The Ontario Emissions Performance Standards (the "Ontario EPS"), a performance-based carbon pricing system for industry is set to take effect in Ontario commencing on January 1, 2022 (unless that date is extended). Under the Ontario EPS, regulated facilities are allocated an annual 'baseline' amount of greenhouse gas ("GHG") emissions that they are permitted to release (the "GHG Emissions Limit"). Regulated facilities will have to pay a carbon price on their emissions output if it exceeds their GHG Emissions Limit. With the GHG Emissions Limit for most emitters set to become more stringent over time and the carbon price expected to increase annually, Ontario emitters have a strong and rising economic incentive to adopt and develop strategies and technologies that reduce their GHG emissions.
Below is a high-level summary of the key attributes of the Ontario EPS. Further details can be provided by contacting the authors.
Background
In 2018, the Canadian government enacted the Greenhouse Gas Pollution Pricing Act (the "GGPPA").1 Under the GGPPA, the Canadian government imposes a 'backstop' carbon pricing system on provinces and territories that have not implemented carbon pricing systems of their own or, in the opinion of the federal government, have implemented carbon pricing systems that do not align with the federal benchmark requirements (the "Federal Backstop"2 The Federal Backstop has two (2) key parts:
- part 1 imposes a carbon levy on the sale of fuel (the "Fuel Charge"); and
- part 2 sets out an output-based pricing system which applies to "covered facilities" - industrial emitters that meet certain criteria set out in the GGPPA and its regulations (the "Federal OBPS").3
Currently, both the Fuel Charge and the Federal OBPS apply in Ontario.4
The Ontario Emissions Performance Standards
The Ontario EPS, a provincial alternative to the Federal OBPS, was initially created in July 2019 under the Greenhous Gas Emissions Performance Standards5 (the "GGEPS Regulation"), a regulation that was enacted under the Environmental Protection Act.6 The administrative requirements of the Ontario EPS came into force in July 2019 and have since been operating alongside the Federal OBPS. However, the substantive requirements of the Ontario EPS had yet to be enforced to avoid duplication with the Federal OBPS.
On March 29, 2021, Environment and Climate Change Canada announced its intent to take the necessary measures to transition the Federal OBPS to the Ontario EPS on January 1, 2022. To that end, barring any changes to the foregoing intention, the substantive requirements of the Ontario EPS will formally supplant the substantive requirements of the Federal OBPS from 2022 onwards.7
It is important to note that, once the Federal OBPS is formally supplanted by the Ontario EPS, the Fuel Charge will continue to operate alongside the Ontario regime and will still apply to the sale of fuel in the province.
Ontario EPS Participation
Participation in the Ontario EPS will be mandatory for facilities that:
- as a result of GHG emissions that occurred in 2014 or any subsequent year, is or was required to file a report under Ontario Regulation 390/18 (Greenhouse Gas Emissions: Quantification, Reporting and Verification) (the"GHG QRV Regulation"), Ontario Regulation 452/09 (Greenhouse Gas Emissions Reporting), Ontario Regulation 143/16 (Quantification, Reporting and Verification of Greenhouse Gas Emissions), or section 46 of the Canadian Environmental Protection Act;
- the amount of annual GHG emissions in respect of the facility, as set out in one of the reports mentioned in item 1 above, is at least 50,000 tonnes of carbon dioxide equivalent emissions ("CO2e"); and
- the primary activity engaged in at the facility is an industrial activity listed in paragraphs 1 to 38 of Schedule 2 of the GGEPS Regulation, which includes, among other things, smelting or refining from feedstock, bitumen or crude production and processing, petroleum refining, processing natural gas, transmission of natural gas, and production of grain ethanol, cement, lime, iron ore pellets, coal, nitric acid, pulp, and bricks.8
Ontario EPS participation will be voluntary for facilities that satisfy the requirements in items 1 and 3 above, have an annual GHG emissions output of at least 10,000 tonnes of CO2e, and are registered under Part II of the GGPPA.9 A facility may want to opt-in to the Ontario EPS because, among other things, it will likely exempt them, in whole or in part, from paying the Fuel Charge on fuel used in their facility. With the Fuel Charge set to increase significantly over the next nine years, facilities that meet the voluntary participation threshold will want to assess whether it would be more cost effective to be subject to the Fuel Charge or the compliance obligations associated with Ontario EPS participation.
