COMMENT – Ontario’s plan vs the federal backstop: What companies need to know

Published 18:03 on February 20, 2019  /  Last updated at 20:36 on March 25, 2019  /  Americas, Canada, Carbon Taxes, Conversations, US, Views  /  No Comments

In the run-up to the Carbon Pricing for Canadian Industry conference - April 25-26 at the Hilton Toronto - Canadian Clean Energy conferences is running a series of articles on key topics for industries complying with provincial and federal carbon regulations.

By Melodie Michel, Canadian Clean Energy Conferences

Editor’s note: In the run-up to Carbon Pricing for Canadian Industry, April 25-26, Hilton Toronto, Canadian Clean Energy conferences is running a series of articles on key topics for industries complying with provincial and federal carbon regulations.

It’s been a rough ride for those heading carbon compliance for Ontario companies: in less than a year, they’ve had to dismantle the infrastructure built for the Cap and Trade Program, set up a tracking system compliant with the Federal Backstop, and consult with the Ontario government on a new potential provincial scheme.

At the time of writing this article, Ontario industry is meant to comply with the Federal Backstop, tracking and reporting their emissions to start paying a yet-to-be-determined tax in the coming months. Simultaneously, the Ontario government is leading a two-front battle: challenging the federal government’s decision to impose the Federal Backstop in the province, and trying to draw its own scheme, A-Made-in-Ontario Environment Plan.

Differences and similarities

On February 12, the Ontario Ministry of Environment, Conservation and Parks released its proposed plan to achieve its 30% emission reduction target, revealing long-awaited details on its emission performance standards (EPS). Under the A Made in Ontario Plan, the province would set a mandatory emissions threshold at either 25,000 or 50,000 tonnes of carbon dioxide equivalent (CO2e) per year, while facilities with GHG emissions between 10,000 tonnes of CO2e per year and the mandatory threshold would be allowed to opt into the program beginning in 2019.

In comparison, the Federal Backstop’s output-based pricing standard (OBPS) applies to industrial facilities that have reported emissions of 50,000 tonnes of carbon CO2e or more per year during any calendar year between 2014 to 2017 with the option for facilities that have reported emissions of between 10,000 and 50,000 tonnes of CO2e per year to subscribe to the system.

“On February 12 Ontario released the next phase of its plan – a proposal to regulate large industrial emitters with emission performance standards that are less stringent than the federal OBPS. It remains to be seen whether this plan will be an acceptable alternate to the federal plan,” explains Julie Tartt, Senior Advisor at climate change consultancy Mantle314.

For both plans, the exact carbon price has yet to be determined, with the federal government hoping to finalize benchmarks by April, and Ontario having opened a 45-day consultation to fine-tune its compliance mechanisms.

There seems to be more attention given to trade exposure and carbon leakage at the provincial level than federally. In its draft proposal, the Ontario government suggests adjusting tax “stringency” based on the risk of carbon leakage, which will be determined using emissions intensity and trade exposure. “A high stringency factor means the facility has a high risk of carbon leakage, because it’s a very trade-exposed facility. The provincial government seems to be recognizing that fixed emissions are very difficult to reduce,” says Robyn Gray, Vice President, Environment at Sussex Strategy Group.

Electricity generation

Where the two plans differ is in their treatment of electricity generation: the Federal Backstop’s system currently uses different benchmarks to calculate the rebate corporates can get on low emissions from coal and from gas. The threshold stands at 800 tonnes of CO2/MWh for coal and 370 tonnes of CO2/MWh for gas – a stark difference that puts gas (a cleaner energy source) at a clear disadvantage. In Ontario, natural gas is practically the only polluting source of electricity – though the province does import coal power from the US, which under the Federal Backstop would not be submitted to any type of regulation.

“The federal system gives these imports a free ride. It also puts domestic generators of clean gas-fired power at a market disadvantage to higher-emission imports, which is very problematic,” says Lisa DeMarco, a Partner at climate change and clean energy law firm DeMarco Allan.

The recently announced Ontario system appears to be assessing this and contemplates applying the new carbon price to electricity imports. According to DeMarco, Ontario has historically applied its carbon price to imports, whereby the importer had to pay the price difference between the Ontario allowance price and the price in the exporting jurisdiction (if it had one) and the new provincial plan is considering mirroring that.

