Canada: Quebec Adopts New Cap‐And‐Trade System For Greenhouse Gas Emission Allowances

Last Updated: April 3 2012
Article by Anne-Frédérique Bourret and Dominique Quirk

On December 15, 2011, Pierre Arcand, Quebec's Minister of Sustainable Development, Environment and Parks, announced the adoption of the Regulation respecting the cap‐and‐trade system for greenhouse gas emission allowances, which implements the first cap‐and‐trade system for greenhouse gas emission ("GHG") allowances in Canada. The regulation came into force on January 1, 2012.

This regulation follows the draft regulation, which was adopted on July 7, 2011. It is based on the rules established by the Western Climate Initiative ("WCI"), which is composed of six U.S. states, as well as Ontario, British‐Columbia, Manitoba and Quebec. Quebec adopted this regulation closely after California adopted its regulation implementing a cap‐and‐trade system for GHG emission on October 20, 2011, a program that will also begin on January 1, 2013.

As noted in the press release announcing the adoption of the regulation, this regulation is the first of two main steps toward the establishment of a regional North American carbon market. The second step is to conclude recognition agreements, between the different partners, in order to link their systems together. This second step has already begun. In fact, on January 12, 2012, the partners in WCI demonstrated a commitment to address climate change with a clear path towards a linked program to reduce greenhouse gases.

Targeted Companies

The regulation targets businesses whose annual GHG emissions equal or exceed the annual threshold of 25 thousand tons of carbon dioxide equivalent, with the exception of certain emissions such as, for example, emissions linked to the combustion or fermentation of biomass or biofuels. The cap‐and‐trade system will consist of three compliance period : 2013‐2014, 2015‐2017 and 2018‐2020. The first compliance period will exceptionally last two years while the other periods will each have a duration of three years. 2012 shall be a transition year, which will allow emitters and participants to familiarize with the operation of the system companies.

As of January 1, 2013, the following sectors will have a general obligation to cover their GHG emissions in order to meet their emission cap or reduction target: mining, 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 sectors

It should be noted that, as of 2015, companies importing and distributing fuel and combustibles used in the transportation and construction sector and whose annual GHG emissions equal or exceed the annual threshold of 25 thousand tones of carbon dioxide equivalent, will also be required to meet their emission cap or reduction target.

Emission allowances and how it works

Every emitter to which the regulation applies must register for the system by submitting an application before May 1, 2012. When an application for registration meets the requirements of the regulation, the minister opens a general account, in which the emission allowances that may be traded are recorded and a compliance account, in which must be recorded the emission allowances used to cover the GHG emissions of its covered establishments at the end of a compliance period.

Every emitter must send annually a report on the coverage of the emitter's GHG emissions, including the total quantity of verified emissions for each of the emitter's covered establishments, the number and type of emission allowances to be deducted from the compliance account to cover the GHG emissions and, where applicable, the order in which the emission allowances are to be deducted.

Essentially, companies have only one obligation: provide a number of emission allowances equal to the total amount of reported and verified emissions within one compliance period. The company has essentially two choices, either reduce emissions to avoid or decrease the amount of allowances it must return to the government or purchase emission allowances.

Emission allowances are composed of (i) emission units, (ii) early reduction credits or (iii) offset credits.

(i) Emission units

An important quantity of emission allowances will be allocated without charge by the Quebec government to most of the emitters. However, the Minister may suspend the allocation of emission units without charge to any emitter that fails to comply with the provisions of the Regulation respecting mandatory reporting of certain emissions of contaminants into the atmosphere. Companies that emit more GHG emissions than the number of units allocated will have to innovate in clean technologies or buy emission allowances at auction from the government. The auctions will be held by the Minister four times a year. Companies can also purchase units by mutual agreement with the Minister who organize a sale of emission units at most, 4 times per year.

(ii) Early reduction credits

Early reduction credits will be issued to emitters for the reductions in GHG emissions made during the eligibility period starting on January 1, 2008 and ending on December 31, 2011. The maximum quantity of early reduction credits that may be issued to an emitter is calculated according to the regulation. An emitter that wishes to be issued early reduction credits must send the Minister an application not later than December 31, 2012.

(iii) Offset credits

Offset credits are issued by the Minister pursuant to subparagraph 2 of the first paragraph of section 46.8 of the Environment Quality Act (R.S.Q.,c. Q‐2). The total quantity of offset credits that the emitter may use to cover the GHG emission of its covered establishment cannot exceed 8% of the emitter's GHG emissions for the compliance period. The government will soon publish its draft rules on the Offset System.

At the end of a compliance period, every emitter must have at least as many emission allowances in its compliance account as its verified emissions for every covered establishment during the compliance period.

Furthermore, emission allowances, which have not yet been registered in a compliance account, may be traded and only between emitters or participants registered for the system. It is important to note that no person holding privileged information on an emission allowance may trade that emission allowance.

If an emitter fails to cover the GHG emissions of a covered establishment on the expiry of the compliance deadline, the emitter must return the missing emission allowances and it may lead to the suspension of its general account, the application of an administrative sanction equal to three emission units or early reduction credits for each missing emission allowance and may be declared guilty of an offence.

Offences

The regulation provides for a fine of $25,000 to $250,000 for a company that contravenes the cap‐and‐trade system, including failing to cover its emissions. As for the failure to communicate information or documents required by the regulation, emitters are exposed to a fine of $5,000 to $50,000. In the case of a subsequent or second offence, the fines are doubled.

About Fraser Milner Casgrain LLP (FMC)

FMC is one of Canada's leading business and litigation law firms with more than 500 lawyers in six full-service offices located in the country's key business centres. We focus on providing outstanding service and value to our clients, and we strive to excel as a workplace of choice for our people. Regardless of where you choose to do business in Canada, our strong team of professionals possess knowledge and expertise on regional, national and cross-border matters. FMC's well-earned reputation for consistently delivering the highest quality legal services and counsel to our clients is complemented by an ongoing commitment to diversity and inclusion to broaden our insight and perspective on our clients' needs. Visit: www.fmc-law.com

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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