Quebec Enacts Bill 42: Do You Know Your Scope 3 Emissions?
By Douglas W. Clarke
On June 19, 2009, the Quebec provincial legislature assented to Bill 42 An Act to amend the Environment Quality Act and other legislative provisions in relation to climate change (the "Bill"). Sections 46.1 to 46.4 and Section 46.18 of the Environment Quality Act (the "Act"), enacted by Section 1 of the Bill and Sections 3 to 5, 7, 8 and 9 came into force on June 19, 2009, the rest of the provisions of the Bill will come into force on the date or dates determined by the Government.
The Bill, presented for the first time 38 days earlier, is the framework within which Quebec will establish targets in regards to greenhouse gas ("GHG") reductions and also provides the basis for one of the fundamental reduction tools to be employed by the Quebec government in order to achieve its goals: a cap and trade system for emissions reductions.
Between the time of its presentation and its assent, two days of hearings were held during which certain interested parties who had been invited to present their views on the draft Bill in writing were also invited to present their submissions verbally to the Transportation and Environment Commission of the Québec National Assembly (the "TEC").
Among the groups present were groups representing industry, the Montreal Climate Exchange ("MCX") and various environmental groups.
Subsequent to these public hearings a detailed review of the bill was undertaken by the TEC and the final version of the Bill was tabled.
The hearings were notable for several reasons. First, they where very short. The public hearings took place over two half days and the witnesses did not have a lot of time to deliver their views on what are extremely complex issues. Second, the parties called to testify did not represent the full spectrum of the stakeholders in the process. For example, only the MCX was heard from the world of finance. While the presence of the exchange was fitting, there seemed to be little realisation on the part of the members of the TEC that the MCX is a private business, and therefore holds a particular view of carbon markets. No other participants from the world of carbon finance were called, no financial institutions, no brokers, no offset developers. In our experience, there is a lot of deep knowledge of cap & trade systems and carbon markets within these groups and it will be interesting to see if future public hearings incorporate this pool of knowledge. In our view the input of these carbon market participants will be key to developing a cap & trade mechanism that is viewed in a positive light by the both the commodity and liquidity providers to that market.
Most of the changes retained by the TEC relate to the decision making processes applicable under the sections of the Act amended by the Bill. The opposition looked for and obtained from the government changes that ensure that certain decisions, which the government had initially intended to make by way of decree will now be taken through regulation, thus ensuring that the substantive content to be added to the framework in the future will be subject to review and debate by the legislature.
On the substantive side however, most of the content of the bill remained unchanged as a result of the public hearings. As will be discussed below, the definition of who is an emitter under the Act drew little criticism and remained unchanged. Some of the other important substantive issues which received little attention or which generated little debate, are as follows:
- The baseline year for emissions reductions remains 1990 and it
is interesting to note that the use of this baseline, which is not
under consideration in either the proposed US or Canadian federal
systems, drew no criticism from the witnesses.
- Section 48.8 of the Act, as amended by the Bill, provides for
the distribution of emissions units for free or through an auction
process. Subsection 48.8(2) is important since it inserts into the
system the concept of offset credits, which are project based
emission reductions created without regulatory obligation but which
can be purchased by emitters in order to satisfy their regulatory
requirements. The inclusion or not of offsets has been a major
topic of discussion in the implementation of cap & trade
elsewhere in the world but in Quebec, the total discussion of the
TEC in regards to allocation versus auction and the inclusion of
offsets during its detailed review of the Bill was over in about a
minute.
Under Section 48.8 of the Act, as amended by the Bill, offset credits will be granted for actions which avoid GHG emissions or which "capture, store or eliminate GHGs" within the periods to be set out by future regulation. Oddly, the creation of offset credits is not limited to emitters that are not subject to an emissions cap. Furthermore, no questions were raised as to why the term "store" was used as opposed to the more commonly used term "sequester".
Credit for early reductions will be granted under future regulations. Although the notion of early action credits was discussed in more depth during the public hearings than some other topics, the discussion was extremely high level and did not generate any debate at the stage of the detailed review of the Bill.
