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Article

A Québec-Regulated Carbon Market Around the Corner!

Date

August 24, 2011

AUTHOR(s)

Cindy Vaillancourt


Beginning in 2013, air releases of greenhouse gases (GHG) could be expensive for large industries in Québec. Indeed, on July 7, 2011, the Québec government released a draft regulation respecting a cap-and-trade system for greenhouse gas emission allowances (Draft GHG Regulation), which proposes a system requiring large emitters of greenhouse gases to register and cover each of their GHG emissions through emission allowances including those purchased from the Québec government and from other covered emitters or participants in the system (the "cap-and-trade system"). As of 2013, the proposed system targets major emitters from specific sectors including mining extraction, electric power generation and manufacturing, and expands to refineries and fuel importers as of 2015.

Context

The Draft GHG Regulation arises from Québec’s participation in the Western Climate Initiative (WCI), a group of 11 Canadian provinces and U.S. states that have chosen to develop common guidelines to create a regulated regional carbon market, without waiting for the implementation of a system at the federal level. Five members of the WCI (Québec, Ontario, British Columbia, Manitoba and California) have actively worked towards setting up their cap-and-trade system by January 1, 2012. However, Manitoba and Ontario postponed the implementation of their systems to an undetermined date, while Québec and California recently announced that their systems would formally come into force on January 1, 2013.

The global target of the WCI is to reduce GHG emissions by 15 per cent compared to the 2005 level by 2020. For its part, Québec announced in November 2009 a more ambitious target of 20 per cent compared to the 1990 level, by 2020, or a reduction of 17 megatons (Mt) CO2 equivalent. The latest available Québec GHG inventory reveals how challenging it will be to reach this target considering that Québec emitted in 2008 only 1 Mt of GHG emissions below the 1990 level, a decrease partly due to the improvement in energy efficiency and fuel substitution in the industry but resulting as well from the shutdown of industrial facilities.1

The Draft GHG Regulation

Pursuant to the Draft GHG Regulation, as of January 1, 2013, the sectors of (i) mining, quarrying and oil and natural gas extraction; (ii) electric power generation, transmission and distribution; (iii) natural gas distribution; iv) steam and air-conditioning supply; (v) manufacturing; and (vi) pipeline transportation of natural gas shall be required to cover each ton of GHG emitted with an emission allowance where an establishment’s GHG emissions meet or exceed the emission threshold of 25,000 tons COequivalent during 2009, 2010 or 2011. As of 2015, the Draft GHG Regulation will also target fuel and combustibles distributors (as defined in section 85.33 of the Act respecting the Régie de l’énergie, R.S.Q. c. R-6.01) whose GHG emissions attributable to the combustion or use of fuels and combustibles meet or exceed the threshold of 25,000 tons CO2 equivalent during the years 2012 or 2013.

An emission allowance, worth one ton of CO2 equivalent, can take several forms:

  • An emission unit allocated free of charge by the Québec government;
  • An offset credit issued by the Québec government for a GHG emission reduction achieved outside of the regulated sectors;2
  • Early reduction credits issued by the Québec government in recognition of GHG emission reductions achieved by a covered emitter between 2008 and 2011;
  • An emission unit purchased through an auction or sale by mutual agreement organized by the Québec government;
  • Any other emission allowance issued by a government other than the Québec government (whether or not it is a member of WCI), with which an agreement has been entered into (e.g. a mutual emission allowance acceptance agreement).

Some major emitters would benefit from assistance, as a large portion of the emission allowances would be distributed to them free of charge by the Québec government: these emitters would be in the manufacturing, mining, quarrying, and steam and air-conditioning supply sectors. The calculation of the number of emission units allocated without charge to an establishment is to be based on average emissions between 2007 and 2010 and would be adjusted based on changes in output during compliance periods. In other words, the more an establishment increases its industrial production, the more emission allowances it would be entitled to without charge, and vice versa. The goal behind this method of allocating allowances without charge is to require the industry to reduce the intensity of its GHG emissions per production unit as much as possible, without harming development plans.

For the first two-year compliance period (2013-2014), emission units without charge would be allocated in the following proportions:

  • 100 per cent of GHG emissions from industrial processes;
  • 80 per cent of GHG emissions from combustion; and
  • 100 per cent of GHG emissions from "other" sources.

For the two subsequent three-year compliance periods (2015-2017 and 2018-2020), fewer and fewer emission units would be allocated without charge for GHG emissions from combustion and "other" sources, forcing covered emitters benefitting from government assistance to make a greater effort to reduce their GHG emissions by reportedly 1 to 2 per cent a year. GHG emissions from industrial processes would continue to benefit from allocations without charge in full until 2020. The gap between emission allowances obtained without charge and the actual emissions of covered emitters would have to be closed by purchasing emission units.

Subsequent to each allocation of emission units without charge, the Minister of Sustainable Development, Environment and Parks (the Minister), would publish in the Gazette officielle du Québec the list of establishments required to cover their GHG emissions and the number of emission units allocated without charge to each of them. The Minister would be authorized to suspend the allocation of emission units without charge to any emitter failing to comply with the Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere or with the Draft GHG Regulation.

The Draft GHG Regulation calls for the cap-and-trade system to come into effect as of January 1, 2012, but the obligation to cover all GHG emissions with emission units would apply as of January 1, 2013. The year 2012 would thus be a transition period during which covered emitters would register and take part in pilot auctions as well as in trading of emission allowances on the market. Covered emitters could use the emission units purchased during 2012 for the first compliance period of 2013-2014.

Conclusion

The Draft GHG Regulation would cover about one hundred companies which account for nearly 90 per cent of Québec’s industrial emissions. To date, the Québec government has not carried out an economic impact study to measure what consequences passing the Draft GHG Regulation will have on the competitiveness of Québec industries and the sustainability of the jobs they create. A cost/benefit impact study for all WCI members participating in the market is apparently being drawn up and is scheduled to be released in the fall of 2011.

It is clear that Québec industries will have to bear substantial costs associated with the Draft GHG Regulation. The cost to purchase an emission unit (one ton of GHGs) is expected to be about $18 during the first compliance period (2013-2014), and to increase gradually to reach more than $30 during the final compliance period (2018-2020). In this era of market globalization, there is reason to worry about Québec businesses’ competitiveness in Québec and in foreign markets. In a context in which California and Quebéc would be alone in implementing their cap-and-trade systems in 2013, we may wonder how the Québec government plans to protect the Québec industries having to include the costs of complying with the Draft GHG Regulation in the price of their products and services and deal with competition from businesses that are not subject to the same requirements.

The Draft GHG Regulation is now undergoing public consultation, which will continue until September 4, 2011.

Please do not hesitate to contact a member of our environmental law team to discuss in greater depth the impacts of this draft regulation on your business.

Dominique Amyot-Bilodeau

Isabelle Blouin

Michel Gagné

Mira Gauvin

Cindy Vaillancourt


1 Québec Inventory of Greenhouse Gas Emissions in 2008 and GHG emissions development since 1990, Direction des politiques de la qualité de l'atmosphère, Ministry of Sustainable Development, Environment and Parks, November 2010 (available in French only).

2 Eligibility conditions for these offset credits would be defined in the "Draft Regulation on Offset Credits" ("Projet de règlement sur le système de crédits compensatoires") scheduled to be published for consultation in the fall of 2011.

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