Carbon cap, trade and tax: understanding new federal and ... · PDF filenew federal and...

Carbon cap, trade and tax: understanding

new federal and provincial requirements

Wednesday, February 1, 2017

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Speakers

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Alan Harvie

Senior Partner

Calgary

Alan Harvie has practiced

energy and environmental/

regulatory law since 1989 and

regularly deals with commercial,

operational, environmental and

regulatory issues, especially for

the upstream oil and gas,

energy, waste disposal and

chemical industries. He is a

member of our energy and

environmental departments.

Janet Bobechko

Senior Partner

Toronto

Janet Bobechko has extensive

experience dealing with a broad

range of environmental issues,

including environmental

compliance, strategic advice on

environmental impact

assessments, mergers,

acquisitions, financings and

environmental management

systems.

Overview

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• Introduction

• Alberta: Climate Leadership Act

− What it is

− How it works

− What it means

• Ontario: Climate Change Mitigation and Low-carbon Economy Act, 2016

− What it is

− How it works

− What it means

• Federal: Pan-Canadian Carbon Plan

− What it is

− How it works

− What it means

• Conclusions

Alberta: What it is

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• Climate Leadership Act

• Climate Leadership Regulation

– Carbon levy on consumers of fuel by a series of payment and remittance obligations that apply to persons throughout the fuel supply chain in Alberta

– Levy rates

Type 2017 2018 to TBD

Gasoline 4.49 ¢/ℓ 6.73 ¢/ℓ

Diesel 5.35 ¢/ℓ 8.03 ¢/ℓ

Natural gas $1.011/GJ $1.517/GJ

Propane +3.08 ¢/ℓ +4.62 ¢/ℓ

Gas liquids +3.33 ¢/ℓ +4.99 ¢/ℓ

Alberta: How it works

• Obligation to collect the levy and pay it to the Government is on the “Direct Remitter”

– First person in fuel supply chain (i.e. gas plant, refinery, importer)

– Makes payment to Tax and Revenue Administrator (TRA)

– Collects carbon levy from next person in fuel supply chain (i.e. wholesaler)

– That next person collects from next (i.e. retailer)

– The end fuel user (i.e. consumer) ultimately pays the carbon levy

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Alberta: How it works (cont’d)

• Fuel

– Gasoline, diesel, pipeline spec natural gas, butane, ethane, gas liquids, coal coke, propane, aviation jet fuel, etc.

– Raw natural gas, crude oil and bitumen are not fuels

– Factory sealed containers of less than 10 litres are exempt

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• Direct Remitter

– Person who produces, processes, refines, purchases, imports or sells fuel in Alberta

– Person that sells or removes fuel from a gas battery, gas plant or gas transmission pipeline

• All Direct Remitters are to be registered

– Registration for each location

– Separate registration for each activity

– Joint venture partners

– Operating partners of partnership

– Duty to notify TRA if cease to carry on business, bankruptcy or amalgamation

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• No carbon levy payable when:

• Transportation fuels:

– Bulk exports

– Move from oil battery, oil production site or oil sands site to another oil battery, oil production site or oil sands site

• Aviation fuels:

– If flight starts in Alberta but first scheduled stop is outside of Alberta

– Foreign carriers

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• No carbon levy payable when:

• Other fuels (bunker fuel, butane, gas liquids, non-heating natural gas, non-motive propane):

– Bulk exports

– Certain imports

– Moved from an oil battery, oil production site or oil sands site to another oil battery, oil production site or oil sands site

– Moved from a gas plant into a liquid pipeline or vice versa

– Sold in a liquids pipeline but not delivered

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• Carbon Levy Exemption Certificates

• Heating fuels (i.e. natural gas)

– Used by specified gas emitter (i.e. facility required by law to reduce emission intensity)

– Used as fuel gas in oil and gas production process before 2023

– Not used as fuel (i.e. used to make fertilizer)

– Used by Indian or Indian Band

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• Transportation fuels:

– Not used as fuel

– Used as diluent

– Used by Indian or Indian Band

– Used by farmers, armed forces, federal government

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• Aviation fuels

– Used by foreign operators, armed forces, federal government

• Other fuels

– Bulk exports

– Used by specified gas emitter

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• Penalties

– If fail to remit levy due to neglect, wilful default, fraud or evasion can be assessed the tax owing, a penalty of 50% plus interest and a $10,000 fine for a first offence and a $25,000 fine for a second offence plus up to 1 year in jail

– Failing to report can result in a $25 per day penalty plus 5% of levy owing to a maximum of $1,000

– Corporate directors are jointly and severally liable for the levy, penalties and interest

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Alberta: What it means

• Unclear if emissions will actually be meaningfully reduced

• Surprisingly little analysis on effectiveness of real life carbon taxes

• Reductions are modest at best in the short term?

