Review of the federal Output-Based Pricing System Regulations

The federal Output-Based Pricing System Regulations (the OBPS Regulations) published in the Canada Gazette, Part II, on July 10, 2019 outline the rules for the federal industrial carbon pricing system. The regulatory impact analysis statement (RIAS) published at the same time included a commitment to review the OBPS Regulations in 2022. This paper describes Environment and Climate Change Canada’s (ECCC’s) planned approach to the review and seeks stakeholder feedback in key areas.

Background

In December 2020, the Government of Canada released Canada’s Strengthened Climate Plan for a Healthy Environment and a Healthy Economy outlining federal policies, proposals, programs and $15 billion in investments to build a stronger, cleaner, more resilient and inclusive economy.

The Strengthened Climate Plan confirmed that the Government of Canada will continue to put a price on pollution, rising every year until 2030. Going forward, the federal carbon price will continue to be revenue neutral, and the Government of Canada remains committed to ensuring that the federal price on pollution remains affordable, and to helping households to make investments to increase energy efficiency and further reduce emissions. Proceeds collected from the Output-Based Pricing System for industry will support our plan to decarbonize industrial sectors.

The Federal Backstop System

The Greenhouse Gas Pollution Pricing Act (GGPPA), adopted on June 21, 2018, establishes the framework for the federal carbon pollution pricing backstop system consisting of two main parts:

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

The federal fuel charge currently applies in Ontario, Manitoba, Alberta, Saskatchewan, Yukon, and Nunavut. The federal OBPS applies in Ontario, New Brunswick, Manitoba, Prince Edward Island, Yukon, Nunavut, and partially in Saskatchewan. On September 20, 2020, the Government of Canada indicated it will stand down the federal OBPS in Ontario and New Brunswick at a date to be determined in consultation with each of the two provincial governments. Other provinces and territories have implemented their own carbon pollution pricing systems.

The Output-Based Pricing System (OBPS)

The OBPS is designed to put a price on the carbon pollution of industrial facilities that emit 50,000 tonnes of carbon dioxide equivalent (CO2e) or more per year, while minimizing international competitiveness and carbon leakage risks from exposure to the federal fuel charge. To minimize competitiveness and carbon leakage risks for additional facilities while maintaining the incentive to reduce their emissions, facilities emitting 10,000 tonnes of CO2e or more in certain sectors can also apply to participate voluntarily in the OBPS.

The OBPS sets an emissions limit for each facility subject to the OBPS (covered facilities). This emissions limit is calculated using an emissions-intensity performance standard (i.e., a set level of greenhouse gas (GHG) emissions per unit of output) for a given product or activity. Facilities that emit less than their emissions limit earn surplus credits they can sell or save for later use. Facilities that emit more than their annual emissions limit must provide compensation for the excess emissions by a prescribed deadline.

By allowing facilities to generate and trade surplus credits for reducing their emissions below the limit, the OBPS ensures that the incentive to reduce emissions created by the carbon pollution price applies to every tonne of emissions from industrial facilities. By only applying the price to emissions above a facility’s emissions limit, the OBPS also limits facilities’ overall costs to help maintain their international competitiveness and minimize carbon leakage.

The performance standards (known as output-based standards) are, for the most part, set according to the production-weighted average emissions intensity of all facilities producing similar products across Canada. ECCC adjusted each output-based standards using two main analyses:

1. an assessment of the sector’s risks of carbon leakage and competitiveness impacts, and
2. each sector’s level of industrial process emissions, which are more challenging to reduce than other emissions. 

Output-based standards for sectors assessed to be at low or medium risk are set at 80% of the sector’s average emissions intensity, while those assessed to be at high risk are set at 90% or 95% of the sector’s average. 78 output-based standards have been set under the OBPS, covering more than 30 industrial sectors across Canada.

Persons responsible for covered facilities are required to provide compensation at the prescribed rate for GHG emissions that exceed the facility’s emissions limit. The methods for providing compensation are one of the following or a combination of both:

• paying the carbon price to the Government via an excess emissions charge, and
• remitting compliance units; namely surplus credits, federal offset credits, or recognized units.