With regards to natural gas, the Ontario plan sets a benchmark of 420 tonnes of CO2/MWh – less drastic than at the federal level. “There may be a better comfort level with this benchmark. It will also be interesting to see how natural gas-fired power generators are treated under this system, compared to the cap and trade system, where most of the regulation was at distributor level. It’s not clear yet where it’s going to be this time, that still has to be determined,” comments Gray.

Carbon reduction support

An interesting aspect to follow for emitters is the way both the federal and provincial systems plan to support carbon reductions. One of the most interesting aspects of the Ontario plan is the creation of a Carbon Trust aiming to commit C$400mn to private sector initiatives over four years. This also includes a C$50mn ‘reverse auction’ for clean energy government contracts, where companies would bid by proposing the lowest price possible for their services. But the conditions of eligibility of the recipients of Carbon Trust loans, as well as how the reverse auction would be conducted, have yet to be determined.

The provincial regulation also appears to be considering offset credits – similarly to Alberta, for example – with no indication yet of how this would work, or what the maximum amount of credits would be for  each company.

In comparison, the Federal Backstop plans to use 90% of its OBPS proceeds to give financial incentives to Ontario families, and the remaining 10% to support the sectors most affected by the changes, including schools, hospitals, small and medium-sized businesses, colleges and universities, municipalities, not-for-profit organizations and Indigenous communities. The federal government has allocated C$2.8bn to green infrastructure investments in Ontario since 2016, but there is no plan to use the direct proceeds of the Federal Backstop to help emitters invest more into clean energy.

“The federal system is more of a carrot and stick system: if you’re emitting less than your baseline, you get credits that you can then sell, so there’s an incentive on that side to invest in different types of low-carbon technologies to reduce your emissions,” says Gray.

How to prepare

In the midst of this uncertainty, it can be hard for Ontario companies to know what to do or where to look for direction. The first thing to remember is that, as confusing as the situation looks, there is one system already being enforced, and that is the Federal Backstop. “My advice is this: until we’re told otherwise, that’s the law, so follow the Federal OBPS system. In any case, it’s actually quite aligned with the Industrial Emission Performance Standards system the Ontario government is planning for large emitters,” says Tartt.

She adds that although the Backstop went into effect on January 1st, the first tax payments under the new system won’t be due until the end of 2020. For now, companies need to be registered in the OBPS system, and to start tracking and reporting their emissions. In any case, the exact tax rate is still unknown – though it should be defined by April 2019.

As they adjust their systems for the Federal OBPS, while keeping an eye on provincial developments, companies should also prepare for more stringent climate-related reporting requirements. “Follow the money,” says DeMarco. “One item that is very big money is climate-related financial disclosures. The Bloomberg Commission, led by the Bank of England, came up with recommendations on what publicly-listed companies should be disclosing in relation to climate-related risk. The Canadian securities administrator put out some guidance on that, and the Ontario plan is considering making that mandatory.”

Emitting companies should therefore adopt a conservative attitude: comply with the Federal Backstop, watch what’s being proposed at both levels, follow updates on the court challenge, and ensure their corporate disclosures are in line with best practice.

In the meantime, watch what happens on April 15-18, when Ontario presents its arguments in the court challenge. Whether or not the Ontario plan is finalized by then should have no impact on the court case, since the argument being made is purely constitutional. And unfortunately, it’s unlikely any decision made then will be final.

“If the federal government received a decision not in their favour, I don’t think it would end there, they would probably take it to the Supreme Court, and I think the provinces are thinking the same thing. So no matter what the outcome of the hearing is, I don’t think the ultimate decision will be made yet – it will just give an indication of where things may be heading,” says Gray. For emitters, unfortunately, it appears the damaging uncertainty related to carbon regulation in Ontario is not going to end any time soon.

Carbon Pricing for Canadian Industry, April 25-26 at the Hilton Toronto, will provide those heading climate and carbon strategies for organizations included under the Backstop and provincial regulations with key regulatory updates and critical insights from industry peers.

Building on the success of 2017 and 2018’s Ontario Cap and Trade Forums, this event offers Canadian industry with business-critical information for navigating carbon market uncertainties and developing successful mitigation strategies.

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