• Energy demand relatively insensitive to price

• BC’s claim of 16% emission reductions is questionable

− 2008 recession

− Canada line

− High gasoline costs

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Ontario: What it is

• Fighting Climate Change: a timeline of action

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Ontario: What it is (cont’d)

• Legislative framework:

− Climate Change Mitigation and Low-carbon Economy Act, 2016 (“Act”)

− O. Reg. 143/16 The Cap and Trade Program; and

− O. Reg. 144/16 Quantification, Reporting and Verification of GHG Emissions

• The Act provides targets for reducing Ontario’s overall greenhouse gas (“GHG”) emissions from 1990 baseline levels:

− A reduction of 15% by the end of 2020



Ontario: How it works

• The Act imposes a “cap” and provides “allowances” to “participants”:

– The cap sets the limit of aggregate emissions of GHG that participants can produce

– The cap is reduced every year to encourage lower emissions

– Participants must have sufficient allowances to cover their emissions

– 1 allowance = 1 tonne of GHG equivalent (CO2 e)

– Extra allowances can be traded amongst the participants

– Reporting and registration requirements vary depending on the types of participants

– Ontario program is expected to be linked to Quebec’s and California’s in 2018

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Ontario: How it works (cont’d)

• Participants

1. Mandatory participants (approx 110):

• Facilities that emit over 25,000 tonnes of CO2 e each year

• Fuel suppliers selling more than 200 litres of fuel per year

• Electricity importers

2. Voluntary participants:

• Facilities that emit between 10,000 and 25,000 tonnes of CO2 e each year who choose to become capped emitters

• Subject to the same rules as mandatory participants

3. Market participants:

• Facilities that emit less than 10,000 tonnes of CO2 e each year

• No reporting obligation

• May apply to register as a market participant

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• Activities covered

− Schedule 2 of the Reporting Regulation (O. Reg. 144/16)

− Sets out 27 activities including:

• Storage and transportation of natural gas

• Petroleum refining

• Production of certain petrochemicals

• Ammonia production

• Electricity generation

• Operation of equipment for a transmission system or a distribution system (electricity)

− Electricity importers, natural gas distributors and petroleum product suppliers may be responsible for emissions associated with a third party.

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• GHG Emissions Reporting

− Regulatory requirements:

• 2015 and 2016 emission reports: O. Reg. 452/09

• Post-2016 reports: O. Reg. 144/16

− Fundamental to the cap and trade program:

• Provide a baseline for companies

• Used as a tool to guide the reporting process

• Help to understand, manage and cut emissions

• Support the implementation of Ontario’s cap and trade program

− Reporting and verification obligations vary depending on the types of

participants

− Reporting deadline: every year by June 1

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• How participants obtain allowances

− Initial allowances

• Eligible participants can apply for free allowances

• Non-eligible participants include:

− Electricity generators or involved in electricity importation and transmission;

− Petroleum producer or supplier; and

− Natural gas distributor

− Auction

• Ontario may offer for sale allowances 4 times a year

• Not resalable

• First auction: March 2017

− Trade between other registered participants on the secondary market

− Other credits:

• Offset credits

• Early reduction credits

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• Offset credits

− The Compliance Offset Credits Regulatory Proposal

• Public comment period has ended

− 1 offset credit represents 1 tonne of CO2 e

− Offset credit creation

• Creation process: initiative registration initiative data reporting initiative verification offset credit application and issuance

• Criteria:

− Consistent with the Western Climate Initiative’s Offset Essential Elements Final Recommendations;

− Includes: real, additional, permanent, quantified, independently verified, enforceable and unique

• Location: offset initiatives undertaken anywhere in Canada will be considered

• Tradeable with other participants


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• Compliance period

− Meaning: the period during which participants can acquire all the allowances needed

− First compliance period: January 1, 2017 – December 31, 2020

− “True-up”: November 1, 2021

• Deadline to submit allowances and credits equal to total GHG emissions throughout the period

