On October 7, 2009, the Ministry of the Environment ("MOE") released a draft Greenhouse Gas ("GHG") Emissions Reporting regulation (the "Regulation"), which the Ontario Government envisions will form the basis of a provincial cap and trade system. The announcement follows the introduction of Bill 185 on May 27, 2009, an act aimed at implementing a GHG cap and trade system in Ontario which has received Second Reading and is currently before committee. The Regulation is intended to align Ontario's proposed system with programs being developed in other parts of North America, including those by the Western Climate Initiative ("WCI") and the United States Environmental Protection Agency ("EPA").
The various reporting requirements contained in the Regulation, including requirements for third party verification, will be phased in over the next three years. An accompanying Guideline for Greenhouse Gas Emissions Reporting (the "Guideline") has also been released which sets out mandatory standardized methods for the quantification of emissions as well as best alternative quantification methods for use during the first year of reporting. The draft Regulation and Guideline have been posted on the Environmental Registry for a 30-day public consultation period, during which time the MOE is seeking comments from interested stakeholders.
Highlights of the draft Regulation include:
- Mandatory reporting for all regulated sources that emit 25,000 tonnes of carbon dioxide equivalent (CO2e) or more per year
- Mandatory reporting of 2010 emissions in the year 2011, and mandatory annual reporting thereafter
- Flexibility to use the best alternative quantification methods for 2010 emissions, which must be reported in 2011
- Use of standardized methods to quantify emissions starting with the reporting of 2011 emissions in 2012
- Mandatory third party verification for 2011 emissions, to be verified in 2012 and every year thereafter
- Submission deadline for emission reports of June 1 of each year starting in 2011
- Completion deadline for third party verification of September 1 of each year, starting in 2012.
Background
Cap and trade, also known as emissions trading, is a market-based mechanism that may reduce GHGs as well as facilitate technological innovation, economic growth and job creation. In a cap and trade system, the government sets a limit or cap on the total amount of GHGs that can be emitted from regulated facilities. Individual facilities are issued emission permits that allow the permit-holder to emit specified amounts of GHGs. Permit-holders that wish to increase their emission allowance must buy credits from those who have a surplus of allowable emissions. Over time, the limits are gradually reduced in line with the government's emission reduction and climate change goals.
The Ontario Government has been working with other North American jurisdictions to develop an integrated approach to emissions reporting and cap and trade. In June 2008, Ontario signed a Memorandum of Understanding with Québec to collaborate on a regional cap and trade initiative. Ontario is also a member of the Climate Registry, a broad-based North American GHG initiative that has developed a voluntary reporting and verification program for it members.
Last year Ontario also joined the WCI, a collection of seven US states and Québec, Manitoba and British Columbia, whose aim is to reduce GHG emissions independently of their federal governments. On July 15, 2009, the WCI released the final version of its Essential Requirements for Mandatory Reporting (the "WCI rules"), containing third party verification requirements and GHG monitoring, reporting and record keeping methodologies for a comprehensive range of emission source categories.
On September 22, 2009, the EPA introduced the United States' first GHG reporting system, which is due to take effect on January 1, 2010. Earlier this year the Obama administration introduced the American Clean Energy and Security Act to establish a cap and trade system. Also known as the Waxman-Markey Bill, it was passed by the House of Representatives on June 26, 2009, and is now awaiting debate in the Senate. These recent developments reflect a growing trend in North America to focus on cap and trade as a GHG reduction mechanism.
Overview Of Regulation
The proposed Regulation is intended to lay the foundation for an Ontario cap and trade system that aligns with emissions trading programs being developed across North America. In order to ensure that Ontario facilities gain access to these markets, a reporting regime that generates accurate emissions data must be in place. To allow for flexibility and sufficient lead-in time, the Ontario Government has designed the Regulation so that reporting requirements are phased in over the next three years. Moreover, it will allow facilities to develop the necessary capacity to comply with the standardized emissions quantification methods as well as third party verification requirements.