- Under Section 48.9 of the Act as amended by the Bill, banking will be permitted, with no limit being set as to the future period(s) in which such banked allowances could be used. Conspicuously absent is a right to borrow from future compliance periods; another issue that the TEC failed to draw out for discussion.
One of the most striking aspects of the Act that remained unchanged from introduction to assent is the definition of who is an emitter under the Act. Under Section 46.1 of the Act, as amended by the Bill, an emitter can be a corporate or a physical person or a municipality that carries on or operates a business, an installation or an establishment. Up until this point, the definition does not overly innovate, however, Section 46.1 goes on to say that also included are a person or municipality that "distributes a product whose production or use entails the emission of GHGs".
Based on the review of the testimony and discussion before the TEC, it is clear that the commission had in mind that this definition would be a means to capture downstream distributors of combustibles (i.e gasoline, home heating oil etc) as well as upstream emissions created outside of Québec, however, the ultimate effect is to initially include within the definition of the term "emitter" an extremely large number of businesses that distribute products whose production or use generate GHG emissions. As an example of a different approach, the draft American Clean Energy and Security Act in the United States, rather that using broad language, specifically targets companies that distribute more that a fixed amount of natural gas to customers that are not covered entities.
Under Section 46.2 of the Act, emitters determined by government regulation will have to declare their emissions. A review of Subsection 46.2(1), shows that the emissions that an emitter must declare are those resulting from the operation of its enterprise, installation or establishment or the "production or use of a product that it distributes". As a result, if the regulation setting out the reporting thresholds for emitters does not also exclude emissions relating to production and use of products distributed by the emitter, they will have to determine and declare such emissions to the government.
Emissions generated by the production and use of a product are considered to be scope 3 emissions in The Greenhouse Gas Protocol: A Corporate Accounting an Reporting Standard1, and under that protocol companies are given the option of reporting such emissions or not. As a result, the inclusion of such emissions within the "footprint" of emitters creates a potentially higher standard both for reporting and reduction in Quebec than in other jurisdictions which decide not to include such scope 3 emissions within the footprint of emitters within their jurisdictions.
Furthermore, under Subsection 46.2(2) of the Act, the emitter must supply the Minister with information or documents required by regulation in order to establish the emissions set out in Subsection 46.2(1). Unless the scope of emissions for which reporting is required is reduced by regulation, measuring and reporting these emissions will be difficult and costly as the emitter may not control either the production or the use of the product that it distributes. Moreover, in many cases, the measurement of the GHG emissions created by the use of a product will quite simply not be feasible.
Under Section 46.6 of the Act, every emitter determined by regulation must, within the conditions and for the period set out in the regulation, cover its GHG emissions with an equivalent number of emission units. The GHG emissions referred to in Section 46.6 are those described in Section 46.1 and, as a result, unless such emissions are carved out by regulation an emitter will have to cover the scope 3 emissions referred to previously.
In both Sections 46.2 and 46.6 of the Act, the government has given itself the ability to restrict the classes and categories of emitters that will be subject to reporting and reduction obligations. However, to the extent that the regulations simply refer to threshold emissions for inclusion in either of the provisions, the broad scope of emissions considered to be part of any carbon footprint may cause the government's net to cast wider than it intended (or at least publicly declared). To avoid this, the trigger or conditions used in the eventual regulation(s) to determine whether or not an emitter is subject to a reporting or reduction obligation, will require a further carve-out in order to limit the scope of emissions subject to the reporting or reduction obligation. In the absence of such a carve-out, the reporting and reduction obligations will include the scope 3 emissions described in Section 46.1.
While the broad scope of the covered emissions may surprise some, it is not out of line with the steps that some private corporations have taken recently with respect to their suppliers. As early as 2007, the Financial Times reported that Wal-Mart was asking its suppliers to measure and report their GHG emissions. Ironically, the motivation behind Wal-Mart's action was to find efficiencies in its supply chain, the logic being that cutting carbon equates to more efficient energy use, which equates to lower costs and therefore lower prices for customers.2
Other companies have also taken up the standard, with UK supermarket Tesco putting carbon labels on certain products to show consumers how much carbon went into the production of the product.3
Such initiatives could serve as an incentive for the Quebec government to stay the course in the event that its expansive definition of covered emissions generates push back from emitters. On the flip side, if the cost of compliance is driven too high by the inclusion of emissions that are not covered in other jurisdictions, the issue of leakage may become front and centre and some distributors could choose to withdraw from the province or at the very least remove certain product lines from the shelves in Quebec, rather that cover emissions that they may not believe are their responsibility.
