Canada: Recent Changes To BC's LNG Fiscal Framework

The federal government's recent approval of the Pacific NorthWest Liquefied Natural Gas project, accompanying announcement of a national carbon policy, and BC Hydro's recent "eDrive" electricity rate for LNG proponents bring changes to BC's LNG fiscal framework. The federal measures provide more cost certainty, but increased costs, for industrial emitters and project proponents in relation to greenhouse gas emissions. In contrast, the BC Hydro move provides a small offsetting incentive for LNG proponents who use electric drives for liquefaction.

Emissions Cap and Federal GHGs Benchmark on Pacific NorthWest LNG Project

On September 27, 2016, the federal government announced its decision to approve, subject to over 190 legally binding conditions, the Pacific NorthWest LNG Project under the Canadian Environmental Assessment Act, 2012 ("CEAA 2012"). The project approval came more than three years after the federal environmental assessment process began, and after the federal government received over 34,000 comments from the public on the Canadian Environmental Agency's draft report and draft conditions on the project.

Most notably, the conditions imposed by the federal government included a maximum cap on the project's overall annual greenhouse gas ("GHG") emissions, reflecting a 20% reduction from the project's projected annual GHG emissions. The federal government also required the proponent to meet annual average emissions intensity benchmarks of equal or less than 0.22 tonnes and 0.21 tonnes of equivalent carbon dioxide equivalent per tonne of LNG produced at each of the commissioning of the second and third trains, respectively.

The emissions cap is unprecedented in BC and, to an extent, undermines BC's existing GHG emissions regime for LNG projects.

As part of the province's commitment to have the "cleanest LNG in the world", the provincial Greenhouse Gas Industrial Reporting and Control Act already regulates GHG emissions from LNG facilities:

• LNG facilities are subject to a GHG emissions intensity benchmark of 0.16 carbon dioxide equivalent tonnes for each tonne of LNG produced; and
  
• LNG facility operators can meet this ratio by creating or purchasing offsets, or purchasing technology fund units for $25 per tonne of carbon dioxide.

As a result, under the provincial regime, LNG proponents can either pay into the regime (which then funds emissions reductions), or directly reduce or offset their emissions. The federal cap effectively limits the full use of those compliance options for Pacific NorthWest LNG.

BC also has a carbon tax in place that is aimed at discouraging carbon emissions. The provincial carbon tax prices each tonne of GHG emissions emitted, with the intended effect of reducing emissions by encouraging reduced fuel consumption, a switch to "cleaner" fuels, and implementation of new technologies. The tax has been priced at $30 per tonne since 2012, and applies to GHG emissions from all LNG facilities.

Previous LNG projects approved under either CEAA 2012 or its predecessor legislation have not received the same "cap" treatment. Rather, carbon emissions were governed solely by provincial regimes.

Pacific NorthWest LNG has entered into a development agreement with the province that protects it from carbon tax increases targeted at LNG facilities, but the agreement does not protect Pacific NorthWest LNG from other general provincial or federal carbon tax increases.

Federal Government Announces National Climate Change Policy

Shortly after the federal government approved the Pacific NorthWest LNG project, the federal Minister of Environment and Climate Change also announced the long-awaited national climate change policy in relation to GHG emissions. Since the federal government publicized that Canada will ratify the Paris Climate Treaty by the end of 2016, there has been significant attention paid to how Canada will fulfil its pledge to lower GHG emissions by 30 percent from 2005 levels by 2030.

Under Canada's new climate action plan, provinces and territories must adopt a carbon pricing scheme by 2018 by either imposing a direct price on carbon or implementing a cap-and-trade system. Otherwise, they will be subject to the federal "floor" price, set at $10 per tonne for 2018 and increasing by $10 per year to $50 per tonne by 2022. Provinces and territories may implement a cap-and-trade system instead, but will be subject to two requirements: they must decrease their emissions in line with Canada's target and with reductions in jurisdictions that choose a price-based system.

The federal government has announced its plan is "revenue neutral", and that any federal revenues generated will stay within the province or territory where they are generated. The full details of the plan have not been announced, but provinces and territories will reportedly be able to use the revenues generated for climate change research, clean technology, and innovation. The federal government also announced in its fall economic update that it would make an investment of over $5 billion in the next five years in "green infrastructure", including interprovincial transmission lines "to reduce reliance on coal" (implicating Alberta) and new low-carbon and renewable power projects.

BC's current carbon tax has been set at $30 per tonne since 2012 and is compliant with the federal climate change scheme. BC will not be required to raise its carbon tax until 2021, at which time the carbon tax will be adjusted to $40 per tonne. In August, the province's Climate Leadership Team review team called for a $10 increase in the tax starting in 2018, but Premier Christy Clark stated she will not do so until other provinces "catch up" to BC.

BC Hydro Announces eDrive Electricity Rate for LNG Projects

On November 4, 2016, the province announced a new "eDrive" electricity rate to incent LNG proponents to use electric drives for liquefaction. The new eDrive electricity rate is described as encouraging electrification, reducing emissions, and developing a low-carbon economy.

Before this announcement, the rate that applied to LNG projects exceeded the standard industrial rate by a significant amount. In contrast, the new eDrive rate will be much closer to the standard industrial rate. BC Hydro's revised load/resource balance, which predicts an electricity surplus for much of the next decade, may also explain the policy shift. The eDrive rate may not be a practical near-term incentive for large loads given infrastructure limitations.

The eDrive announcement coincided with Woodfibre LNG's announcement that its board has authorized proceeding with the $1.6 billion project. The Woodfibre LNG project, located in Squamish BC, is licensed to export 2.1 million tonnes of LNG annually. This represents roughly one-tenth of the volume of the Pacific NorthWest LNG and LNG Canada projects, respectively. The Pacific NorthWest LNG and LNG Canada projects have completed the environmental assessment processes and received necessary authorizations, but have delayed final investment decisions until 2017 and 2018 or later, respectively.

In closing, climate change policy continues to drive changes in LNG regulation across the board and signals an aggressive approach by the federal government. Undoubtedly, the costs of complying with GHG emissions regulations for LNG and the potential need for project changes will continue to shape the landscape for LNG projects in BC in the near future, and will continue to be topics of significant interest to both industry and the public.

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