− Penalty for excess emission: 3-for-1

• Must surrender the allowance originally owed + additional 3 allowances

− Subsequent compliance period will have a 3-year duration


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• Penalties

− Fines ($5,000 to $6 million) and possible imprisonment for individuals

− Fines ($25,000 to $6 million) for corporations

− Higher penalties for specified offences:

• Failure to comply with the duty to submit emission allowances and credits

• Contravention of the prohibition re: trading

• Contravention of the prohibition re: auction of Ontario emission allowances; and

• Contravention of the prohibitions affecting administration

− The court has discretion to increase the fines by the amount of the monetary benefit acquired

− Corporate directors or officers may be liable of an offence, even if the corporation has not been prosecuted or convicted

Ontario: What it means

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• Regulatory frameworks and protocols:

− Ontario is committed to fighting climate change by reducing GHG:

• Challenges in tracking GHG emission and reduction information

• Guidelines and protocols are still in development

− Moving target: lessons learned from Quebec and California

− Opportunities:

• Clean-tech companies:

− Investments from cap and trade proceeds

− Incentives for industries in new clean technologies

− Other opportunities:

• Voluntary participants and offset credits

• Pan-Canadian Framework on Clean Growth and Climate Change sets federal goal of at least a 30% reduction from 2005 emissions by 2030 (i.e. reductions of 523 MT)

• Feds will put a floor price of $10 per tonne in 2018 rising $10 per tonne each year until $50 per tonne in 2022

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Federal: What it is

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Federal: How it works

• Carbon tax jurisdictions (i.e. B.C. and Alberta) will have to at least meet the federal rates

• Cap and trade jurisdictions (i.e. Ontario, Quebec and Nova Scotia) must achieve:

− Reductions of at least 30% below 2005 levels by 2030; and

− Declining annual caps that correspond, at a minimum, to the predicted emissions reductions resulting from the federal carbon price that year

• Jurisdictions without any carbon pricing (i.e. Saskatchewan) will be subject to federal carbon pricing

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Federal: What it means

The math: Reductions

by 2030 Federal Base Case Predictions 742 MT

Less Federal Plan - 86 MT

Less Provincial Plans - 89 MT

Total = 567 MT

Federal Target - 523 MT

Shortfall 44 MT

• Potentially, a significant amount of uncertainty, a carbon gap, economic distortions and constitutional disharmony

• The provincial carbon gap:

– Ontario and Quebec cap and trade prices are predicted to be below the federal floor price 2019 – 2022

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Federal: What it means (cont’d)

Carbon prices 2016 to 2022 ($ per tonne)

2016 2017 2018 2019 2020 2021 2022

Quebec* 16.45 18.09 18.10 18.82 19.86 22.13 23.70

Ontario* N/A 18.09 18.10 18.82 19.86 22.13 23.70

Alberta N/A 20.00 30.00 30.00 30.00 40.00 50.00

British

Columbia 30.00 30.00 30.00 30.00 30.00 40.00 50.00

Federal N/A N/A 10.00 20.00 30.00 40.00 50.00 Source: California Carboninfo. Actual $ amounts will vary based on exchange rates.

• California deliberately created oversupply of free emission permits to electrical utilities

• California is awash in relatively cheap permits and is expected to remain so until 2026

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Federal: What it means (cont’d)

• Ottawa’s two cap and trade equivalency conditions:

1. 2030 emissions target meets or exceeds the federal objective of a 30% reduction from 2005

• Ontario and Quebec already have such targets

• Nova Scotia has already met the target due to economic decline

2. Annual emission targets that correspond, at a minimum, to the projected emission reductions resulting from the carbon tax

• Does this mean cap and trade prices need to be the same as the federal tax or at least produce same results?

• As no clear metric for this second federal condition, subject to subjective calculating and economic modeling

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Federal

• The future:

− Regional political conflict?

− Federal intervention in Ontario and Quebec to enforce the federal floor?

− Trump tearing up the Paris Climate Agreement and banning cross-border permit trading?

− A flood of carefully tuned reports and models showing that Ontario and Quebec cap and trade at half the tax price is as effective as the tax?

− Constitutional court challenges if federal levy imposed on provincial Crown corporations?

− What happens after 2022?

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Federal

• Alberta’s tax is on heating and transportation fuels

• Ontario’s cap and trade regime still under development

• Feds tax will treat provinces differently

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Conclusions

Contact Janet Bobechko

Senior Partner, Norton Rose Fulbright

[email protected]

Alan Harvie,

Senior Partner, Norton Rose Fulbright

[email protected]

mailto:[email protected]

mailto:[email protected]

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