GHG Emissions Limits
Facilities regulated by the Ontario EPS ("Ontario EPS Facilities") will pay a carbon price on their emissions output if it exceeds their GHG Emissions Limit. A facility's GHG Emissions Limit will be determined annually in accordance with the "GHG Emissions Performance Standards and Methodology for the Determination of the Total Annual Emissions Limit" (the "EPS Methodology").10 There are various factors that will effect a facility's GHG Emissions Limit, including but not limited to, the type of emissions produced at the facility, the emissions-intensive trade exposed level in which a facility operates, and whether the facility is subject to a facility-specific or sector-specific emissions performance standard.11
GHG Reporting Requirements
All establishments (including but not limited to Ontario EPS Facilities) that engage in a specified GHG activity, as set out in Column 1 of Schedule 2 of the GHG QRV Regulation, are required to give a report to the director if the reporting amount in respect of the facility for each calendar year is 10,000 tonnes of CO2e or more.12 Ontario EPS Facilities have an additional obligation to get their reports verified by a third party.13
Compliance Obligations
Ontario EPS Facilities will be able to achieve its GHG Emissions Limit by either reducing its GHG emissions to the target level or, submitting one compliance instrument (as described below) for each tonne of CO2e that was emitted beyond the GHG Emissions Limit. There are two (2) types of compliance instruments:
- excess emissions units (credits purchased from the government of Ontario at the unit price ($40 per excess emissions unit in 2022 and $50 per excess emissions unit in 2023);14 and
- performance units (credits that are earned by Ontario EPS Facilities that outperform their GHG Emissions Limit).
With regard to item 2 above, the number of performance units that will be issued to an Ontario EPS Facility will correspond to the difference between the GHG Emissions Limit and the actual quantity of GHGs emitted by the facility. Ontario EPS Facilities will have the option of either banking performance units to offset excess emissions in future years or selling them to other Ontario EPS Facilities that fail to meet their GHG Emissions Limit.15
Current Developments
On May 27, 2021, the Ministry of Environment, Conservation and Parks, posted proposed amendments to the Ontario EPS for comment. These changes are in addition to proposed changes that are under consideration and consulted on through Environmental Registry notice 019-2813. The proposed amendments seek to clarify certain compliance and reporting requirements, support the administration and enforcement of the Ontario EPS, and reduce any unnecessary regulatory burden on industry while creating further alignment with the federal benchmark requirements.
Conclusion
We will continue to monitor the developments associated with the proposed amendments to the Ontario EPS and any changes to the intended transition date (January 1st, 2022).
Footnotes
1 SC 2018, c 12, s 186.
2 Ibid.
3 Ibid.
4 Ibid at Schedule 1.
5 O Reg 241/19 [GGEPS Regulation].
6 RSO 1990, c E 19
7 See Ontario, "Emissions Performance Standards Program" (August 16, 2021), online at: Emissions Performance Standards program | ontario.ca
8 GGEPS Regulation, supra note 5 at s 2(1).
9 Ibid at s 4(1).
10 Ibid at s 12.
11 See Ontario Canada, "GHG Emissions Performance Standards and Methodology for the Determination of the Total Annual Emissions Limit", (July 2019) at 6 - 9, online (pdf): https://www.ontariocanada.com/registry/showAttachment.do?postingId=28727&attachmentId=41017
12 See Greenhouse Gas Emissions: Quantification, Reporting and Verification, O Reg 390/18, at s 6.
13 Ibid at s12(2)(a).
14 GGEPS Regulation, supra note 5 at s 11(9).
15 Ibid at s 19(3).
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.
