Ontario proposes greenhouse gas emission performance standards

Ontario’s Ministry of the Environment, Conservation and Parks (MECP) has announced the next step in developing a provincial plan to address greenhouse gas (GHG) emissions. In particular, details have now been released on the performance standards which were first proposed in November 2018 in the Made-in-Ontario Environment Plan.¹

What you need to know

• The proposed industrial emission performance standards (EPS) are intended to substitute for the federal output-based pricing system (OBPS) under the Greenhouse Gas Pollution Pricing Act (GGPPA).
• Ontario plans to implement the EPS by summer 2019, covering GHG emissions as of January 1, 2019. The proposed EPS will:
  • at a minimum, apply to the sectors covered by the federal OBPS based on a mandatory emissions threshold of either 25,000 or 50,000 tCO₂e per year;
  • allow voluntary participation by facilities with annual emissions between 10,000 tCO₂e and the mandatory threshold; and
  • require regulated entities to meet their compliance obligations (i.e., the difference between a facility’s total emissions and annual limit) by reducing emissions or purchasing/using compliance units to cover emissions that exceed the limit.
• Ontario is considering whether to extend the EPS to additional sectors starting in 2020, such as institutions, thermal energy supply and greenhouse operators.
• The outcome of Ontario and Saskatchewan’s independent constitutional challenges to the GGPPA may have a significant impact on the implementation of the EPS. Ontario’s challenge will be heard by the Ontario Court of Appeal in April.² In the meantime, companies in covered sectors should familiarize themselves with the EPS proposal and pay particular attention to the methodologies for setting emission limits likely to apply to their facilities. Comments on the EPS proposal can be submitted through the Environmental Registry until March 29.³

Highlights of the proposed EPS

Scope of coverage

At a minimum, 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.

Other sectors not covered by the federal OBPS could still incur costs as a result of the carbon levy portion of the GGPPA. While Ontario’s judicial challenge of the GGPPA is pending, the MECP is contemplating the addition of such sectors to the EPS program in 2020, including institutions, greenhouse operators, and providers of steam and thermal energy to industrial, commercial or institutional users.

The MECP is proposing a mandatory emissions threshold of either 25,000 or 50,000 tCO₂e per year, and a voluntary opt-in scheme for those facilities with emissions between 10,000 tCO₂e and the mandatory threshold. 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) will be covered by the EPS.

EPS framework

In effect, an EPS sets an annual emission limit relative to the historical emissions or emission intensity for a facility or sector. Where multiple facilities produce similar products, sector-based EPS would be derived from a weighted average emission intensity per unit of production, multiplied by a stringency factor to incent further efficiencies (see below).⁴ As currently proposed, this type of EPS would apply to the grey cement, petroleum refining and steel sectors. More sectors may be subject to this type of EPS as the proposal develops.

The MECP has also outlined EPS for electricity generation, thermal energy supply (i.e., generated outside of a regulated facility), and cogeneration, taking into account achievable levels of performance and efficiency. In particular, a stringency factor may not be imposed on electricity generation emissions, which are predominantly from gas-fired generators.

Where there is only one regulated facility in a sector or the adoption of sector-based EPS is not otherwise possible, the MECP is proposing the following alternative metrics: (i) facility-specific emission intensity, which is the preferred approach where feasible; (ii) energy use intensity, which reflects the amount of fuel used but does not recognize onsite emission reductions; and (iii) historical facility average emission limits, which are based on recent historical emissions instead of production or energy use.

In each case a stringency factor will be applied to incent further energy efficiencies and emission reductions. As shown in Table 1 below, the proposed stringency factors vary depending on emission intensity and trade exposure (EITE) as well as emission type (i.e., fixed process vs. non-fixed process). To minimize competitiveness impacts and reduce carbon leakage, lower stringency factors will apply to high EITE sectors and fixed process emissions, resulting in a lower annual emission limit; whereas fixed process emissions, which are harder to reduce, will be subject to less stringent requirements (i.e., through the use of a 100% stringency factor).

Table 1: Proposed stringency factors

Compliance obligations

To meet the applicable EPS, a regulated facility can reduce its GHG emissions or:

• purchase compliance units to cover any emissions above the EPS limit, at a price of $20 per tonne in 2019 and increasing to a maximum of $50 per tonne in 2022. These annual carbon prices match those under the GGPA; or
• acquire offset credits stemming from initiatives not regulated by the EPS, according to applicable offset protocols.

If a covered facility outperforms its EPS, it will receive compliance units for the portion of its emissions that are below the standard in a given year (subject to maximum caps in some circumstances), with the ability to bank these units for future use or trade them with other regulated facilities.

Once implemented, the EPS will apply to emissions as of January 1, 2019. Regulated facilities will be subject to reporting and verification requirements, including the submission of an annual compliance report.

Next steps

Public comments on the EPS proposal can be submitted until March 29. The Province plans to have the program in place by summer 2019, in advance of the obligations to submit compliance units for the first compliance period under the federal GGPPA. Of course, the development and implementation of the EPS may ultimately depend on the outcome of the constitutional challenges to the GGPPA.

_________________________

¹ See “Province unveils Made-in-Ontario Environment Plan.”

² See https://news.ontario.ca/ene/en/2019/02/statement-by-minister-rod-phillips-on-saskatchewans-challenge-to-the-federal-carbon-tax.html.

³ See https://ero.ontario.ca/notice/013-4551.

⁴ MECP’s proposal includes a methodology for assessing competitiveness and carbon leakage impacts, and Ontario sectors will be ranked according to the results of this assessment.

To discuss these issues, please contact the author(s).

This publication is a general discussion of certain legal and related developments and should not be relied upon as legal advice. If you require legal advice, we would be pleased to discuss the issues in this publication with you, in the context of your particular circumstances.

For permission to republish this or any other publication, contact Janelle Weed.

© 2024 by Torys LLP.

All rights reserved.