Carbon cap, trade and tax: understanding
new federal and provincial requirements
Wednesday, February 1, 2017
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2
Speakers
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Alan Harvie
Janet Bobechko
Senior Partner
Calgary
Senior Partner
Toronto
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 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
• 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
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Alberta: What it is
• 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
Gasoline
Diesel
Natural gas
Propane
Gas liquids
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2017
2018 to TBD
4.49 ¢/ℓ
6.73 ¢/ℓ
5.35 ¢/ℓ
8.03 ¢/ℓ
$1.011/GJ
$1.517/GJ
+3.08 ¢/ℓ
+4.62 ¢/ℓ
+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”
–
–
–
–
–
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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
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
7
Alberta: How it works (cont’d)
• 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
–
–
–
–
–
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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
Alberta: How it works (cont’d)
• 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
9
Alberta: How it works (cont’d)
• No carbon levy payable when:
• Other fuels (bunker fuel, butane, gas liquids, non-heating natural gas, nonmotive 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
10
Alberta: How it works (cont’d)
• 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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Alberta: How it works (cont’d)
• Carbon Levy Exemption Certificates
• 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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Alberta: How it works (cont’d)
• Carbon Levy Exemption Certificates
• Aviation fuels
– Used by foreign operators, armed forces, federal government
• Other fuels
– Bulk exports
– Used by specified gas emitter
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Alberta: How it works (cont’d)
• 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
15
Ontario: What it is
• Fighting Climate Change: a timeline of action
16
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
− A reduction of 37% by the end of 2030
− A reduction of 80% by the end of 2050
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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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Ontario: How it works (cont’d)
• 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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Ontario: How it works (cont’d)
• 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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Ontario: How it works (cont’d)
• 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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Ontario: How it works (cont’d)
• 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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Ontario: How it works (cont’d)
• 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
•
−
Penalty for excess emission: 3-for-1
•
−
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Deadline to submit allowances and credits equal to total GHG emissions
throughout the period
Must surrender the allowance originally owed + additional 3 allowances
Subsequent compliance period will have a 3-year duration
Ontario: How it works (cont’d)
• 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
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Ontario: What it means
• 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:
•
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Voluntary participants and offset credits
Federal: What it is
• 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 $50 per tonne in 2022
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Federal: How it works
• Carbon tax jurisdictions (i.e. B.C. and Alberta) will have to at
least meet the federal rates
• Cap and trade jurisdictions (i.e. Ontario, Quebec and Nova
Scotia) must achieve:
− Reductions of at least 30% below 2005 levels by 2030; and
− Declining annual caps that correspond, at a minimum, to the predicted
emissions reductions resulting from the federal carbon price that year
• Jurisdictions without any carbon pricing (i.e. Saskatchewan) will
be subject to federal carbon pricing
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Federal: What it means
The math:
Federal Base Case Predictions
Less Federal Plan
Less Provincial Plans
Total
Federal Target
Shortfall
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Reductions
by 2030
742 MT
- 86 MT
- 89 MT
= 567 MT
- 523 MT
44 MT
Federal: What it means (cont’d)
• Potentially, a significant amount of uncertainty, a carbon gap,
economic distortions and constitutional disharmony
• The provincial carbon gap:
– Ontario and Quebec cap and trade prices are predicted to be below the
federal floor price 2019 – 2022
Carbon prices 2016 to 2022 ($ 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
30.00
30.00
30.00
30.00
30.00
40.00
50.00
N/A
N/A
10.00
20.00
30.00
40.00
50.00
British
Columbia
Federal
Source: California Carboninfo. Actual $ amounts will vary based on exchange rates.
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Federal: What it means (cont’d)
• 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
• 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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Conclusions
• 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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Contact
Janet Bobechko
Senior Partner, Norton Rose Fulbright
[email protected]
Alan Harvie,
Senior Partner, Norton Rose Fulbright
[email protected]