Canada: TIER Amendments Provide Price Certainty And Incentivize Carbon Capture And Storage

On January 1, 2023, significant amendments to Alberta's Technology, Innovation and Emissions Reduction Regulation (TIER) came into effect. The amendments align TIER with the federal Greenhouse Gas Pollution Pricing Act (GGPPA), facilitate TIER participation by the proponents of carbon capture and storage (CCS) projects, provide price certainty and seek to address a potential surplus of provincial carbon credits in the coming years.

INCREASE IN TIER FUND CREDIT COST TO ALIGN WITH GGPPA

Although not publicly accessible on the Alberta Environment and Protected Areas (AEPA) website until mid-January 2023, Alberta's Minister of Environment and Protected Areas issued Ministerial Order 62/2022 on December 21, 2022. The Ministerial Order confirms the cost to obtain TIER Fund credits will increase in C$15 annual increments from C$65 per credit in 2023 to C$170 per credit in 2030. This change aligns TIER with the carbon pricing requirements established by the federal GGPPA. For additional details regarding the interplay between TIER and the GGPPA, see our January 2022  Blakes Bulletin: Alberta Increases Cost of TIER Fund Credits to C$50.

For the last several years, TIER Fund price announcements have been made annually. By confirming that TIER will align with the GGPPA over the long term, the current Alberta government appears to have embraced the federal government's carbon pricing regime for large emitters, rather than pushing back against this aspect of the energy transition. The Ministerial Order provides additional certainty in the market by confirming the long-term (i.e., eight-year) price for carbon credits in Alberta. This additional price certainty is likely a welcome change for regulated entities and emission offset generators. It should facilitate both financing and contractual negotiations for certain types of carbon credit projects in the near to medium term.

TIER AMENDMENTS

The Ministerial Order was issued shortly after Alberta's Minister of Energy released an Order in Council implementing significant amendments to the TIER regime that came into effect on January 1, 2023.

Perhaps the most noteworthy amendment is the establishment of a new set of TIER credits, designed to facilitate TIER participation by CCS proponents. The TIER amendments include:

• New CCS credits: Sequestration credits and capture recognition tonnes are established as new compliance instruments.
  • Sequestration credits: Emission offsets that have been serialized on the Alberta Emission Offset Registry may be converted into a sequestration credit if: (a) the offset was created from the geological sequestration of CO₂, (b) the sequestration occurred in 2022 or later, and (c) the CO₂ was captured by a large emitter or opted-in facility that is regulated under TIER.
    • AEPA has advised sequestration credits may be used to satisfy compliance obligations under TIER and the federal Clean Fuel Regulations (CFR). While the "stacking" of sequestration credits is not expressly addressed in the TIER amendments, AEPA's statement aligns with the federal government's comments that the dual use of credits under the CFR and provincial regimes could be possible, if authorized by provincial regulators. See our July 2022  Blakes Bulletin: Canada Finalizes Clean Fuel Regulations for additional information regarding the interplay between the CFR and provincial emission reduction regimes.
  • Capture recognition tonnes: Large emitters or opted-in facilities can convert sequestration credits into capture recognition tonnes and deduct those tonnes from their net emissions in order to reduce emission reduction obligations under TIER. A sequestration credit can be converted into a capture recognition tonne if: (a) the geologically sequestered CO₂ was captured by the large emitter or opted-in facility that has requested the conversion, (b) the sequestration occurred in 2023 or later, and (c) the conversion occurs on or before May 31 of the year after sequestration occurred.
• Accelerated credit expiry: Emission offsets, emission performance credits (EPCs) and sequestration credits with a vintage year of 2023 or later will remain valid for five years after the year in which they are generated. This represents a reduction from the current eight- and nine-year expiry periods for EPCs and emission offsets, respectively.
• Increased credit use limit: Emission offsets, EPCs and sequestration credits can be used to satisfy 60% of a regulated facility's emission reduction obligation under TIER in 2023, which is consistent with the current credit use limit. However, this limit will increase to 70% in 2024, 80% in 2025 and 90% in 2026 and future years.

The amendments confirm the provincial government's support of CCS projects under the TIER regime. In addition to developing new compliance credits specific to CCS projects, the TIER amendments also contemplate the possibility that many CCS-related credits will be produced if the 25 CCS projects for which the province has allocated pore space come to fruition. By accelerating the rate at which credits expire and increasing the credit use limit, the TIER amendments take some steps to facilitate ongoing demand for carbon credits in the face of potential increased supply.

Other notable TIER amendments increase the stringency of emission reduction obligations and expand the number of entities that can opt in to the regime. While not specifically aimed at CCS, these amendments may also facilitate increased and ongoing demand for carbon credits generated in Alberta:

• Emissions scope includes flaring: Regulated emissions for aggregate oil and gas facilities now includes emissions associated with flaring.
• Benchmark tightening: While it is not immediately clear from the amended version of TIER, AEPA has advised that a 2% annual tightening rate will apply to facility-specific benchmarks and high-performance benchmarks. For oil sands mining, in situ and upgrading, the annual tightening rate will be 4% in 2029 and 2030.
• Reduced opt-in threshold for the emissions-intensive trade-exposed sector: Qualifying facilities may opt in to TIER if they emit 2,000 tonnes of CO₂e per year, which represents a significant decrease from the previous threshold of 10,000 tonnes of CO₂e per year. By facilitating TIER participation by otherwise ineligible small emitters, this change may increase demand for carbon credits.

LOOKING AHEAD

With the exception of electricity, hydrogen and industrial heat, the high-performance benchmarks for products previously identified in Schedule 2 of TIER have been eliminated. AEPA has advised that it will release additional high-performance benchmarks via ministerial order in early 2023. We expect some of the benchmarks that were eliminated as part of the TIER amendments will be replaced pursuant to those ministerial orders. AEPA has also signalled that updates to the TIER standards (e.g., the Standard for Greenhouse Gas Emission Offset Project Developers and the Standard for Validation, Verification and Audit) may be forthcoming.

We will continue to monitor these and other developments with respect to TIER.

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