Carbon pollution pricing: options for a Federal Greenhouse Gas Offset System, chapter 2

A price on carbon pollution is a key pillar of Canada’s clean growth and climate plan, the Pan-Canadian Framework on Clean Growth and Climate Change (PCF). Pricing carbon pollution is one of the most effective and affordable ways to reduce pollution. A well-designed price on carbon pollution provides an incentive for climate action and clean innovation while protecting competitiveness.

In October 2016, the Prime Minister announced the Pan-Canadian Approach to Pricing Carbon Pollution (the federal benchmark), which recognized that provinces and territories would have the flexibility to develop their own carbon pollution pricing system and outlined criteria all systems must meet to ensure they are stringent, fair, and efficient. The federal government also committed to implementing a federal carbon pollution pricing system in provinces and territories that requested it or did not have a carbon pollution pricing system that meets the federal benchmark stringency requirements (referred to as “backstop jurisdictions”). Under the Greenhouse Gas Pollution Pricing Act (GGPPA), which came into force on June 21, 2018, the federal carbon pollution pricing system has two parts:

As part of the federal government’s commitment to ensure carbon pollution pricing applies throughout Canada, the Prime Minister announced on October 23, 2018 when and where the federal backstop carbon pollution pricing system will apply. Based on the assessment of existing and planned provincial and territorial systems against federal benchmark stringency requirements:

Output-Based Pricing System

In December 2018, the federal government released the Regulatory proposal for the Output-Based Pricing System Regulations under the GGPPA (Regulatory proposal for the OBPS) to implement the OBPS that will apply to facilities carrying out certain industrial activities. The OBPS is designed to put a price on carbon pollution from industry while minimizing competitiveness and carbon leakage risks. The system creates a strong financial incentive for the least efficient facilities to reduce emissions per unit of output and for strong performers to continue to improve. Most carbon pollution pricing systems include an approach to address competitiveness and carbon leakage risk for industrial facilities. The government plans to finalize the OBPS Regulations made under the GGPPA in spring 2019.

The OBPS sets an emissions-intensity threshold, or output-based standard (OBS), for each sector under the system. Each facility calculates an emissions limit based on the relevant standard(s) and its level of production. Facilities that emit less than their limit earn credits they can sell or bank for future compliance use. Facilities with emissions above their limit have three options to comply:

Compliance units include surplus credits issued to facilities that emitted less GHGs than their limit, federal offset credits and recognized units. At this time, the only units proposed to be recognized as compliance units are provincially issued offset credits that would meet the offset program and offset protocol eligibility criteria in the OBPS Regulations. In addition to program and protocols eligibility criteria, the OBPS Regulations will specify eligibility criteria for credits issued by provinces. The Minister will maintain a list of offset programs and protocols that are eligible to generate recognized units.

Adding federal offsets as a compliance mechanism will broaden the carbon pollution price signal across the economy, and can help to reduce GHG emissions from sources of emissions that are not covered under specific regulations or carbon pricing policies.