Details of Ontario’s transition to emissions performance standards program released

On October 22, 2021, the Government of Ontario made several regulatory amendments and changes to incorporated documents (together, the regulatory amendments) to facilitate the province’s transition from the federal output-based pricing system (OBPS) to Ontario’s own emissions performance standard (EPS) program beginning on January 1, 2022. The new EPS program will regulate greenhouse gas (GHG) emissions from Ontario’s large industrial facilities by setting emissions limits that facilities are required to meet and is intended to align with the compliance obligations currently imposed on large industry under the federal OBPS.

In this blog post, we discuss Ontario’s transition to the EPS program, the details of the EPS program and the regulatory amendments, and the implications for Ontario industry.  

Background – Ontario’s transition to the EPS program

In 2018, the Government of Canada enacted the Greenhouse Gas Pollution Pricing Act (the GGPPA), which imposes a carbon pricing system on provinces and territories that either have not implemented a carbon pricing system of their own or which have implemented a system that does not meet federal stringency requirements. The GGPPA is comprised of two key parts:

• Part 1, administered by the Canada Revenue Agency, applies a charge to 21 types of fuel and combustible waste (the fuel charge)
• Part 2, administered by Environment and Climate Change Canada, imposes the OBPS on “covered facilities” (i.e., large industrial emitters that meet prescribed criteria set out in the GGPPA and its regulations)

In response to the federal government’s enactment of the GGPPA, Ontario created the EPS program in July 2019 through the adoption of the Greenhouse Gas Performance Standards Regulation (the GGEPS Regulation) under Ontario’s Environmental Protection Act. The EPS program is a substitute for the OBPS, designed to align in scope with the OBPS by covering the same emitters.

On September 21, 2020, the Federal Government announced that the EPS program met the federal stringency requirements and that it had accepted Ontario’s EPS program as an alternative to the federal OBPS. Subsequently, on March 29, 2021, the Federal Government announced that it had informed the Government of Ontario of its intention to take the necessary steps to transition Ontario from the OBPS to the EPS from 2022 onwards. Then, on September 1, 2021, the federal Governor in Council made an order removing the application of the federal OBPS to Ontario facilities effective January 1, 2022.

The recently announced regulatory amendments provide details regarding the January 1, 2022, transition from the OBPS to the EPS program. The OBPS remains in effect in Ontario until the transition has been completed.

Details of the EPS program

As mentioned above, the EPS program will establish GHG emissions performance standards that prescribed large Ontario industrial facilities are required to meet each year. These standards will become more stringent over time and require facilities to reduce their emissions or pay a carbon price if they exceed their emissions limit. The objective of the EPS program is to encourage GHG emission reductions from large industrial emitters while maintaining competitiveness of Ontario businesses and minimizing carbon leakage.

Application

The EPS program applies to industrial facilities with annual emissions of at least 50,000 tonnes of carbon dioxide equivalent (tCO2e) in the sectors regulated by the OBPS. Regulated sectors are identified in the GGEPS Regulation as including cement, chemicals, electricity generation, food (specifically sugar and corn milling), industrial, food and fuel ethanol, metal tubes and steel, lime, metal mining or milling, mineral products, natural gas liquids, natural gas transmission, non-ferrous metal smelting and refining, petroleum refineries, oilseeds processing, pulp and paper, upstream oil extraction and upgrading and vehicle manufacturing.

Participation in the EPS program is mandatory for facilities that were required to report their GHG emissions for 2014 and subsequent years. Smaller facilities with annual emissions between 10,000 and 50,000 tCO2e will be allowed to voluntarily opt-in to the EPS program.

Annual emission limits

Facilities regulated by the EPS program will have to pay a carbon price if they exceed their annual emissions limit. The annual emissions limit for a facility or sector is determined in accordance with the incorporated document entitled GHG Emissions Performance Standards and Methodology for the Determination of the Total Annual Emissions Limit (the methodology). Factors that may affect the total annual emissions limit include the emissions intensity and historical emissions of a covered facility or regulated sector.

Reporting requirements

The Greenhouse Gas Emissions: Quantification, Reporting and Verification Regulation (the Reporting Regulation) requires certain facilities to report their annual GHG emissions to Ontario’s Ministry of the Environment, Conservation and Parks. Specifically, facilities that engage in an industrial activity listed in Column 1 of Schedule 2 of the reporting regulation are required to submit a GHG report if they import greater than zero megawatt hours of electricity per year and emit 10,000 tCO2e or more per year. This requirement applies regardless of whether the facility is covered by the EPS program. However, facilities that are covered by the EPS program must have their GHG reports verified by a third-party.

