Proposal for the Output-Based Pricing System Regulations: chapter 1

A price on carbon pollution is an essential part of Canada’s plan to fight climate change and grow the economy. Pricing carbon pollution is the most efficient way to reduce greenhouse gas (GHG) emissions and stimulate investments in clean innovation. A price on carbon pollution creates incentives for individuals, households, and businesses to choose cleaner options.

In October 2016, the Government of Canada announced the Pan-Canadian Approach to Pricing Carbon Pollution (the federal “benchmark”) would be flexible and would recognize that provinces and territories have implemented or are developing their own carbon pollution pricing systems. The federal benchmark outlined criteria that 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 request it or do not have a carbon pollution pricing system that meets the federal benchmark (referred to as “backstop jurisdictions”).

The federal government has engaged with Canadians on the federal carbon pricing system over the past two years:

• In May 2017, the federal government released a Technical Paper on the Federal Carbon Pricing Backstop outlining the proposed elements of the federal carbon pricing backstop’s elements.
• In January 2018, the federal government released a technical paper on the Regulatory Framework for the Output-Based Pricing System outlining the proposed design of the system. At the same time, the federal government also released for comment draft legislative proposals relating to the Greenhouse Gas Pollution Pricing Act and Explanatory Notes.
• In May 2018, the federal Government published the document titled Carbon pricing: compliance options under the federal output-based pricing system that describes the proposed rules related to the types of credits that can be used by the covered facility for the compensation of greenhouse gas emissions that have exceeded the emissions limit applicable to this facility. It also included a proposed design of rules to enhance market liquidity.

In addition to the publication of these three discussions papers, the federal government organized a series of workshops and webinars that took place from January to September of 2018 in order to provide further information and seek feedback on the proposed design elements. As part of this ongoing engagement process on the federal OBPS, the Government of Canada received feedback and comments from across industrial sectors, environmental organizations, academia and the public. In addition to the questions raised and comments provided during these workshops and webinars, more than two hundred official submissions on the proposed design elements were received.

Based on stakeholder input and further internal analysis, the federal government updated a number of elements of the proposed approach. To address concerns related to competitiveness and carbon leakage, the federal government revised the starting point of the output-based standards (OBS). In addition, to inform the final stringency of the OBS, the government developed a three-phased approach that takes into account factors that may lead to competitiveness risks for industry and to carbon leakage due to carbon pollution pricing. In response to comments from smaller industrial facilities, the government further refined its approach to voluntary participation to allow for earlier participation in the OBPS than originally proposed. The proposed treatment of electricity under the OBPS was also updated to encourage the decarbonization of electricity generation while mitigating electricity price impacts on businesses and households. The federal government received numerous comments on the compliance options and rules under the OBPS. To ensure the effective functioning of the trading system, the government is proposing expiry dates for compliance units, and a ceiling on the use of compliance units for regulatory compliance purposes starting in 2021. A federal offset system is also being considered, and the proposed regulatory approach in this paper reflects how these offset credits could be used for compensation under the OBPS.

Under the Greenhouse Gas Pollution Pricing Act, in force on June 21, 2018, the federal carbon pollution pricing system has two parts:

1. A charge applicable to fossil fuels (fuel charge) that is generally payable by fuel producers or distributors, with rates for each fuel that are equivalent to $10 per tonne of carbon dioxide equivalent (CO₂e) in 2018, rising by $10 per year to $50 per tonne of CO₂e in 2022 (Part 1 of the Act, for which the Minister of National Revenue is responsible); and,
2. The Output-Based Pricing System (OBPS) for facilities carrying out certain industrial activities (Part 2 of the Act, for which the Minister of the Environment is responsible).

When Parts 1 and 2 of the Act apply in a particular jurisdiction, these parts are designed to avoid pricing the same tonne of CO2e twice. Thus, a person subject to the OBPS under Part 2 of the Act may be eligible to register with the Canada Revenue Agency for Part 1 of the Act and may be eligible to obtain an exemption certificate that generally allows that person to purchase fuel that is exempt from the fuel charge, provided that the fuel is for use at the person’s covered facility.

Part 2 of the Act sets out key obligations that will apply to a person subject to the OBPS (person responsible for a covered facility), such as the registration of a facility as a covered facility, submission of a report for each compliance period, compensation for greenhouse gas emissions above its applicable emissions limit, opening of accounts in a tracking system, and record keeping.

In order for the OBPS to take effect starting on January 1, 2019, the following instruments have been published:

• On October 31, 2018, the Government of Canada published in the Canada Gazette the Order Amending Part 2 of Schedule 1 of the Greenhouse Gas Pollution Pricing Act to add a province, territory or area to Part 2 of Schedule 1 to the Act, in which a covered facility must be located to be subject to the OBPS. These provinces and territories added are: Ontario, New Brunswick, Manitoba, Prince Edward Island, Saskatchewan, Yukon and Nunavut.
• On October 31, 2018, the Minister of the Environment published in the Canada Gazette the Notice Establishing Criteria Respecting Facilities and Persons and Publishing Measures (the “Registration Notice”) that sets out the criteria determining which facilities are required under the Act to be registered in the federal OBPS (covered facilities).
• On October 31, 2018, the Minister also published in the Canada Gazette the Greenhouse Gas Emissions Information Production Order (the “Information Order”) that sets out the quantification, reporting and verification requirements for covered facilities. These include requirements related to: sampling, analysis and measurement in order to quantify the GHG emissions emitted from that facility, quantification of production amounts, making and keeping of records and producing verified reports. The requirements of the Information Order take effect starting January 1, 2019 in provinces where the federal OBPS applies and July 1, 2019 in Nunavut and Yukon. An amendment to the Information Order providing more details was published on December 20, 2018.

On December 19, 2018, the Minister published the Policy Regarding Voluntary Participation in the Output-Based Pricing System to clarify considerations the Minister will take into account when deciding, on a case-by-case basis, which facilities may be designated as a covered facility under section 172 of the Act. Further engagement will take place on this policy.

The government plans to finalize the OBPS regulations under sections 192 and 193 of the Act by mid-2019. The text below is set out in the form of proposed regulations, including definitions, sections, internal cross references, formulas and reporting obligations. At the beginning of every topic, a paragraph is provided setting out the context for that topic. The rules set out in the Registration Notice and the requirements in the Information Order will also be integrated, as appropriate, into the OBPS regulations. Persons that have already registered their covered facility (i.e., facility that either has met the criteria in the Registration Notice or has been designated as a covered facility) prior to the making of the OBPS regulations will not have to re-register.