Finally, the Act does not specifically state that emissions relating to the production of a product distributed in Quebec that are accounted for in another regulatory regime, will be excluded from the footprint of the emitter. This issue along with all of the others discussed will have to be worked out in the regulation(s) otherwise, having cast its net wide, the Quebec government may catch more fish than expected.
Carbon MarketWatch
By Douglas W. Clarke
Montreal Climate Exchange ("MCX")
Activity remains depressed on this exchange due to the uncertainty that the underlying element of the forward contracts (Canadian federal GHG emission reduction units) will be available for delivery on the contract expiration dates.
The table above shows the trading volume since January 1, 2009 for the four (4) contracts that are currently traded. Until such time as the federal government begins to create more certainty with respect to the timing of the coming into force of GHG regulation in Canada, there is little reason to expect any significant pick-up in the transaction volumes handled by the MCX.
The MCX has confirmed publicly that it has been in discussions with provincial representatives, including from Alberta, with regard to the establishment of new derivative products the underlying unit of which would be emission reduction units issued under the provincial cap & trade systems. It is unclear however, aside from a deal with Alberta, whether or not a deal with any other province will increase the level of activity on the MCX in the short term since there exists the same level of uncertainty with respect to the provincial cap & trade systems as there is with the federal system (i.e. will they emerge and if so when).
A more interesting route, but one which the MCX has not indicated it will go down, would be the introduction of a futures contract based on one or more voluntary market standards.
OTC Market
Activity in the voluntary OTC markets across North America picked up in the second quarter of 2009, with Voluntary Carbon Standard (VCS) credits up between 8 and 25% to the $4 to $5 range in early July as compared to May 2009 and Californian Climate Action Reserve (CCAR) credits (Carbon Reduction Tons or "CRTs") up $1 to between $7 and $8 for the 2009 vintage, during the same period4. The Chicago Climate Exchange reports that volumes for all Chicago Climate Futures Exchange-traded products are up 70 percent so far in 20095. Volume in the Canadian OTC carbon market has remained soft from our perspective.
On July 23rd the VCS announced that its Board of Directors had ruled unanimously to allow projects hosted in Canada to issue Voluntary Carbon Units without the corresponding cancellation of Assigned Amount Units under the Kyoto Protocol. Previously, Canadian projects did not have access to the VCS standard, which has become one of the most important "brands" in the voluntary carbon market, accounting for a third of that market in 20076 and 48% of the market in 20087. This change creates a significant opportunity for Canadian projects to now create credits that will be more liquid and eventually transferable into the regulatory cap & trade systems looking to come on line in North America within the next 2-3 years8.
It is of note that the VCS accepts all of the project methodologies approved under the Clean Development Mechanism (CDM) and the CCAR. As a result, based on the Proposed Fast Track Eligibility List set out in Annex I of the Guide for Protocol Developers released by the federal government on June 13, 2009, which includes 14 protocols drawn from the CDM and CCAR, Canadian project developers can now, more that ever, create a carbon commodity that has a solid current value in the voluntary market and is likely to be accepted into the eventual federal offset system. This was possible in the past using the ISO 14064 standard but the release of the Fast Track Eligibility List and the opening up of the VCS to Canadian projects should increase the potential liquidity of the credits created in the short term and in the long term, increase the level of comfort that those projects that meet the criteria for both will generate credits that will be saleable in an eventual federal cap & trade system.
Tax Fraud Through the Sale of Carbon Credits
By Simon Labrecque
Nine people were arrested in London recently under suspicion they tried to defraud European authorities of US $62 million in tax revenues owed on carbon trades. The traders are charged with buying carbon credits outside Britain without paying the value added tax ("VAT"), and then reselling the credits in Britain with the VAT tacked on. The traders then disappeared without paying the tax owed to the British government.