The Regulation applies to "facilities" and broadly focuses on three main areas: the reporting threshold, third party verification of emissions data, and a standardized emissions quantification framework. These are discussed in more detail below:
As defined in the Regulation, a facility means all buildings, equipment, structures and stationary items that are owned or operated by the same person and are located either (a) on a single site; (b) on two or more integrated adjacent sites; or (c) on two or more non-adjacent sites, if the activities carried out at all of the sites consist of:
- natural gas storage, transmission or distribution;
- oil or gas production or processing;
- oil transmission; or
- electricity transmission.
Although the Regulation will apply across a broad range of industry groups, the following industries are most likely to be affected by the new emissions reporting obligations:
- Extractive industries and metals production
- Electricity generation
- Pulp and paper production
- Refrigeration industry
- Petroleum industries
- Chemicals manufacturing.
Where feasible, the Ontario Government has said it will harmonize the requirements of the Regulation with those of the WCI and EPA. There are a number of areas where the Regulation differs from the requirements of its North American partners. Most importantly, the Regulation is limited to the direct generation of GHGs. As discussed below, Ontario will not require fuel suppliers to report emissions, which contrasts with the requirements of the WCI, EPA and the Climate Registry, all of which set out requirements for fuel suppliers. Ontario's proposed Regulation also contains a 25,000 tonne reporting threshold, which is in line with the EPA but higher than the 10,000 tonne WCI threshold.
The Climate Registry also mandates the reporting of emissions throughout all of North America and encourages the reporting of emissions associated with an organization's worldwide activities. The proposed Regulation is silent on the issue of geographic boundaries.
Reporting Threshold
In line with the EPA reporting system, the draft Regulation will require all regulated sources emitting 25,000 tonnes of CO2e or more per year to report their emissions on an annual basis. Facilities emitting between 10,000 and 25,000 tonnes will not be subject to the reporting requirements. The MOE plans to encourage these smaller facilities to report emissions voluntarily to ensure that they are prepared to adapt to emerging North America-wide requirements, such as the 10,000 tonne threshold in the WCI rules.
Mandatory reporting of 2010 emissions will begin in the year 2011, with a June 1 deadline for emissions reports each year.
Third Party Verification
One of the key components of the proposed Regulation is the requirement for emissions reports to be verified by an accredited verification body, in accordance with the provisions of the Regulation. Under the Regulation, an accredited verification body is defined as one that has been accredited to ISO 14065 by a member of the International Accreditation Forum. The verification requirement is intended to provide a reasonable level of assurance that the emissions report was prepared in accordance with the quantification and contents requirements of the Regulation and that it contains no material discrepancies.
Mandatory third party verification will apply for the first time to emissions generated in 2011, with the first verification to be submitted in 2012.
Standardized Quantification Framework
The Guideline, which has also been posted on the Environmental Registry, sets out the standardized mandatory methods to be used to quantify emissions for each of the specified sources. The Guideline relies primarily upon the methods contained in the WCI rules and those adopted by the U.S. in the EPA reporting regulations. The Guideline also sets out the best alternative quantification methods that may be used for reports submitted in 2011 for GHG emissions generated in 2010.
Document And Record Retention
Under the Regulation, owners of facilities will be required to keep certain records relating to the collection and quantification of GHG emissions data. Among other things, facilities affected by the Regulation will be required to keep certain records in paper or electronic format for a period of at least seven years. These requirements will be in addition to the records retention requirements of clause 4.10 of ISO 14604-3.
Exclusion Of Fuel Suppliers
The Regulation does not require fuel suppliers to report emissions attributable to the combustion of their products in transportation, residential, commercial or other industrial sectors. This contrasts with WCI proposals and EPA requirements for such mandatory reporting. The MOE has stated that it will reconsider the inclusion of fuel suppliers once it has conducted a full review of the WCI fuel supplier methods and the EPA requirements.
Preparing For A Cap And Trade System
The proposed Regulation represents a significant step towards the implementation of a cap and trade system in Ontario. It is still too early to determine the final shape of a reporting system for cap and trade in Ontario given the MOE's intention to harmonize emissions reporting requirements with other jurisdictions. However, based on the Regulation as currently drafted, it appears likely that certain industries will ultimately be required to comply with new reporting obligations. Further details of a made-for-Ontario cap and trade framework are anticipated in the coming months and those industries most likely to be affected by the new regulatory regime will need to consider how Bill 185 and its regulations will impact business operations in the future.
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