintendent of a facility) or an individual having overall responsibility for environmental matters for the entity. The designated representative will be required to provide certification statements in accordance with the specific language set out in Rule WCI.7.

• Operator's Representative (Canada only). For reporting entities located in Canadian member jurisdictions, an "operator's representative" (rather than a designated representative) will be required to issue certification statements. In the "Response to Stakeholder Comments and Final Draft Essential Requirements for Mandatory Reporting" dated May 7, 2009, the WCI acknowledged that the concept of a "designated representative" is not used in Canada, so the ERMR language references certification by an "operator's representative" in the Canadian context. The provision for an operator's representative is meant to have the same effect as the designated representative provision, but is consistent with Canadian practices whereby the representative is based on either the corporate structure or the management of the operation.

• Verification Bodies. Accreditation requirements set out in the ERMR will apply to all verification bodies that wish to provide verification services. A verification body is qualified to conduct verification services for the WCI if: (i) it has demonstrated knowledge of WCI reporting requirements; and (ii) it is accredited to ISO 14065 (Greenhouse gases – Requirements for greenhouse gas validation and verification bodies for use in accreditation or other forms of recognition) through a program developed under ISO 17011 (Conformity assessment – General requirements for accreditation bodies accrediting conformity assessment bodies) by an accreditation body that is a member of the International Accreditation Forum. A verification team must include a lead verifier and an independent peer reviewer. A verification body may also elect to subcontract verification services to another party.

• Verification Process. The ERMR contains detailed information about the development of verification plans, verification statements, and conflict of interest issues for verification bodies. Reporting entities which are subject to verification requirements will not be permitted to use the same verification body for a period of more than six consecutive years (the reporting entity may contract again with the previous verification body only after not using them for a period of at least three years).

• Quantification Methodologies. The ERMR contains methodologies for emissions quantification as well as sampling, analysis and measurement information for each of the source categories listed above.

Provincial Initiatives to Facilitate Cap-and-Trade

The ERMR serves as the basis for WCI jurisdictions to adopt initial rules for implementing the WCI's reporting program. It is anticipated that WCI member jurisdictions will have rules in place for the 2010 reporting year or as soon thereafter as possible. In B.C., the Ministry of Environment issued a policy paper (Intentions Paper) in October 2008 to outline its intention to introduce a Mandatory Reporting of Greenhouse Gas Emissions Regulation (B.C. Reporting Regulation) in 2009 to facilitate the implementation of the WCI cap-and-trade system. The main provisions of the Intentions Paper were drawn from the WCI's "Draft Essential Requirements for Mandatory Reporting Document", which was originally released in July 2008. While the proposed regulation has not yet been finalized, with the release of the ERMR, it is likely that the draft B.C. Reporting Regulation will be issued shortly. For more detail about the proposed reporting regulation in B.C., please see our December 2008 Blakes Bulletin on Environmental/CleanTech: A New Era of Reporting Obligations: British Columbia Proposes Mandatory Reporting of Greenhouse Gas Emissions for 2009.

While Manitoba has legislated a greenhouse gas emissions reduction target of 6% below 1990 levels by 2012 (which is consistent with the emissions reduction target under the Kyoto Protocol) and has committed to the WCI, it has not yet introduced any legislation to facilitate the implementation of a cap-and-trade system.

In Ontario, the provincial government has been taking steps to establish a framework in support of a cap-and-trade system. On May 27, 2009, the Ontario government introduced the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading) 2009, which will enable the government to set up a GHG emissions trading system in Ontario and provide the province with the ability to link Ontario's cap-and-trade system to other trading systems, including the WCI. This proposed legislation is subject to a 60-day public review and comment period, which ends July 26, 2009. In addition, the Ontario government issued a discussion paper in June 2009 entitled "Moving Forward: A Greenhouse Gas Cap-and-Trade System for Ontario". In the discussion paper, currently undergoing public consultation, the Ontario government says it is their intention to harmonize the province's reporting process with that of the WCI and any U.S. federal trading system.

In Quebec, Bill 42 (entitled An Act to amend the Environment Quality Act and other legislative provisions in relation to climate change) was tabled in the National Assembly by the Minister of Sustainable Development, Environment and Parks on May 12, 2009. The Act allows the government to set GHG emissions reporting requirements and establish a cap-and-trade system. Reporting provisions took effect on June 19, 2009. The Quebec government is expected to adopt a regulation this fall identifying subject entities and setting out reporting rules.

Continued Progress

The Canadian and federal U.S. governments continue to make progress on the climate change front. In June 2009, the Canadian Minister of Environment announced that the federal government is moving forward with its offset credit program for GHGs. Two draft guides were published in the Canada Gazette on June 12, 2009 which set out the proposed offset program rules and guidance for both offset project proponents and verification bodies. The final version of these proposed rules and guidance, together with the Guide for Protocol Developers (a draft of which was published in the Canada Gazette on August 9, 2008), are expected to be published in fall 2009. For more information on these guides, please see our June 2009 Blakes Bulletin on Environmental/CleanTech: Draft Federal Greenhouse Gas Offset Rules Issued – Subject to Comment Until August 12, 2009.

The federal government has indicated that Canadian offset program rules, federal regulations and enforcement mechanisms will be reviewed to ensure they are comparable with any U.S. climate change legislation that is eventually implemented. On June 26, 2009, the American Clean Energy and Security Act of 2009 (ACES) was passed by the U.S. House of Representatives. The ACES establishes the framework for a U.S. cap-and-trade system as well as energy efficiency initiatives and incentives for the development of clean energy technologies. The vote on the ACES in the U.S. House of Representatives is the first step in a two-stage process. In order for the ACES to become law, it must next pass the U.S. Senate. It is anticipated that the Senate debate on the ACES will take place in late summer and fall 2009. If passed, the U.S. will be required to reduce its GHG emissions by 17% below 2005 levels by 2020.

Laying the Foundation

The ERMR is an important first step in laying the foundation for the WCI's cap-and-trade system. Accurate emissions reporting and high quality data are essential to ensuring the integrity of any emissions trading system and fostering public confidence in that system. While the WCI continues to further develop reporting requirements and quantification methodologies, it is now up to the WCI jurisdictions to undertake stakeholder consultations and implement enabling legislation to facilitate the adoption of reporting requirements. The WCI has acknowledged stakeholder concerns about the administrative burden associated with multiple reporting systems and member jurisdictions have indicated their intent to harmonize reporting requirements with the requirements of the WCI and any federal system. These efforts to ensure consistency in reporting standards should help to minimize overlapping regulatory requirements and simplify the administration of the reporting system.

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