This type of fraud could happen in Canada based on the actual rules related to the goods and services tax ("GST") applicable to carbon credits. Effectively, for GST purposes, the purchase and disposition of a carbon credit should be considered the "taxable supply" of an "incorporeal movable property" under the Excise Tax Act ("ETA"). (This result may be different for the trading of carbon credits that are cash settled on a recognized commodities exchange).
Normally, a GST registered purchaser of such a taxable supply should be entitled to claim input tax credits to recover any cost of GST incurred on its acquisition, thus avoiding this indirect cost. In order to claim such input tax credit, the seller must provide the purchaser with a detailed invoice or document containing the information prescribed by the ETA, such as the GST registration number of the seller. With this number, it is possible to verify, on the website of the Canada Revenue Agency, if the GST registration number is valid. The seller must normally remit the GST collected on the sales of the carbon credits to the Receiver General of Canada within a prescribed time.
In practice, the purchaser of carbon credits can mitigate this risk by asking for and validating the seller's GST registration number prior to the transaction. Also, the purchase may ask for documentary evidence that the GST was in fact reported and duly remitted by the seller. Special provisions concerning the seller's obligations concerning GST should be inserted in the purchase and sale agreements.
An alternative solution to avoid such fraud would be for the government of Canada to amend the definition of "financial effect" in the ETA in order to include the emission allowances and carbon credits. A financial effect is a GST "exempted supply" under the ETA. Accordingly, any transaction involving carbon allowances and credits would be exempted from GST. Thus, if a trader purchased carbon credits outside Canada free of GST, he would not be able to charge any GST in addition to the purchase price on such an exempted supply. However, with the actual rules, this type of fraud is, in theory, possible in Canada.
The Role of Nuclear Energy, Gasification and Carbon Capture & Storage ("CCS") in Alberta's Oil Sands
By Patricia Leeson
On April 26, 2007, the Government of Canada released a action plan to regulate greenhouse gas emissions and air pollutants from industrial emitters. As outlined in Turning the Corner: An Action Plan to Reduce Greenhouse Gases and Air Pollution, 9the Government is committed to achieving an economy-wide greenhouse gas reduction target of 20 percent below 2006 levels by 2020.
The Canadian Energy Research Institute ("CERI") has recently examined expected changes to Canada's regulatory regime relating to the costs associated with emitting greenhouse gases (GHGs) from the oil sands. This study focuses on nuclear energy, gasification, and carbon capture and storage as the most likely methods to reduce emissions10.
Background
The oil sands industry consumes substantial amounts of natural gas during production and upgrading activities. In 2006, the oil sands industry accounted for more than 40 percent of Alberta's total natural gas demand. As production levels increase, natural gas consumption by the oil sands industry will increase, which means that unless GHG reduction technologies are implemented, GHG emissions will also increase significantly.
Alternative Fuels and CCS
Nuclear Energy
According to the CERI study, the supply cost for nuclear facilities (e.g., ACR-1000 and EPR-1600) is approximately C$67/MWh. The ability of nuclear energy to produce electricity (or thermal energy) with zero emissions can act as a long-term hedge against uncertain emissions compliance costs. This hedging opportunity is likely to make nuclear energy an attractive option for oil sands operators.11
Gasification
Gasification is a process that does not burn the feedstock (i.e., coal) but gasifies the feedstock. In this process, the impurities in coal are almost entirely filtered out when coal is gasified. The CERI study determined costs of over C$80/MWh, which is more than nuclear energy. However, the long lead time for nuclear energy will likely result in increased use of gasification facilities.
CCS
Carbon capture is the process of capturing CO2from gas streams, which are usually emitted by large industrial sources. Subsequently, captured CO2 is compressed and transported for injection into geologic storage for long-term storage and management.
The estimated cost for post-combustion capture of CO2 ranges from $50 to $70/tonne of CO2 – with a representative value of $55/tonne. The representative value can be viewed as the point at which it makes sense to start capturing emissions from an oil sands project or other industrial facilities. For any emissions compliance cost below this value, it makes more economic sense for projects to pay the compliance cost and allow the emission.
