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On September 21st, 2020, the Canadian federal government accepted Ontario’s Emission Performance Standard (EPS) program as an alternative to the federal output-based pricing system (OBPS) that’s been in effect in the province since January 1st, 2019. Both programs are cap and trade-type emission pricing regimes designed to incentivize industrial polluters (e.g., pulp and paper facilities, base metal smelting facilities, etc.) to lower greenhouse gas (GHG) emissions.
Under the federal Greenhouse Gas Pollution Pricing Act of 2018, all Canadian provinces are required to implement GHG emission reduction programs imposing a cost on emissions. The law allows each province to tailor its program to its unique economic circumstances, as long as the program’s cost per tonne of CO2 equivalent either meets or exceeds the gradually increasing federal baseline amount.
Following Conservative Premier Doug Ford’s scrapping of Ontario’s cap and trade program in October 2018, the federal backstop program - implemented in provinces that fail to establish an adequate provincial emission pricing program – took effect in Ontario in 2019.
The federal backstop program has two aspects: (1) a monetary charge applied to fossil fuels; and (2) the OBPS emission credit trading program which applies with respect to industrial polluters’ emissions. In provinces where the federal backstop is in effect, all revenues collected under the program are returned to the provinces. A portion of those collected revenues are then paid to provincial residents in the form of annual climate action incentive payments. (Osler has a more in-depth explanation of how the backstop program works here.)
Now that the federal government has deemed Ontario’s EPS program an acceptable emission-pricing program for industrial polluters, once it is applied, the federal OBPS will no longer apply in Ontario. A transition date has not been announced yet. The fuel charge, being the other aspect of the federal backstop, will, however, remain in provincial application.
What’s the difference between the EPS and OBPS?
Though similar in general design, there are some notable differences between Ontario’s EPS and the federal OBPS, and how each program functions.
In terms of similarity, under both Ontario’s EPS and the federal OBPS:
(a) industrial polluters are given an annual limit on the amount of emissions they can generate;
(b) for emissions generated above the applicable limit, the responsible party must either pay a charge or purchase offset credits; and
(c) where emissions are below the limit for covered facilities, the responsible party will be issued credits which can be banked, remitted or sold to other parties in the system.
In terms of major differences between Ontario’s EPS and the federal OBPS:
(a) Ontario’s EPS will be administered by the province, whereas the OBPS is administered by the federal government;
(b) EPS credits will be tradeable within the EPS, whereas OBPS credits can be traded with other OBPS parties; and
(c) Ontario describes the EPS as tailored to specific industry and facility conditions, as compared with the OBPS’s more generalized application. By seemingly all other accounts, the EPS is characterized as a weaker version of the OBPS with narrower scope and lower standards.
Jeff Yurek, Ontario’s Minister of the Environment, Conservation and Parks, also says the EPS phases in stringency over time, whereas the federal backstop presented industry with an “initial shock” upon application. These comments, however, are misleading.
The federal carbon price is fairly low at $30 per tonne of CO2 equivalent this year, rising $10 per tonne each year until it hits $50 per tonne in 2022. And OBPS participants aren’t even paying that until they exceed their limit under the system (keep in mind they can also purchase credits from other parties which will likely sell for less). By comparison, Scientific American writes that several economic models show a US carbon price should start at around US$40 per tonne (a little over CAD$50) to be effective. The federal program therefore already started with a soft impact and phases in increased stringency over time. Minister Yurek’s comments should be understood to mean that Ontario’s weaker carbon pricing system for industry is simply more accommodating to industrial polluters.
Furthermore, it was the Ford government’s rush to scrap Ontario’s cap and trade program - blatantly ignoring public consultation requirements under law, for which they were successfully sued - less than a month into their mandate that resulted in the real “initial shock” to the province’s industrial polluters and energy markets. According to Ontario NDP MPP Peter Tabuns, that decision rendered “nearly $4 billion worth of assets worthless, and needlessly [exposed] Ontario to massive liabilities.” Companies with unused carbon credits, that they purchased while the program was active, were told to first try and recover the costs for their now worthless credits from consumers. Only if companies failed to manage this would they be eligible for a government payout.
Of course, the irony is after all that chaos (and an ongoing constitutional challenge to the federal carbon pricing law), the Ford Government is now going to replace two different cap and trade-type systems it campaigned against with a third (and worse) one of their own making.