Tightening Standards for Industrial Carbon Pricing

Summary#

This is a proposed set of changes to the Output-Based Pricing System Regulations and the Environmental Violations Administrative Monetary Penalties Regulations published for comment. The proposal would add fixed annual “tightening” rates to most industry performance standards, add and update some standards, and change reporting and verification rules; it is open for comment for 60 days.

What it does#

• Adds an automatic annual tightening to output-based standards so they get steadily stricter over time:
  • 2% per year for most sectors, starting January 1, 2023.
  • 1% per year for a small group of sectors judged at “very high” risk of competitiveness impacts (cement, lime, many petrochemicals, and natural gas extraction/processing).
  • The tightening does not apply to electricity generation from fossil fuels.
• Adds or revises standards:
  • Introduces about 12 new output‑based standards (for example, a standard for surface mining of oil sands and for aluminium from alumina).
  • Splits some existing standards (for example, separating granular urea from urea liquor) and updates a few standards when greenhouse‑gas accounting changes materially affect them.
• Changes reporting, measurement and verification:
  • Moves detailed quantification rules into a technical document (the “Quantification Methods”) that can be updated more easily.
  • Lowers some verification materiality thresholds (for example, the emissions threshold for smaller facilities goes from 8% to 5%, and the production threshold used in verification goes from 5% to 0.1%).
  • Requires corrected annual reports only when an error would have been a material discrepancy; the deadline to submit a corrected report is increased from 90 days to 120 days.
  • Updates verification to newer ISO standards and allows a 4‑year transition for ISO 14065 accreditation changes.
• Streamlines and clarifies participation and calculations:
  • Defines “additional industrial activities” so more secondary activities can be included in a facility’s emissions limit.
  • Clarifies how calculated standards and facility emissions limits are worked out, and fixes start dates for first compliance periods.
• Administrative and enforcement updates:
  • Some compliance and penalty text is adjusted to reflect the regulatory changes.
  • Many provisions would come into force on registration, but key changes are timed to apply on January 1, 2023 or January 1, 2024 depending on the rule.

Who's affected#

• Covered industrial facilities that fall under the federal OBPS. In 2022 those included facilities in jurisdictions where the federal backstop applies (for example Manitoba, Prince Edward Island, Yukon, Nunavut and parts of Saskatchewan).
• Industries most directly affected include cement, lime, petrochemicals, oil and gas (including oil sands), aluminium, some chemicals and fertilizer producers, refineries, pulp and paper, and other large industrial emitters.
• Households, indirectly, because modelling in the Regulatory Impact Analysis Statement expects some reduction in overall household welfare (see figures below).
• Smaller sites that might want to opt in could see a streamlined process; the document notes that no small businesses are expected to become covered under the current scope.
• If you are unsure whether a particular facility or activity is covered, the proposal provides definitions and a list of the industrial activities that would have standards.

Why it matters#

• The government says the change is meant to keep the OBPS aligned with the strengthened federal benchmark and with a rising excess emissions charge that reaches $170 per tonne of CO2e by 2030. The tightening rates are intended to keep demand for credits high enough so the market price continues to encourage emissions cuts.
• Expected climate and economic effects (2023–2030, from the regulatory analysis):
  • Estimated emissions reductions of about 5.8 million tonnes (Mt) of CO2e over 2023–2030.
  • Estimated reduction in Canadian household welfare of $684 million (central case). The analysis gives a range of $513 million to $855 million in sensitivity tests.
  • Implied societal cost per tonne of CO2e reduced of about $119/tonne (central), with a range of $89 to $149/tonne.
  • The Department’s analysis judges it “likely” that the climate benefits (using updated estimates of the social cost of carbon) would exceed these costs.
• In practical terms, affected facilities face steadily stricter emissions-intensity limits that aim to keep pressure on industry to cut emissions while trying to limit competitiveness harms. That can mean higher operating costs for some firms, potential changes in investment decisions, and modest downstream impacts for consumers and workers in the affected regions.
• This is a proposal, not final law. Some changes would start on January 1, 2023 and others on January 1, 2024 if enacted. The public could make representations within 60 days of the notice.