Conclusion
A world where the oil sands is not viewed as dirty (from an emissions perspective) will require the reduction of GHGs, so that the oil sands are on par with conventional oil. This is an attainable goal. With carbon capture and storage and/or nuclear energy, the oil sands can produce fewer emissions on a per barrel basis than conventional crude oil in Canada.
This conclusion is supported by the Alberta Energy Research Institute (AERI), which has released a pair of reports on the Life Cycle Analysis of North American and Imported Crude Oils. The studies found that direct GHG emissions from the oil sands are generally about 10 percent higher than direct emissions from other heavy oil crudes in the US. If cogeneration is taken into consideration, oil sands crudes would be similar to conventional crudes in terms of GHG emissions.12
Carbon Capture and Storage Update
By Patricia Leeson
On June 30, 2009, the Alberta government announced it had completed its evaluation of projects applying for $2 billion in funding for carbon capture and storage ("CCS") projects and would be pursuing letters of intent with proponents of three commercial-scale projects. Successful in their initial requests for provincial funding were:
- Edmonton-owned utility EPCOR and partner Enbridge for an integrated gasification combined-cycle carbon capture power generation facility adjacent to EPCOR'S existing Genesee power plant, west of Edmonton;
- Enhance Energy Inc. and Northwest Upgrading for The Alberta Carbon Trunk Line, to incorporate gasification, CO2 capture, transportation, enhanced oil recovery and storage in the Alberta Industrial Heartland and central Alberta. It will capture CO2 from the Agrium fertilizer plant and the Northwest upgrader; and
- A joint project by Shell Canada Energy, Chevron Canada Ltd. and Marathon Oil Sands L.P. for a fully integrated CCS project at the Scotford Upgrader in the Alberta Industrial Heartland.
It is anticipated these projects will be operational by 2015. Earlier this year the Enhance Energy/Northwest Upgrading and the EPCOR/Enbridge projects were also selected to receive a portion of the up to $140 million dollars in federal government funding for CCS projects. In the final report released by Alberta Energy in July of this year, the Alberta Carbon Capture and Storage Development Council estimated it will take an investment of between $1 - $3 billion per year from the governments of Alberta and Canada combined with significant additional investment of industry to promote further CCS projects after the first wave of demonstration projects.
Carbon Round-Up
Federal Government
On July 11, 2009 the Notice requiring the reporting of GHG emissions for the year 2009, was published in the Canada Gazette (see the notice at http://www.gazette.gc.ca/rp-pr/p1/2009/2009-07-11/html/notice-avis-eng.html#d101). The following changes where brought into effect by the Notice:
- The reporting threshold has been lowered from 100,000 tonnes
CO2 equivalent (CO2E) to 50,000 tonnes
CO2E.
- Venting and Flaring and Waste and Wastewater, two reporting categories used in previous years' reporting, have been split into separate categories.
Under Section 46 of the Canadian Environmental Protection Act, 1999, Environment Canada collects information on greenhouse gas (GHG) emissions from Canadian facilities through its GHG Emissions Reporting Program. Facilities with that emit more than 50,000 tonnes CO2E must report their GHG information to Environment Canada on or before June 1, 2010.
British Columbia
On July 22, 2009, the Pacific Carbon Trust, a Crown corporation established in 2008 as part of B.C.'s Climate Action Plan, delivered its first 34,370 tonnes of emission offsets to the B.C. government.
The Pacific Carbon Trust purchases offsets generated by B.C.-based activities, which supports a low-carbon economy for B.C. and helps the province meet its goal of achieving carbon neutrality
The Pacific Carbon Trust has the goal to purchase over 700,000 tonnes of offsets annually by 2011.
Nova Scotia
On August 14, 2009 Nova Scotia released the Greenhouse Gas Emission and Air Pollutant Regulation.
The regulation applies to electrical generation facilities with emissions over 10,000 tonnes CO2E and sets hard caps on emissions within the electricity sector. Emissions will reduce slightly between 2010 and 2013 after which they will be allowed to increase before going more than one third lower in 2020.