Compliance obligations

The compliance obligation of a covered facility under the EPS program will be the difference between its verified total emissions and its verified total annual emissions limit imposed by the EPS program. A covered facility can satisfy its compliance obligation either by reducing its GHG emissions or submitting a compliance instrument. The two compliance instruments available are excess emissions units and emissions performance units. Excess emissions units are non-tradable and must be purchased from the government of Ontario at a price of $40 per tCO2e for 2022 and $50 per tCO2e in 2023. Emissions performance units, on the other hand, can be banked or traded with other covered facilities in the EPS program for up to five years. These units may also be transferred between facilities’ accounts by agreement if the relevant notice requirements are followed.

The regulatory amendments

On October 1, 2021, the government of Ontario filed the regulatory amendments, which are intended to clarify certain compliance and reporting requirements, support the administration and enforcement of the EPS program, and reduce unnecessary regulatory burden on stakeholders while creating further alignment with the federal OBPS.

Regulation 729/31 amended the GGEPS Regulation and the incorporated methodology. The amendments under Regulation 729/31 include the following changes:

• Providing a three-year grace compliance exemption for new facilities (excluding facilities that generate electricity using fossil fuels as their primary industrial activity). New facilities would have a compliance obligation under the EPS program once they have completed three years of production.
• Supporting the partial year coverage of emissions for facilities that register part way in a year. This involves adding calculations that facilities will have to use to determine prorated amounts such as verified emissions, production parameters, and emissions limits. These adjustments were made both to the incorporated methodology and the Guideline for Quantification, Reporting and Verification of Greenhouse Gas Emissions (the guideline).
• Aligning the Ontario performance standard for electricity generation with the federal OBPS to avoid unnecessary administrative costs and maintain stability in the electricity market.
• Adjusting the Ontario performance standard for all fossil fuel-fired electricity generation from 420 to 370 tonnes CO2e/GWh.
• Clarifying the application of the cogeneration standard in the methodology to ensure facilities are applying it in a consistent manner that corresponds with the 80% efficient cogeneration system policy.

Regulation 730/21 amended the reporting regulation and the incorporated guideline. The amendments under Regulation 730/21 include the following changes:

• Beginning compliance obligations for covered facilities under the EPS program (those registered or required to register) on January 1, 2022.
• Allowing for partial year coverage of emissions for facilities that register part way in a year. These adjustments were made both to the incorporated methodology and the guideline.
• Adding eight new sectors to the EPS program, namely gold ore and silver ore mining, fruit and vegetable canning, picking and drying, animal (except poultry) slaughtering, and manufacturing of paper bag and coated and treated paper, polystyrene foam product, tire, forging and stamping and motor vehicle transmission as well as power train parts.
• Allowing for the collection of additional information to support the exemption of covered facilities from the federal fuel charge.

The regulatory amendments include further administrative, technical, and clarifying adjustments, some of which are meant to ensure that covered facilities are not charged twice for the same emissions under the OBPS or the fuel charge and the EPS program, that there is no gap in pricing for emissions because of the transition to the EPS program, and that covered facilities remain eligible for their exemption from the Fuel Charge. 

Implications for Ontario industry

With compliance obligations beginning on January 1, 2022, regulated emitters need to take the necessary steps to ensure compliance with the requirements of the EPS program. While the transition to the EPS program will impose some additional administrative burden on covered facilities, given that the EPS program applies to the same Ontario emitters as are currently covered under the federal OBPS program, the EPS program will generally not impose significant new compliance obligations on industry.

For new facilities considering operations in Ontario, the regulatory amendments introduce flexibility by providing an exemption from compliance obligations for a period of three-years (except for, as noted above, new electricity generation using fossil fuels as their primary industrial activity). This exemption will provide most new facilities the opportunity to better understand their baseline operating emissions, calculate their anticipated future obligations under the EPS program, and take steps to reduce their emissions prior to having to first meet the compliance obligations imposed by the EPS program. Once a new facility has an understanding of its baseline emissions, it would be wise to consider options for reducing its GHG emissions, including through increased energy efficiency, use of renewable energy, or the more efficient use and recycling of materials.

Existing regulated facilities with significant compliance obligations should similarly consider options for reducing their GHG emissions. With the federal government’s announced plan [PDF] to accelerate the increase in the benchmark compliance price under the GGPPA by $15/tonne per year, beginning in 2023 to reach $170 per tonne by 2030, it is anticipated that Ontario’s EPS program will increase in lock-step in order to maintain federal stringency requirements. It goes without saying that a price of $170 per tonne is materially higher than the currently applicable compliance price of $40 per tonne of GHG emission and has the potential to impact the bottom-line of facilities with emissions intensive operations.