Canada: Québec Cap-And-Trade System Proposed

The Québec government recently introduced Bill 42, An Act to amend the Environment Quality Act and other legislative provisions in relation to climate change, which proposes a structure for a provincial greenhouse gas (GHG) cap-and-trade system. When considered in the broader North American context, Bill 42 will present business opportunities for clean technologies.

North American Context for Québec Regime

The adoption of Bill 42 would enable Québec to meet its commitments as a member of the Western Climate Initiative (WCI), a group of seven US states and four Canadian provinces (British Columbia, Manitoba, Ontario and Québec) that have committed to common GHG emission-reduction targets and to implementing a regional cap-and-trade system.

British Columbia's Greenhouse Gas Reduction Act received Royal Assent last year and will come into force by regulation. This year, Ontario introduced the Environmental Protection Amendment Act (Greenhouse Gas Emissions Trading), 2009 (Bill 185). Manitoba is expected to introduce proposed legislation shortly. Bill 42 also aligns with a June 2008 memorandum of understanding between Québec and Ontario.

These provincial regimes differ significantly from Alberta's Climate Change and Emissions Management Act and from federal policy set out in the Government of Canada's "Turning the Corner" plan. They also differ in many ways from the system proposed in the American Clean Energy and Security Act of 2009 (Waxman-Markey Bill).

Key Features of Bill 42

Reduction targets will be based on 1990 emissions and may be broken down into sector-specific targets. The proposed GHG emission-reduction objective is 10 million metric tonnes (Mt CO2 eq.) per annum.

No specified threshold for emitter eligibility has yet been set. Emitters that are subject to the new regime will have to counter actual GHG emissions with an equivalent number
of emission units. These will include: (i) free allowances granted by the Minister; (ii) allowances sold at auction or by agreement; (iii) early-action credits; and (iv) offsets. Finally, the Minister may grant any other type of emission-reduction units determined by future regulation.

These units will be fungible and emitters will be able to trade them. Emitters will be entitled to bank them for use or trade during a later period. The Minister will maintain a public register of emission allowances to ensure proper accounting and tracking. Furthermore, the Minister will have the power to enter into agreements with governments or international organizations for the harmonization and integration of cap-and-trade systems.

Failure to comply with the targets will result in penalties. All sums collected through auctions and penalties will be paid into the Green Fund, which will be used to finance measures to address climate change.

Comparison with Other Initiatives

The WCI provides for emission reductions of 15 per cent below 2005 levels by 2020, while the Waxman-Markey Bill provides for three per cent reductions below 2005 levels by 2012 and reductions of seven per cent by 2020, 42 per cent by 2030 and 83 per cent by 2050. The Canadian federal plan proposes intensity-based reductions rather than fixed emission caps. All covered industrial sectors will be required to reduce their emissions intensity from 2006 levels by 18 per cent by 2010, with two per cent continuous improvement every year after that. The federal government also indicated its intention to move from emission-intensity targets to fixed emission caps in the 2020-2025 period.

The WCI provides that early-action credits may be issued for reductions that occurred between January 1, 2008 and January 1, 2012. The Canadian federal plan proposes a very limited amount of early-action credits for reductions that occurred between 1992 and 2006. The Waxman-Markey Bill does not allow for issuance of early-action credits.

Both the WCI and the Waxman-Markey Bill allow for offsets, but propose limiting their availability for use by regulated emitters. While the WCI limits offsets to 49 per cent of total emission reductions from 2012 to 2020, the Waxman-Markey Bill proposes an upper limit of two billion tons of offset allowances, as well as variable limits on use for regulatory compliance. In the recent report by the National Round Table on Environment and Energy (NRTEE), it proposes that the availability of offsets be phased out by 2015.

McCarthy Tétrault Notes:

Bill 42, particularly when taken in the broader North American context, presents business opportunities for clean technologies. Emission-reduction incentives will include funding of research and development for clean technologies. Non-regulated companies may be able to leverage the economic value of reductions achieved through their technology to finance projects. Regulated GHG emitters will create demand for clean technologies and resulting offsets.

As currently drafted, Bill 42 rewards early emission reductions. Forthcoming regulation should be monitored to maximize benefits from early-reduction credits. For example, as mentioned above, according to the WCI, 49 per cent of total emission reductions could be satisfied by offsets.

Emission-reduction units will also present trade opportunities. The NRTEE is predicting carbon prices as high as $200 to $300 per tonne, if provincial cap-and-trade systems are not integrated and if the Canadian system is not linked internationally.

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.

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