Pricing carbon pollution for large 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 action presents an enormous opportunity to create jobs and advance clean economic growth. The federal government is developing a carbon pollution pricing system for large industry to cut pollution from Canada’s industrial sector, spur innovation, and maintain competiveness.

Pricing carbon pollution in Canada

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

1. a regulatory charge on fuel, known as the fuel charge
2. a regulatory system for large industry, known as the Output-Based Pricing System (OBPS)

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

• The federal fuel charge will apply starting in April 2019 in Ontario, New Brunswick, Manitoba and Saskatchewan.
• The OBPS will apply starting on January 1, 2019, in Ontario, New Brunswick, Manitoba, Prince Edward Island, and in two sectors in Saskatchewan.^{Footnote 1} 
• To ensure alignment across the territories and to account for their unique circumstances, both parts of the federal backstop will come into effect on July 1, 2019, in Nunavut and Yukon, when the Northwest Territories’ carbon price will start. 

Why we have an Output-Based Pricing System

Large industrial facilities typically emit significant amounts of greenhouse gas pollution. But they often face competition from peers in jurisdictions that don’t yet price pollution. The Output-Based Pricing System is designed to put a price on carbon pollution for industries while maintaining their competitive position relative to international peers.

The OBPS does this by setting a performance standard for each sector under the system. Companies have to pay for any emissions over the standard. If they perform better than the standard, they will have credits to sell. The result is that companies have an incentive to cut pollution and support clean innovation while minimizing the total cost they pay.

Most carbon pollution pricing systems have a version of this approach to pricing industrial GHG emissions. In Canada, Quebec and Alberta have variations of the OBPS in effect today as part of their price on pollution. BC is developing a similar system. Saskatchewan and Newfoundland and Labrador are putting a similar system into effect for some of their industrial sectors in 2019. California and the EU have included similar policies in their carbon pricing systems from the start.

Use of revenues from pricing pollution

As committed in the Pan-Canadian Approach to 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. On October 23, 2018, the Government of Canada announced how proceeds from the federal fuel charge would be returned.

We will also return all direct proceeds generated under the OBPS to the jurisdiction of origin to help further reduce GHG emissions. For jurisdictions that voluntarily adopted the federal system, our intention is to return direct proceeds to the provincial or territorial government. In other jurisdictions, the intent is to support emissions reductions in facilities covered by the OBPS. The specific mechanism to be used will be announced in the new year and will be transparent, administratively simple, and easily adjusted to reflect the amount of OBPS revenues generated.

Regulatory development process of the OBPS

Since May 2017, the federal government has engaged stakeholders on the development of both parts of the federal backstop. Today’s publications provide the proposed elements of the OBPS and updated quantification, reporting and verification requirements for facilities the system covers.

The federal government is publishing the draft OBPS regulations to receive comments from the public and interested stakeholders before finalizing the regulations. The draft regulations provide the proposed output-based standards and rules for compliance.

In our system,

• The vast majority of the 38 industrial activities across 23 sectors with 74 output-based standards included in the system will face a standard set at 80% of their sector’s weighted average emissions intensity. The standard includes emissions from combustion and those generated from industrial or chemical processes.
• As a result of further analysis and specific data received over the fall, the standards for the cement and lime sectors were adjusted from 90% to 95% given the higher risks of competitiveness impacts and leakage from carbon pollution pricing.
• In addition, the standard for petrochemicals will be set at 90%.
• We have also adjusted our approach to electricity. The standard for coal-fired electricity phases down so that it reaches the level of natural gas electricity by 2030^{Footnote 2} . This aligns with our 2030 phase-out date for traditional coal power.
• We are also proposing new limits on the use of offsets and other credits to ensure the market functions well.

The material released today also includes considerations that would be taken into account for voluntary participation in the OBPS, an amended Information Order, and a draft cost-benefit framework that will be applied to the final OBPS regulations when they are published in spring 2019.

Criteria for voluntary participation (opt-in)

To minimize competitiveness and carbon leakage risks while maintaining the incentive for smaller facilities to reduce their emissions, some facilities will be able to voluntarily participate in the OBPS. Environment and Climate Change Canada (ECCC) is releasing a Policy Regarding Voluntary Participation in the Output-Based Pricing System. This outlines considerations that would be taken into account when determining whether a facility can voluntary participate in the OBPS.

Amendment to the Information Order and RIAS

On October 31, 2018, the federal government published two regulatory instruments on the OBPS in Canada Gazette, Part II. The amendment published today modifies the Greenhouse Gas Emissions Information Production Order by adding specific quantification requirements for additional industrial sectors in Ontario and by updating some verification requirements.

Notice of Intent

The Notice of Intent published today explains that the final OBPS regulations will be published in spring 2019 and will be retroactive to January 1, 2019.

Next steps

• The deadline for public comments on the regulatory proposal for the OBPS, on the cost-benefit analysis framework , and on the proposed approach to voluntary participation for EITE sectors not captured under the OBPS is February 15, 2019.
• Environment and Climate Change Canada will continue engaging on the development of the OBPS regulations through winter 2019.
• The publication of the final OBPS regulations is targeted for spring 2019.
• Facilities that meet the criteria outlined in the Registration Notice (covered facilities) are required to register for the OBPS. The OBPS registration system went live on November 1, 2018. Starting on January 1, 2019, quantification, reporting and verification requirements set out in the Information Order will apply to covered facilities.