Canada: Quebec Passes Regulation On Cap-and-Trade System

In July 2010, the Western Climate Initiative (WCI), of which Quebec is a partner, published detailed operational rules for the cap-and-trade system it wished to adopt. According to these rules, as a first step, all partner states and provinces wanting to participate in the WCI North American regional carbon market were required to adopt regulations to implement a GHG cap-and-trade system in their respective jurisdictions. Recognition agreements would then be signed and the required regulatory amendments adopted so that individual WCI partner systems would be linked to officially create the regional carbon market.

To meet its commitment to the WCI, the Government of Quebec published its regulation¹ setting out the rules for operation of a cap-and-trade system under s. 46.5 of the Quebec Environment Quality Act² (EQA) on December 14, 2011, in the Gazette Officielle du Québec. Adopted by the National Assembly in 2009, s. 46.5 of the EQA laid the foundation for the system by providing that the applicable terms and conditions may be determined by regulation.

Quebec passed the regulation despite there being only one partner for the regional market: California.

Who does the regulation apply to?

The regulation applies to the largest GHG emitters, principally in the areas of mining and quarrying; oil and natural gas extraction; electric power generation, transmission and distribution; natural gas distribution; steam and air-conditioning supply; manufacturing; and pipeline transportation of natural gas. Emitters subject to the regulation with annual GHG emissions at or over the threshold of 25,000 metric tonnes CO2 equivalent will have a general obligation to "cover" their emissions in order to meet their emissions cap or reduction target. Thus, starting in 2013, the operators of about 100 establishments, mainly in the industrial and electricity sectors, whose annual GHG emissions equal or exceed 25,000 metric tonnes CO2 eq. will be subject to a cap and will have to reduce their GHG emissions.

How will emitters and participants register?

To register for the cap-and-trade system, the enterprises concerned must provide the Minister of Sustainable Development, Environment and Parks with certain information no later than September 1, 2012. Any person other than an emitter who wishes to participate in the system must also provide information to the Minister. Such a person will be called a "participant." If the application meets the regulation's requirements, the Minister will assign an identification number to the emitter or participant and will open an account in which emission allowances to cover the emitter's GHG emissions will be recorded.

Compliance periods

There will be three compliance periods, 2013 2014, 2015 2017 and 2018 2020. The first compliance period will last two years and the other two periods will last three years each. These compliance periods will be preceded by a transition year, 2012, during which no reduction targets will be set, to allow emitters and participants to familiarize themselves with the system.

How will the cap-and-trade system work?

According to the regulation, capping of GHG emissions will commence on January 1, 2013. The system will consist of two stages (1) the reporting of GHG emissions by emitters subject to the regulation, and (2) the surrender to the government of emission allowances. At the compliance deadline following a compliance period, emitters will have to surrender to the government a number of GHG emission allowances equivalent to their total verified GHG emissions reported for the relevant compliance period. Most emitters will receive emission units from the government at no charge, which will make up a large part of their GHG emission allowances. They will have to cover any remaining emissions by purchasing units auctioned off by the Minister (several auctions will be held each year) or, by private agreement, from another registered emitter. Emitters will also be able to use offset credits, created pursuant to terms to be determined in a forthcoming regulation, not exceeding 8% of their emissions and may be eligible to receive early reduction credits, subject to conditions set out in the regulation.

If an emitter has not covered its GHG emissions at the compliance deadline, it will be liable to the suspension of its account, administrative sanctions such as the deduction of three emission units for each missing emission allowance needed to complete the coverage, as well as a fine.

Starting with the second compliance period, i.e. commencing on January 1, 2015, the cap-and-trade system will also apply to GHG emissions from the combustion of fossil fuels used in the transportation and construction industries. From that date, the operators of enterprises that import into or distribute in Quebec fuels whose combustion produces annual GHG emissions at or over the annual threshold of 25,000 metric tonnes CO2 eq., will also be subject to the cap-and-trade system.

Penal sanctions

The regulation provides for fines of between $25,000 and $250,000 for any enterprise that commits an offence under the cap-and-trade system, including for not covering its emissions. An enterprise that fails to provide information or documents required under the regulation will be liable to a fine of between $5,000 and $50,000, with fines being doubled for repeat offences.

Notes

¹ Regulation respecting a cap-and-trade system for greenhouse gas emission allowances.

² RSQ, c Q-2, as amended by Bill 42, SQ 2009, c 33, An Act to amend the Environment Quality Act and other legislative provisions in relation to climate change.

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