Pricing carbon pollution from industry

Backgrounder

Greenhouse gas (GHG) emissions from industrial facilities in Canada contribute to climate change, which is driving stronger storms, wildfires, and record-breaking heat waves. Tackling climate change will help avoid catastrophic impacts in the future, while presenting an enormous opportunity to create jobs and clean economic growth.

The federal government has developed a carbon pollution pricing system for industry to cut pollution from Canada’s industrial sector, spur innovation, and maintain competitiveness.

Pricing carbon pollution in Canada

Under the Greenhouse Gas Pollution Pricing Act, which came into force on June 21, 2018, the federal carbon pollution pricing system (also known as the federal backstop) has two parts:

  1. a pollution price on fuel, known as the fuel charge;
  2. a pollution price for industry, known as the Output-Based Pricing System (OBPS).

In order to ensure that carbon pollution pricing applies throughout Canada, the federal government is putting this system in place in any province or territory that requests it or that does not implement its own system that meets the federal benchmark requirements:

On June 28, 2019, the Government of Canada took the next major step in the development of the federal carbon pollution pricing system by publishing the Output-Based Pricing System Regulations.

Why Canada needs an Output-Based Pricing System

Industrial facilities typically generate significant amounts of greenhouse gas pollution. But they often face competition from peers in jurisdictions that don’t yet price pollution. The OBPS is designed to put a price on carbon pollution for industrial facilities that emit 50,000 tonnes or more per year, while maintaining their competitive position relative to international peers. To minimize competitiveness and carbon leakage risks for additional facilities in some sectors while maintaining the incentive to reduce their emissions, facilities emitting 10,000 tonnes or more in certain sectors can also apply to participate voluntarily in the OBPS.

The OBPS sets a performance standard (i.e. a set level for greenhouse gas emissions per unit of output) for each sector under the system. Facilities that produce more emissions than the standard have to compensate for the excess. Facilities whose emissions are below the standard get credits they can sell or save to use later. That means the least efficient (highest polluting) facilities pay on more of their emissions, while the top performers are rewarded, and all facilities have an incentive to cut carbon pollution and support clean innovation.

Most carbon pollution pricing systems have a version of this approach to pricing industrial GHG emissions. In Canada, Quebec, Nova Scotia, Alberta, Saskatchewan, and Newfoundland and Labrador have variations of the OBPS in effect today. BC is developing a similar system. California and the EU have included similar policies in their carbon pricing systems from the start.

Output-based standards

The performance standards (known as output-based standards) are set according to the average emissions intensity of all facilities producing similar products across Canada.

Environment and Climate Change Canada set the specific level of each standard according to two main analyses: an assessment of the risks to competitiveness and “carbon leakage” (i.e. the risk of industries moving from one region to another to avoid paying a price on carbon pollution) for each sector, and each sector’s level of industrial process emissions, which are much more challenging to reduce than emissions from burning fuel.

Under the competitiveness analysis, standards for sectors assessed to be at low or medium risk are set at 80% of the sector’s average emissions intensity; those assessed to be at high risk are set at 90% or 95% of average. This means that the cost of carbon pollution is applied each year to 5%, 10%, or 20% of the total emissions from the sector. A given facility may pay more than that if it is less efficient than the sector average. If it beats the sector’s standard, it can earn credits that can be sold to other emitters. This approach ensures the incentive to reduce emissions created by the carbon pollution price applies to every tonne of emissions from industrial facilities, but limits their overall cost exposure to maintain their competitiveness.

Electricity

The OBPS is designed to help fight climate change by reducing carbon pollution from electricity generation while minimizing competitiveness impacts for industrial sectors and reducing costs for businesses and households. The OBPS assigns different standards to electricity generation according to the type of fuel used. This approach works with other policies to reduce emissions from electricity generation, including the federal regulations to phase out coal across Canada by 2030.

Under the OBPS Regulatory Proposal, published in December 2018, the standard for coal-fired electricity declined to reach the level of an efficient natural gas plant by 2030. The final regulations maintain that approach for coal but add a similar decline for new gas generation that drops to zero by 2030.