Facility owners will be able to apply for "new transmission incentives", which are increases in the emissions cap for a compliance period that are granted in return for eligible investments made by a facility owner that "has or will increase the facility owner's ability to move electrical power generated in the Province by sources of low-emissions electricity."
United States
On June 26, 2009 the US House of Representatives passed the bill establishing the American Clean Energy and Security Act of 2009 ("ACES") by a narrow margin of 219 votes to 212. During the debate, House Republicans criticized the bill as amounting to an energy tax which would lead to job losses to countries like China that do not regulate emissions.
The bill's passage was in part thanks to major lobbying by the White House, as climate change and clean energy legislation are domestic priorities of President Obama.
Changes that were inserted into the bill in order to obtain the support necessary for passage include:
- The oversight of forestry and agricultural offsets by the
Department of Agriculture as opposed to the Environmental
Protection Agency (EPA).
- A prohibition on the inclusion of indirect land use change in
the calculation of the GHG intensity of biofuels for a period of
five years.
- The expansion of the definition of renewable biomass.
- The receipt by small petrochemical refiners of an additional
.25% of emission allowances between 2014 and 2026.
- The placing of restrictions on OTC energy derivatives.
- No electricity local distribution company will receive more
emission allowances than it needs for its direct and indirect cost
of compliance and any additional allowances will be distributed
based on historic GHG emissions data.
- Electricity local distribution companies that deliver less that 4 MWH annually will receive .5% of the allotted emissions allowances between 2012 and 2025. The allowances are to be used for energy efficiency, renewable electricity, and low income ratepayer assistance programs.
The Bill is presently at the Senate where it has had two readings.
There are already initiatives underway in the Senate Energy and Natural Resources Committee, which passed a draft bill entitled the American Clean Energy Leadership Act on June 17. On July 17, 2009 this bill was also placed on the Senate calendar. The Senate Environment and Public Works Committee is also planning to propose a GHG cap-and-trade measure.
These measures, and others under consideration by Senate committees, deal with many of the issues already addressed by ACES. If the Senate passes its own bill that combines the different measures, differences between the Senate bill and the ACES will have to be reconciled, with a final version of the bill being passed by both Houses. The last hurdle, before being signed into law, will be the veto power of President Obama.
Footnotes
1.By the World Business Council for Sustainable Development and the World Resources Institute, available online at http://www.ghgprotocol.org/files/ghg-protocol-revised.pdf .
2. "Wal-Mart Seeks Emissions data" September 24, 2007,available online at www.ft.com; "Wal-Mart Asks Suppliers to Disclose Emissions Data, August 7, 2009" available online at http://www.climatechangecorp.com/content.asp?ContentID=4921 .
3. "Rolling Out Carbon Labelling", available online on September 11, 2009 at http://www.tesco.com/greenerliving/cutting_carbon_footprints/ carbon_labelling.page;
4."VERs Boosted by US Climate Bill", available online at http://www.carbonpositive.net/viewarticle.aspx?articleID=1599 .
5. "CCX Welcomes CFTC Consideration of Carbon Contract" available online at http://www.chicagoclimatex.com/news.jsf?story=3172
6. "Apex Powers the Voluntary Carbon Standard Registry" available online at http://www.apx.com/news/pr-APX-Powers-Voluntary-Carbon-Standard-VCS-Registry.asp .
7."Standards Now Integral to Voluntary Carbon Markets" available online at http://www.carbonpositive.net/viewarticle.aspx?articleID=1565
8. "VERs Boosted by US Climate Bill" available online at http://www.carbonpositive.net/viewarticle.aspx?articleID=1599 .
9.Available online at www.ecoaction.gc.ca/news-nouvelles/pdf/20070426-1-eng.pdf
10. Available online at www.ceri.ca/
11.However, the downside to nuclear energy is the associated lead time and construction costs.
12.Cost is always an issue. However, CERI has recently reported that the petroleum industry is expected to be a major contributor to the Canadian economy over the next 25 years. The sector could have gross domestic product (GDP) impacts of $3.6 trillion based on investment exceeding $1 trillion.
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