Alberta Unveils Changes to Its Credit and Offset Regime: What’s in Store for Large Industrial Emitters

by Blake, Cassels & Graydon LLP
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[co-author: Josh Smith, Student-at-Law]

On December 6, 2017, the Government of Alberta released guidance documents regarding the new Carbon Competitiveness Incentives (CCI) Regulation, which will come into force on January 1, 2018 and replace the existing Specified Gas Emitters Regulation (SGER). While the guidance documents are quite extensive and provide glimpses into what the CCI Regulation will entail, there are also several concepts that remain unclear, such as references to CCI pricing, allocation of free emissions, determination of carbon leakage risk, and exactly how and what aspects of the CCI Regulation will be phased in over a three-year period.

ELIGIBILITY THRESHOLD AND SECTOR-BASED EMISSIONS PERFORMANCE

The CCI Regulation will apply to any facility that has emitted 100,000 tonnes or more of carbon dioxide (CO2) equivalent greenhouse gas (GHG) emissions since 2003. As such, it will generally apply to the same facilities that are presently regulated under the SGER. It will also require third-party verifiers and third-party verification reports in a manner similar to what presently exists under the SGER. However, the primary methodology regarding GHG emissions reductions under the CCI Regulation will be markedly different. Unlike the SGER, which is a facility-specific regime, the CCI Regulation will primarily involve a product-based or “best-in-class” sector-specific carbon competitiveness regime, including stringency based on “good-as-best gas” for electricity and “top quartile performance or better” for oil sands in-situ and mining. In essence, regulated facilities will be compared to other regulated facilities in their sector, with the least efficient facilities being penalized.

In all other categories, emissions benchmarks will be set at a maximum of 80 per cent of production-weighted average emissions intensity. If the risk of carbon leakage for a given sector is real (i.e., the risk that an industry will set up in another jurisdiction with less stringent rules surrounding GHG emissions is a real and valid concern), the emissions intensity stringency will be lessened to 90 per cent or 100 per cent of production-weighted average until the risk is mitigated. Other than these generic statements, the guidance documents contain no clarification as to how the risk of carbon leakage will be determined and quantified.

Only in rare, outlying cases will the CCI Regulation impose facility-based benchmarks. These cases include where only one facility produces a particular product, or the upgrading, natural gas processing, and multi-product chemical sectors where interim facility-based average emissions will be used until product-specific benchmarks are established. In the event that a facility-based benchmark is determined, it cannot be extended to a new entrant or other existing facility.  

EMISSIONS CALCULATIONS

The CCI Regulation will cover the same gases described in the SGER, plus an additional nine gases to align with the United Nations Framework Convention on Climate Change. It will also be restricted to direct emissions only. Indirect emissions, such as those associated with electricity, heat and hydrogen imported by a facility will be excluded from the emissions intensity threshold, but will be included in any output-based allocation calculations.

Industrial process emissions, which are emissions that are primarily fixed by chemistry and therefore not amenable to any type of efficiency reduction, will be set at 100 per cent of an established benchmark, effectively exempting them from any emissions intensity reduction requirements. Similarly, carbon dioxide emissions from biomass combustion or decomposition will be exempt from the emissions threshold and from CCI pricing. Conversely, methane and nitrous oxide emissions from biomass combustion or decomposition will be included in the CCI pricing. As noted above, the CCI pricing mechanism is not described in the guidance documents.

The CCI Regulation will also include benchmarks for facilities with co-generation that export any heat or power to ensure they benefit from the associated reduced emissions intensity. However, at this time no further indication has been provided as to how that regime will work.

Finally, the guidance documents refer to “allocations” of free emissions, which will decrease at one per cent per annum beginning in 2020. Other than confirming that allocations will not apply to industrial process emissions, the guidance documents do not provide any further clarification about how the allocations will work. Furthermore, referring to such allocations at all is somewhat confusing, because the issuance of allocations of free emissions is more of a cap and trade concept rather than an emissions intensity concept, upon which the CCI Regulation will be based. That stated, their reference may simply be a means of identifying emissions intensities that are below the applicable emissions intensity compliance target, which will become one per cent more stringent each year.

INCREASED CREDIT LIMIT USAGE AND CREDITS EXPIRY

As described in our March 2017 Blakes Bulletin: Alberta to Restrict Compliance Options for Large Industrial Emitters: Smart Policy or Government Windfall?, the Alberta government had previously issued a policy decision whereby the use of emission performance credits or offsets (collectively referred to as “credits”) was capped at 30 per cent of a facility’s compliance obligations. Under the CCI Regulation, this limit is increased to between 50 and 60 per cent. More specifically, the CCI Regulation will differentiate between old credits (2016 vintage year and earlier) and new credits (2017 vintage year and later). Old credits issued in 2014 or earlier will be valid until 2020, at which point they will expire and become unusable for compliance purposes. Old credits issued in 2015 and 2016 will expire in 2021. Conversely, new credits will be valid for an eight-year period, after which they will expire.

Facilities may allocate any combination of old and new credits towards up to 40 per cent of their compliance obligations for the 2018–2021 compliance periods. In addition, they may allocate another 10 per cent of new credits only towards their 2018 compliance obligations, which amount increases to 15 per cent in 2019 and 20 per cent in 2020, for a total allocation of 60 per cent. By 2022, facilities will be unable to utilize old credits and the combined overall credit allocation will remain at 60 per cent.

REPORTING OBLIGATIONS FOR “SUPER-EMITTERS”

The CCI Regulation will increase reporting obligations for facilities that emit more than 1 million tonnes of carbon dioxide per year (Super-emitters). Super-emitters will be required to file annual forecasts of emissions, production and credit usage. They will also be required to file quarterly compliance reports, which should include incremental true-ups regarding credit usage and explain any unexpected events that impact annual forecasts. All other facilities will continue to file annual reports.

THREE YEAR PHASE-IN AND FIVE YEAR REVIEW PERIOD

The CCI Regulation compliance obligations will phase in at 50 per cent in 2018, 75 per cent in 2019 and 100 per cent in 2020. As noted in the guidance documents, the three year phase-in is a transition allowance based on historical emissions. The phase-in will also apply to credits generated under the CCI Regulation.

Beyond referring to these general concepts, the guidance documents provide no further clarification as to how the phase-in will occur or exactly what aspects will be covered each year. However, the government has subsequently indicated that the three year phase-in will not apply to electricity generation.

The CCI Regulation is anticipated to include a clause that mandates a full policy review every five years. Changes to benchmarks can only be made during this review period, which should provide some stability to industry and emitters.

TAKEAWAY

Despite the fact that the CCI Regulation is expected to be in force as of January 1, 2018, its formal publication has yet to occur. While the guidance documents provide a glimpse of what the CCI Regulation will entail, several aspects of the regime remain unclear. As such, with less than three weeks to go until the new regime is in place, its full extent, and how it will be applied and enforced, remains to be seen.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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