Canada announces fund to reinvest proceeds from output-based pricing system

On February 14, 2022, Environment and Climate Change Canada (ECCC) launched the Output-Based Pricing System Proceeds Fund (Proceeds Fund) — a program that aims “to support industrial initiatives that reduce greenhouse gas (GHG) emissions and deploy clean technology and green energy.” The program will use the proceeds from the federal output-based pricing system (OBPS) — which totals $161.1 million for the 2019 compliance period — to support “low carbon technology” in provinces that are or were subject to the federal OBPS on a non-voluntary basis — namely, New Brunswick, Ontario, Manitoba and Saskatchewan. Provinces and territories that have voluntarily adopted the federal OBPS can elect for a direct return of the federal OBPS proceeds collected in their jurisdictions.

Federal output-based pricing system

The federal OBPS requires certain large industrial emitters (covered facilities) to pay a carbon price if the emissions at their facilities exceed set levels. However, the federal OBPS only applies in backstop jurisdictions, meaning provinces and territories which have not implemented their own carbon pricing systems for industrial emitters that meet the minimum federal pricing and emissions reduction targets. The federal OBPS is administered by ECCC in accordance with Part 2 of the Greenhouse Gas Pollution Pricing Act (GGPPA) and the Output-Based Pricing System Regulations. For more information on the federal OBPS, as well as the separate fuel charge established by Part 1 of the GGPPA, see Osler’s overview of Canadian Government Carbon and Greenhouse Gas Legislation.

The federal OBPS came into force in 2019 in New Brunswick, Ontario, Manitoba and Prince Edward Island, and partially in Saskatchewan, as well as the territories of Nunavut and Yukon. Of these provinces and territories, only Prince Edward Island, Yukon and Nunavut voluntarily adopted the federal OBPS.^[1] New Brunswick and Ontario have since developed their own provincial pricing systems for industrial emitters that meet the federal minimum benchmarks. However, for the purposes of the 2019 compliance period, those two provinces, along with Saskatchewan and Manitoba, would be considered provinces that did not voluntarily adopt the federal OBPS. Going forward, the federal OBPS no longer applies in New Brunswick (after January 1, 2021) and Ontario (after January 1, 2022).^[2]  

Output-Based Pricing System Proceeds Fund

For the backstop jurisdictions (in either the current or previous compliance periods) that did not voluntarily adopt the federal OBPS, the Proceeds Fund will return the proceeds collected within those jurisdictions through two program streams: the Future Electricity Fund (FEF) and the Decarbonization Incentive Program (DIP).

Future Electricity Fund

The FEF program aims to support “clean electricity projects and/or programs.” The proceeds collected from electricity generating facilities covered by the federal OBPS will be returned to the governments of backstop jurisdictions through funding agreements. The total funds under the FEF program for the 2019 compliance period is $81.4 million, allocated between New Brunswick, Ontario, Manitoba and Saskatchewan. The Government of Canada’s Output-Based Pricing System Proceeds Fund webpage provides a breakdown of these funds by province.

Details have not been announced on exactly what the funding arrangements under the FEF will involve, what projects and programs will qualify as “clean electricity”, and whether funding will be provided directly to specific projects or instead to provincially managed programs. However, ECCC announced that it does not currently anticipate an open call for projects under the FEF, suggesting that it may be left to the provinces to administer the proceeds to specific projects and/or provincial programs.

Decarbonization Incentive Program

The DIP is a merit-based program aiming to support clean technology projects that will help decarbonize industrial sectors over the long term and help meet Canada’s GHG emission reduction targets. The program will specifically support single- or multi-year projects with the objective of deploying commercially available and/or proven low-carbon technologies and processes in eligible provinces (i.e, New Brunswick, Ontario, Manitoba and Saskatchewan for the 2019 compliance period). The amount of funding available for projects in each province will vary depending on the proceeds collected from facilities in each province under the federal OBPS.

The total funds under the DIP for the 2019 compliance period is $79.5 million, allocated between New Brunswick, Ontario, Manitoba and Saskatchewan. The DIP is currently accepting applications for project funding with these proceeds.

Some of the key details regarding the DIP funds available from the 2019 compliance period include

• requirements for applicants. Applicants must be legal entities incorporated or registered in Canada, operate or have a controlling ownership stake in an eligible facility covered under the federal OBPS be located in one of the eligible provinces and demonstrate they have the authority over the facility or asset to undertake the project. Applicants to the DIP must request a minimum of $500,000 in funding for each project, but projects may not request more than $10 million in total project funding from the program.
• requirements for projects. To be eligible, projects must
  • occur at an eligible covered facility, meaning a facility that is located within an eligible province, is currently or was previously subject to the federal OBPS and does not generate electricity as their primary activity
  • result in GHG emissions reductions that must be material in the year 2030 and measurable over the lifetime of the project, affecting sources of GHG emissions either within the facility’s direct control and/or from acquired sources of energy, and incremental to GHG emissions reductions obtained by other required actions
• timing for applications. Applications will be accepted for a minimum of two months starting on February 14, 2022, and until available funding within their respective eligible province has been allocated.

More details on the DIP have been published by ECCC, along with a detailed applicant guide which sets out program eligibility, including a list of example eligible activities, as well as funding parameters and the application and project assessment processes.  

Key takeaway

While further details are still to come on the FEF, the DIP is now actively accepting applications for proceeds collected under the federal OBPS in the 2019 compliance period. This is a significant funding opportunity for eligible applicants in New Brunswick, Ontario, Manitoba and Saskatchewan. We encourage interested owners and operators of facilities in those provinces that are or have been subject to the federal OBPS to review the DIP applicant guide to determine their eligibility and whether the DIP is something they can and should pursue.