ln Alberta, new regulations focused on reducing greenhouse gas (GHG) emissions by large industrial emitters (with some exceptions) has companies calculating, analyzing and working through their business modelling. As of January 1, 2018, the Carbon Competitiveness Incentive Regulation (CCIR), a key component of the Alberta Climate Leadership Plan introduced in 2015, replaced the former Specified Gas Emitters Regulation (SGER).
While both regimes aim to incent companies, they go about it in very different ways; in addition, the complexity and evolution of the CCIR raises a number of questions. “Companies are still getting their heads around this very complex regime,” says Vivek Warrier, a partner and head of the Oil and Gas practice at Bennett Jones LLP in Calgary.
The new regulations, he says, move from the SGER, which was more of an historical emissions-based regime, to an output or product-based emissions baseline. It assesses a facility’s output based on its allocation of carbon dioxide equivalent, which is a different measure than had been used before.
“In doing so, the new regulations established benchmarks that apply to different, emissions-intensive, trade-exposed sectors,” says Warrier. “Each company is going to be assessed based on the benchmarks established for that sector. The CCIR applies to any facility that has emitted 100,000 tonnes of carbon dioxide equivalent. Those that do not meet the performance-based emissions benchmarks prescribed in the legislation will have to ‘true up’ through acquiring emissions performance credits, emissions offsets, fund credits or a combination of all of them.”
For Alan Harvie, a senior partner and Energy and environmental lawyer at Norton Rose Fulbright LLP in Calgary, the intent of the CCIR is to give a huge push toward having the most efficient facilities compared to your peers. And therein lies the challenge for individual companies.
“They’re benchmarking similar types of facilities within a given industry; for example, cement factories, or fertilizer plants, or oil sands plants, or power-plant types of facilities that emit more than 100,000 tonnes a year are subject to the CCIR. So the idea is to reward the best emitters, and to get the other emitters to move up to the best quality of emissions profile, compared to their peers.”
But what happens, he asks, if the emissions profiles are all similar, in other words, all bunched together? Or the corollary: what if there’s an outlier with terrible GHG emissions? “I’m aware of one instance where, in one industry, there’s one plant, a large one, that has absolutely terrible emissions. And all of the other players in that industry are really happy. Because they all look really good in comparison.”
Notwithstanding the complexity of the CCIR, Sarah Powell, an Environment and Energy partner in Davies Ward Phillips & Vineberg LLP in Toronto, philosophically agrees with the policy shift in Alberta to a product-based emissions benchmark.
She sees the CCIR as an efficient way to put pressure on industry in a relatively cost-effective way to reduce GHGs through peer pressure by comparing facilities in the same sector.
Yet there are a number of instances that still need clarity; for example, co-generation facilities, where Powell says it’s not clear how indirect emissions will be calculated and allocated in operations where you’ve got more than one facility involved.
“Right now there’s some pain points in the lack of specificity,” she says. “Alberta still has regulations to come, so industry doesn’t yet have ‘perfect information’ and what industry likes is certainty.”
On the other hand, while the province “has taken a lot of heat on its GHG footprint, it was an early adopter,” says Powell, with relatively complicated carbon regulation under the CGER. As such, “there’s a significant amount of well-established expertise in Alberta which puts the industry in a good place moving forward as they try to work through this new regulatory framework.”
Complex, yes, but also, still evolving. Further regulations are going to be required to implement specific aspects of the CCIR, says Warrier, which gives industry an opportunity to help shape how the policy is ultimately implemented. “We’re seeing some significant discussions between industry and the government, in light of today’s challenging commodity price environment, in regard to the impact this new approach may have on the competitiveness of oil and gas companies in particular. It’s been a very iterative process so far.”
Indeed, the regulations are almost like a work in progress, a real-time exercise, says Paul Cassidy, partner and co-head of the National Environmental, Regulatory & Aboriginal Group at McCarthy Tétrault LLP in Vancouver. “Competitiveness can be impacted very quickly; the Alberta regulatory regime does not intend to make a particular emitter uncompetitive. It’s not intended to make Alberta a regime of carbon leakage, where carbon-intensive industries look to transfer assets and operations out of a jurisdiction that imposes a higher degree of taxation or cost on them than another jurisdiction.”
For example, there may have to be some rejigging of the emissions levels. A particular emitter, suggests Cassidy, could reap significant benefit from the new regime for reasons that are unique to it, but are not easily emulated by the other players in that particular industry, for various and entirely legitimate reasons. “So you’ve created a potentially uneven playing field that is at odds with the strategy of giving everyone the ability and the incentive to reduce emissions, of operating from a level playing field, when in fact there isn’t one.”
CCIR is, in some ways, more of a journey than a done deal, agrees Harvie, who says the government recognizes it’s not necessarily “going to get it 100% correct the first time, which is why they’ve already built in automatic reviews of those standards.”
He says one result emanating from the CCIR is that companies that are not regulated by this system, because they’re below 100,000 tonnes per year, have the ability to create offset credits. “When offsets were $10, companies might have looked at it and decided investing to actually create the offsets wasn’t really economic.” But as the price of offsets goes up, he says, we’re seeing an increase in interest by potential offset developers.
For example, Harvie has a client whose emissions are below 100,000 tonnes who changed out some of its equipment at a plant for operational reasons and replaced it with much more efficient, state-of-the-art equipment, creating fewer emissions. “They weren’t required to do that by law and so could create an offset from it. But to create the offset they would have to bring in consultants and it wasn’t worth it.” Now, says Harvie, they’re revisiting the situation.
Balkanized carbon regime
As for Alberta’s competitiveness vis-à-vis the CCIR, Warrier thinks the new regulations cut both ways. “Various foreign investors — some European investors, or international companies operating in jurisdictions such as Europe or Australia, where this type of legislation and regulatory framework already exists — are happy to see an established framework in place.” There’s certainty around that, and once they understand how it works, they can price it into their modelling, and understand how it would impact their investment.
Still, there are investors from other parts of the world who may not share that European view, says Cassidy from his vantage point in British Columbia, a province with experience wrestling with carbon tax and investment issues. “These investors may not be prepared to reflect in their investment a carbon taxation concept, [when] they could go elsewhere.”
Moreover, says Cassidy, many potential foreign investors look at Alberta’s new regime and see some additional regulatory uncertainty in the context of Canada’s balkanized political system. “I’m regularly asked about the regulatory regime in Canada for carbon taxation, the framework. The range of the uncertainty will depend, in many respects, on political outcomes, at both the federal and the provincial levels.”
In fact, Ontario has recently elected a new government, a Progressive Conservative majority government with a much different environment/energy viewpoint than its Liberal predecessors, and Alberta, as it stands, heads to the polls next year. Then there’s the uncertainty over how the federal government’s Pan-Canadian Framework on Clean Growth and Climate Change will play out in terms of the provinces.
Davies’ Powell says companies want a long road map in order to understand how they can efficiently respond to regulatory change; hills and valleys with respect to climate change, in her opinion, have not benefited anyone in industry. Yet on the whole, Powell is optimistic that “if we could just get the politicians to work together on the national and provincial levels, industry ‘is ready to go ahead’ and they absolutely — in particular in the Oil and Gas sector in Alberta — have the required experience because of the complexity of their CGER regime for the last decade.”