Ontario reveals the details about its performance standards for large industrial emitters

Climate change regulatory update

13 minute read
19 February 2019

On February 12th 2019, Ontario announced its proposed plan to reduce greenhouse gas ("GHG") emissions, the Industrial Emissions Performance Standards Program ("EPS").[1]

This is the latest development in Ontario's new approach to climate change, following:

In this article, we take a closer look at Ontario's new EPS plan, building on our recent analyses of unfolding Federal and Provincial climate policy.

1. Industrial Emissions Performance Standards

Ontario's proposed EPS would apply annual emission limits on facilities, processes or equipment that emit GHGs.[2] These emission limits would be different depending on the sector or industry.[3] Emitters would be charged for exceeding those limits, and be granted tradeable credits when they emit less than the limit.[4]

The EPS closely resembles Saskatchewan's recently announced Climate Change Strategy, which rejects a carbon price in favour of flexible Output-Based Performance Standards (not to be confused with the Federal government's Output-Based Pricing System ("OBPS")). EPS also resembles the New Source Performance Standards regime implemented by the United States Environmental Protection Agency.[5]

a. Who must comply with the EPS?

Ontario's EPS targets the same GHG-emitting sectors as the Federal OBPS and fuel charges. These include: (1) electricity, fuel, and energy sectors; (2) food sectors; (3) certain institutions; (4) certain chemical sectors; (5) metal, cement, lime and mineral sectors; (6) pulp & paper; and (7) vehicle manufacturing, among others.[6]

The EPS will only apply to larger facilities, namely those that exceed a certain threshold of annual emissions (likely 25,000 or 50,000 tonnes per year of carbon dioxide (CO2) equivalent emissions, depending on the sector).[7]

b. How do businesses comply?

The EPS is 'Sector-Based', meaning that the emissions limit will vary by sector.[8] Ontario has not yet determined these emission limits. Ontario has also proposed stringency exceptions for the electricity-generation sector and for natural-gas-based thermal energy generation.[9]

Emitters that fail to comply with their annual limit will be required to pay for 'Compliance Units' for each tonne of excess CO2. Ontario has proposed a cost for Compliance Units of $20 per tonne in 2019, increasing by $10 per year to a maximum of $50 per tonne in 2022.[10]

Emitters who emit less than the limit can generate Compliance Units, which can then be sold to non-compliant emitters. Ontario has also proposed to develop an offset crediting system for unregulated parties who voluntarily reduce emissions or remove carbon.[11]

c. EPS vs. carbon pricing

So what makes the EPS unique? Is it a carbon cap-and-trade system by another name? Not exactly.

The EPS is a performance standard. The EPS and carbon pricing (i.e. a cap-and-trade system or a carbon tax) are both a means of encouraging emitters to reduce emissions. The key difference is that a carbon price applies a market-wide standard across all industries, whereas performance standards apply differently to each industry. In addition, unlike a carbon tax, the EPS does not put a price on each tonne of GHG emitted. Costs for emission are only incurred if a particular emitter exceeds its industry-specific target. However, all emissions below that threshold are free.

Performance-based standards may therefore result in lower costs to industry participants and are intended to consider trade exposure and competitiveness. Critics often counter that performance based standards can be less effective at reducing emissions, especially when less stringent emissions limits are used.

2. Implications for the Federal backstop program

As we have discussed in previous articles, the Greenhouse Gas Pollution Pricing Act ("GGPPA") (also called the "Federal Backstop"), is the Federal carbon pricing program. The GGPPA imposes minimum requirements on Provincial carbon pricing programs. Where Provinces fall short of the Federal standard, the Federal backstop will apply either (1) a charge on fossil fuels for fuel producers, distributors and importers or (2) an output-based pricing system for industrial facilities.

Following Ontario's termination of cap-and-trade, Canada has begun to apply its Backstop in Ontario. Assuming Ontario's proposed EPS is enacted, Canada will reassess whether Ontario meets the Federal standard. However, Ontario's EPS may not ward off federal intervention if it is considered less stringent than the GGPPA. If Canada's approach to Saskatchewan's performance standard is any indication, Canada has said that it will apply the GGPPA backstop in Saskatchewan "to the emissions sources not covered by Saskatchewan's system".[12] Then again, Saskatchewan's performance standards are more limited than Ontario's, only applying to Saskatchewan's largest facilities.

The fate of the EPS and the Federal Backstop will also depend on the outcomes of both Ontario's and Saskatchewan's pending challenges to the constitutionality of the GGPPA. If the GGPPA is stuck down by the Courts, the EPS would stand. If the GGPPA is upheld, the EPS will be vulnerable to Federal intervention.

3. Conclusion

Ontario's proposed EPS presents an important regulatory consideration for any industry that emits GHGs. The scale of its regulatory demands will depend on how the Province sets the sector-specific GHG emission limits and the price of Compliance Units.

Even if enacted, however, the EPS's fate is closely tied with that of its Federal counterpart, the GGPPA, whose constitutional validity is still pending.

The proposal has been posted on the Environmental Registry of Ontario for a 45-day public comment period, concluding on March 29, 2019. Ontario aims to have the EPS apply to emitters by as early as 2020.

[1] Government of Ontario, Making Polluters Accountable: Industrial Emission Performance Standards (February 2019), online: https://prod-environmental-registry.s3.amazonaws.com/2019-02/EPS%20Regulatory%20Proposal%20%28EN%29_0.pdf [EPS].

[2] EPS, s. 3.0.

[3] EPS, s. 3.1.1. An emitter's annual emissions limit will be a function of its industry performance standard. An industry performance standard will be calculated by multiplying the average emissions rate for that industry by a "Stringency Factor", as determined by Ontario. The latter factor represents the fraction of a sector's average emissions that Ontario will permit in a given year.

[4] EPS, s. 4.0.

[5] See New Source Performance Standards under Section 111 of the USA's Federal Clean Air Act and 40 CFR Part 60 Regulations.

[6] See the more detailed list in the EPS, s. 2.1.

[7] GHGs other than CO2 will be quantified based on their equivalence to the 'Global Warming Potential' of CO2, as guided by Ontario's pre-existing Regulations for Greenhouse Gas Emissions: Quantification, Reporting and Verification.

[8] EPS, s. 3.1.1. See footnote 3.

[9] EPS, s. 3.1.2.

[10] EPS, s. 4.0. Note that these are the same price levels as set by the federal government in its carbon pricing regime.

[11] EPS, s. 4.0.

[12] Government of Canada, "Saskatchewan and pollution pricing" (November 23, 2018), online: https://www.canada.ca/en/environment-climate-change/services/climate-change/pricing-pollution-how-it-will-work/saskatchewan.html.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.