This standard, which applies to new generation starting up in 2021 or later, will help renewable electricity, such as wind and solar, compete even more effectively against natural gas when utilities are making decisions about what kind of new power generation to choose.Footnote 2

Approach to process emissions

The federal fuel charge prices fossil fuels used for combustion (e.g. burning natural gas in a furnace or gasoline in a car), while the OBPS puts a price on carbon pollution from a broader set of sources, including industrial process emissions.

Industrial process emissions come from a chemical or physical reaction other than combustion. They result from the processes used to convert raw materials into different products. Cutting these emissions requires new processes, new technology, or capturing and storing the emissions.

The OBPS Regulatory Proposal, published in December, treated process and combustion emissions as equivalent. In response, industries with a high proportion of process emissions raised concerns about the difficulty of reducing these emissions and the time and investment needed to develop new technologies.

The Government of Canada also heard that virtually all other carbon pollution pricing systems recognize the challenge of reducing process emissions. For example,

However, although they’re typically at an early stage of development, technologies to reduce process emissions are starting to be developed and used in Canada today:

In response to these considerations, we have taken a new approach to addressing process emissions in the final regulations. This approach recognizes that there are few options to reduce process emissions today, but also maintains a price signal to support innovation in this area. In sectors where process emissions constitute over 30% of a sector’s emissions (such as steel and fertilizer), the sectoral standards are adjusted as follows:

Sectors at 95% in the OBPS Regulatory Proposal (cement and lime) remain at 95% in the final regulations.

Offsets

In the OBPS, facilities can meet their compliance obligation through any combination of:

As announced in Budget 2019, the Government of Canada is developing a federal GHG offset system to support the implementation of the federal carbon pollution pricing system. On June 28, 2019, the Government published a discussion paper to seek input on key elements of the design of this system.

Eligible provincial offset credits can be used by a facility to compensate for excess emissions under the OBPS. Eligible provincial offset credits must be generated from a provincial offset program and protocol on the Department’s List of Recognized Offset Programs and Protocols, which will be posted on Environment and Climate Change Canada’s (ECCC) website soon.

Proceeds from pricing carbon pollution

All direct proceeds from pricing carbon pollution under the federal system will be returned to the jurisdiction in which they were collected.

For jurisdictions that chose to adopt the federal system, the Government of Canada will return all proceeds directly to the provincial or territorial government.

In provinces that have not committed to pricing carbon pollution, the Government of Canada is returning approximately 90% of the direct revenues from the federal fuel charge to individuals and families through the Climate Action Incentive payment. The remaining proceeds will support municipalities, small and medium-sized businesses, schools, hospitals, universities and colleges, not‑for‑profit organizations, and Indigenous communities.

On June 28, 2019, the federal government published a paper to seek input to inform the approach to investing proceeds from pricing industrial pollution. Comments can be submitted until August 30, 2019.

Criteria for smaller facilities to participate in the OBPS voluntarily (opt-in)

The OBPS is mandatory for facilities that emit 50,000 tonnes or more per year. To minimize competitiveness and carbon leakage risks for additional facilities in some sectors while maintaining the incentive to reduce their emissions, facilities emitting 10,000 tonnes or more in certain sectors can also apply to participate voluntarily in the OBPS.

The Policy Regarding Voluntary Participation in the Output-Based Pricing System outlines considerations that Environment and Climate Change Canada takes into account when determining whether a facility can participate in the OBPS. On June 28, 2019, Environment and Climate Change Canada updated this policy to expand the list of sectors at risk of carbon leakage, thereby allowing more facilities to opt in to protect their competitiveness while supporting clean growth. Due to a lack of adequate sectoral data, opt-in standards for additional sectors are currently set by facility. It is Environment and Climate Change Canada’s intention to move to sectoral standards in all cases as quickly as possible as reporting requirements provide the department with better sectoral information.

Consultation process

Since May 2017, the federal government has engaged stakeholders on the development of both parts of the federal system, including detailed technical work with industry to ensure the OBPS accurately reflects their operations. In December 2018, the Government published a regulatory proposal for the OBPS. The final OBPS regulations released today incorporate a number of changes based on comments from stakeholders.

A number of output-based standards were updated in the final regulations to ensure all standards were set using the best available data and analysis. These final regulations are subject to review beginning in 2020, and again in 2022, and could be adjusted to ensure a well-functioning OBPS system.

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