Review principles

As committed in July 2019, this paper marks the launch of ECCC’s review of the OBPS Regulations. The following principles will guide the review:

1. ensure the OBPS continues to contribute to Canada’s GHG emissions reduction goals, while minimizing competitiveness and carbon leakage risks due to carbon pollution pricing;
2. ensure the OBPS Regulations can effectively function as a backstop and apply in any jurisdiction in Canada, if required; and
3. reduce administrative burden, where feasible.

Review scope

ECCC plans to focus the review on four issues: 

1. Contribution to Canada’s GHG emissions reduction goals:

ECCC will explore options for increasing the contribution of emission reductions from the OBPS to Canada’s GHG emissions reduction goals. In particular, ECCC will consider adding an annual tightening rate post-2022 to output-based standards.

ECCC plans to conduct a scan of technologies and processes that can reduce emissions, including industrial process emissions, in order to inform options to increase emission reductions from the OBPS.

2. New output-based standards:

ECCC intends to develop additional output-based standards for activities with three or more facilities emitting 10,000 tonnes of CO₂e or more in Canada. In its role as a national backstop, this will help to ensure that the OBPS Regulations can apply in any jurisdiction in Canada, if required. Standard setting for these activities will include a test of the sector’s competitiveness and carbon leakage risks due to carbon pricing.

A preliminary assessment by ECCC has identified fifteen additional activities for development of an output-based standard. More than one new standard per activity may be required to properly capture some activities listed in Table 1 below.

3. Current output-based standards:

During the review of the OBPS Regulations, ECCC will only have collected data from one or two compliance periods and will not have sufficient information to conduct a full review of the current standards to determine their effectiveness. Therefore, ECCC does not plan to review existing output-based standards currently listed in Schedule 1 to the OBPS Regulations except in specific circumstances when:

1. the activity definition in the OBPS Regulations does not align with the activity undertaken by the affected facilities; and
2. a sector is undertaking or planning to undertake activities not currently accounted for in the output-based standard.

Based on a preliminary analysis, ECCC has identified the following Schedule 1 activities that meet these criteria: production of steel from feedstock that comes primarily from scrap iron or steel, and production of iron or steel from smelted iron ore or production of metallurgical coke.

ECCC may also consider making corrections to output-based standards in cases where a significant error in the baseline data has become known since the OBPS Regulations were put in place. In all cases, the review will not reassess competitiveness and carbon leakage risks for sectors that were previously assessed.

As committed to in the Strengthened Climate Plan, the federal government will work with provinces, territories, and stakeholders to ensure that Canada's electricity generation achieves net-zero emissions before 2050. The treatment of electricity generation under the OBPS will reviewed as part of this process.

4. Explore opportunities to reduce administrative burden:

ECCC intends to explore opportunities to improve harmonization of quantification methods for GHG emissions between the OBPS Regulations and the federal Greenhouse Gas Reporting Program (GHGRP). It will also consider additional opportunities to reduce administrative burden. ECCC welcomes stakeholder feedback on key opportunities to reduce administrative burden.

In the future, when information is available from multiple compliance periods, ECCC proposes to review provisions related to compliance flexibility, including the minimum excess emissions charge payment that starts in 2022; recovery of compensation; and the retirement and cancellation of compliance units.

Stakeholder engagement

ECCC plans to engage on these four issues beginning in winter 2021. This will include opportunities for provinces and territories, organizations representing Indigenous peoples, industry, and environmental non-governmental organizations to provide feedback on ECCC’s proposals. Engagement on output-based standards with impacted sectors will take place in parallel and will include working groups for sectors with a significant number of facilities.

After initial engagement, ECCC intends to release detailed proposals for stakeholder comment to inform draft regulations. Final regulatory amendments are targeted to come into force in 2023.

In the context of the COVID-19 pandemic, the approach to engagement will leverage virtual platforms and teleconferences. The approach may be revisited over time.

Next steps

ECCC will review feedback received and launch engagement on the issues for review outlined in this paper in winter 2021. Interested parties are invited to provide written comments by email by March 29, 2021 to: ec.tarificationducarbonecarbonpricing.ec@canada.ca.