COMMENT – Transitioning to the Canadian federal backstop: Industrial perspectives on carbon pricing

Published 13:10 on January 24, 2019  /  Last updated at 12:56 on December 19, 2023  / Carbon Pulse /  Americas, Canada, Carbon Taxes, Contributed Content, Other Content, US

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 John McCloy for 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.

The abrupt cancellation of Ontario’s cap and trade program in July has been challenging for industry participants who are now preparing budgets and plans for the new Federal Backstop program which started in January.

“Cap and trade participants were all involved in a market that was canceled in the most unexpected way, and no one expected it to happen so quickly,” points out Chelsea Erhardt, Trader, Compliance and Renewable Fuels at Elbow River Marketing. “Market participants took delivery of allowances in the middle of June and then our accounts were frozen by the end of that month.”

The concern now is that there may be further regulatory changes, with carbon pricing and taxation a key issue in upcoming federal and provincial elections. The province of Ontario and Saskatchewan have also launched a legal challenge to the federal government’s right to impose a carbon tax on their provinces.

Assessing costs

With draft rules expected shortly, Ontario companies are seeking further clarity on the Output Based Pricing System (OBPS) under the federal backstop. One of the key concerns for industry is the cost of compliance under the new system, which is difficult to predict without the final rules.

As Chris Cuthbert, Manager of Co-Generation and Energy with Hamilton Health Services, points out, the cancellation of cap and trade resulted in the removal of free allowances. It also took away funding for programs that provided financial support for carbon abatement.

“With the transition to the Federal Backstop, the funding for all those energy projects has dried up,” he notes. “At the same time, we’re now facing a tax on our carbon emissions which will have a significant impact on our budget, to the tune of C$1.6 million for the first year out.”

As Cuthbert notes, organizations are trying to identify their costs under the Federal Backstop and are looking for clarity on what carbon abatement support will be available. “It’s really challenging because we’re in budget build at the moment and we’re trying to work out a budget where we’ve got C$1.6 million worth of unknowns to deal with,” he says.

Under the Federal Backstop, pricing is based on a fixed-price schedule beginning at C$20 per tonne of CO2e in 2019 and increasing by C$10 per tonne each year to reach C$50 in 2022. This results in a higher price than the former cap-and-trade’s market-based calculation.

As Mike Kandravy, Director of Fuel Quality and Regulatory Affairs for Suncor, notes, Ontario emitters are being challenged to incorporate this increased price into a shorter one-year compliance period.

“For us, the key impact is incorporating the steep escalation in the price of carbon under the federal backstop,” he comments. “It’s escalating to C$50 a tonne by 2022. Incorporating that increase into business plans at the last minute has been challenging, and our taxation department is working furiously to incorporate it at the point of sale.”

Market competitiveness

While the stated aim of the federal OBPS system is to minimize competitiveness risks for emissions-intensive industrial facilities in Ontario, the number of free allowances for trade exposed sectors has yet to be finalized, leaving companies like Suncor concerned about the potential impact on their market competitiveness.

“Our industry is trade-exposed,” points out Kandravy. “Fuel can be purchased from neighboring countries and emerging jurisdictions that don’t have any climate change regulations imposed on them or any type of carbon taxation, potentially giving those producers a competitive advantage,” he observes.

John Wilkinson, Senior Vice President of Sustainability at Greenfield Global Inc., says the transition impacts the competitiveness of Ontario operations with other provincial facilities.

“We also operate in the province of Quebec where the cap and trade program gives us both a lower price on carbon and a full suite of market tools to manage both the cost and risks,” he comments. “Our interest centers around ensuring the competitiveness of our Ontario operations. Today, certainty in Quebec favors corporate investment there, versus Ontario.”

Those businesses that were traditional sellers of offsets in the Ontario cap and trade market are now moving their focus away from the province to take advantage of opportunities in more stable carbon markets elsewhere.

“We are looking to develop a deeper strategy in British Columbia, which has a low carbon fuel standard,” notes Elbow River Marketing’s Erhardt. “We are working hard to strengthen our relationships in California, given that our relationships in Ontario will no longer need offsets, and trying to nurture any budding markets in places like Oregon.”

Identifying priorities

“It’s really about having lots of different opportunities and then focusing on the ones that have certainty,” continues Erhardt. “In terms of the markets that do not have certainty, as much as possible, we’re taking the foot off the gas pedal there and unfortunately, that contributes to the further degradation of the market.”

Regulatory uncertainty creates inaction, it means the industry just kicks things further down the road. It means we don’t make investment decisions in the technologies to help us meet compliance standards.”

“The initial issue with the transition to the backstop is that the program is still fluid and still changing and that’s a problem,” adds Hamilton Health Services’ Cuthbert. “The other issue is that they’re hitting everyone with this carbon tax, rebating most of it, and only investing a small portion of it in actual carbon reduction strategies. Under the previous program, you could see all of the money that was coming in being used for carbon reduction strategy.”

Clarity is key

Ultimately, industry affected by the transition to the Federal Backstop are looking for clarity on the finalized details of the program. Because while the cost of carbon under the federal program is clear, participants want to understand compliance and cost containment options.

“We need to have further details on offset projects, offset protocols, and offset jurisdictions,” explains Erhardt. “We need to know what vintages are going to be allowed in the program. We need to know what percentage of an entity’s compliance obligation is going to be allowed to be met by offsets. We need to know what the targets are and the baselines, so we can calculate what the emissions obligations are going to be for each entity.”

What’s clear to all is the need for regulatory certainty. Either carbon regulation – cap and trade or taxation – can be successful if it provides industry with enough certainty to make investment decisions and doesn’t lead to carbon leakage, observes Suncor’s Kandravy. “It is essential that further decisions and changes to the regulatory regime don’t compromise the competitive position of industry in Ontario,” he concludes.

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.