Federal government accepts made-in-Ontario emissions performance standards

On the eve of the Supreme Court of Canada’s hearing on the constitutionality of the federal Greenhouse Gas Pollution Pricing Act (GGPPA), the federal Minister of Environment and Climate Change (MECC) determined that Ontario’s emissions performance standards (EPS) for industrial emitters meet the minimum stringency requirements under that Act. This allows Ontario to transition large industrial emitters in the province—which are currently subject to the federal output-based pricing system (OBPS)—to its EPS program.

What You Need To Know

Released in July 2019, the EPS program was largely put on hold while Ontario sought to be removed from the list of provinces under the GGPPA that are subject to the OBPS. Although significant details of the transition from the OBPS to the EPS must still be finalized, once that transition is complete, the EPS will, among other things:

• apply to the sectors covered by the federal OBPS based on a mandatory emissions threshold of 50,000 tonnes of carbon dioxide equivalent (tCO2e) per year;
• require each regulated entity to reduce emissions or purchase/use compliance units to cover the difference between the entity’s total emissions and annual limit imposed under the EPS regime; and
• set the price of compliance units in lockstep with the federal backstop carbon price, which is $20 for 2020, and which increases $10 a year to $50 in 2023.

Notably, on September 22 and 23, 2020, the Supreme Court of Canada heard arguments regarding the constitutionality of the GGPPA, which is an appeal from the reference case decisions from the Saskatchewan, Ontario and Alberta Courts of Appeal. Notwithstanding the expected transition to EPS, that court case remains relevant to Ontarians, even if the Supreme Court finds the GGPPA constitutional, given that the GGPPA imposes a charge on fossil fuel distribution that would continue to apply in the province.

Highlights

As discussed in our February 2019 bulletin, Ontario introduced its EPS program as an intended substitute for the federal OBPS, which became mandatory in the province following the cancellation of Ontario’s cap-and-trade system. The OBPS applies to emission-intensive, trade-exposed industrial facilities in provinces where the pricing of greenhouse gas (GHG) emissions does not meet (as determined by the Governor-in-Council) the minimum standards of the GGPPA. In addition to the OBPS, the GGPPA established a charge on fossil fuel distribution, which will continue to apply in Ontario (assuming the Supreme Court finds the GGPPA constitutional).

The federal MECC’s recent determination allows Ontario to transition large industrial emitters in the province to the EPS program. Key details about that transition still need to be finalized, including the timing of the transition and whether or not the EPS will be applied only to future compliance periods.

The key aspects of the EPS (as prescribed by O. Reg. 241/19) are highlighted below. To date, only the registration and record keeping provisions under O. Reg. 241/19 have come into effect, while the other compliance requirements were put on hold as Ontario sought to be removed from the federal OBPS.

• Covered sectors. Ontario’s EPS will apply to the same sectors covered by the federal OBPS, including: cement, chemicals, power generation, food (i.e., sugar, corn milling), industrial, food and fuel ethanol, metal tubes and steel, lime, metal mining or milling, mineral products, natural gas liquids, natural gas transmission, non-ferrous metal smelting and refining, petroleum refineries, oilseeds processing, pulp and paper, upstream oil extraction and upgrading, and vehicle manufacturing.
• Registration threshold. The EPS will apply to covered facilities with annual emissions of at least 50,000 tCO2e and allow voluntary opt-in by facilities with annual emissions between 10,000 and 50,000 CO2e. GHG emissions from both fixed processes (i.e., chemical or physical reactions not related to combustion) and non-fixed processes (i.e., combustion, fugitive and on-site mobile sources) are covered by the EPS.
• Annual emission limits. Annual emission limits are established relative to the historical emission or emission intensity for a facility or sector. The detailed methodology is outlined in “GHG Emissions Performance Standards and Methodology for the Determination of the Total Annual Emissions Limit”.
• Compliance units. Regulated entities can purchase compliance units to cover any emissions above the EPS limit, at a price that will match the federal backstop carbon price of $20 per tonne in 2020 and increasing to a maximum of $50 per tonne in 2023. Compliance units may be transferred between facilities’ accounts by agreement provided that notice requirements are followed.

As mentioned above, no specific timeline for transition to the EPS has been announced, although the Ontario Ministry of Environment, Conservation and Parks (MECP) indicated that it “will immediately get to work with the federal government to ensure a smooth transition for industry and to ensure there is clear understanding around compliance requirements”. The MECP also stated that the EPS program will be phased in over time—“saving Ontario industries the initial shock that is present in the federal plan and giving industry more time to meet its obligations”. Until the transition occurs, the federal OBPS will continue to apply to industrial emitters in Ontario, including the requirement to file annual reports (and associated verification reports) for the 2019 compliance year by October 1, 2020.