One critique of carbon markets and cap and trade programs is that they are complicated and difficult to understand. CSG has developed visual diagrams that help explain the complexities of two carbon market systems (1) the Western Climate Initiative (WCI) carbon market between California, Quebec and Ontario (when linked in 2018), and (2) the Alberta Carbon Levy and Methane Reduction Program. The diagrams explain how CSG’s portfolio of carbon offsets fits within these two programs. A detailed explanation of the two systems is included with the diagrams below.
Cap-and-Trade (C & T) is a government mandated market-based approach for controlling greenhouse gas emissions that allows businesses to trade emissions allowances under an overall cap, or limit, on those emissions.
Emitters under C & T must attain permits (emission allowances) or offsets to cover their emissions. Allowances are purchased initially from the government in auctions or may be freely allocated by the government.
A “cap” puts a legal limit on how many tonnes of greenhouse gases that can be emitted. The cap is set at a specific amount, initially at or near business-as-usual levels and drops every year to require lower emissions.
The program requires emitters to comply with the emissions cap, or face steep penalties. An emitter cover their compliance obligations by making internal emission reductions by investing in clean technologies, or purchase emission allowances or offsets. Companies can freely buy or sell allowances and offsets in the open market, subject to certain restrictions. The market based approach of cap and trade creates carrot and stick incentives for emitters to reduce emissions in the most cost effective way.
Alberta implemented a carbon levy commencing January 1, 2017 that applies a cost of $20/tonne CO2e to the broad spectrum of greenhouse gas (GHG) emissions from the combustion of fossil fuels. Large emitting facilities known as “specified gas emitters” (SGER Emitters”), which emit more than 100,000 tonnes of CO2e per year are exempt. The carbon levy is about $20/tonne in 2017, rising to $30/tonne in 2018 with a soft commitment to increase to $50/tonne to comply with the Canadian federal government’s announced-but-not-enacted requirement for carbon prices to reach that level by 2021.
The Specified Gas Emitters Regulation (“SGER”) imposes obligations with respect to the reduction in intensity of GHG emissions at certain facilities, that being the number of tonnes of GHG’s emitted for every unit of the facility’s product output. Each such facility has a requirement which, over time, becomes a 20% reduction in its emissions intensity as compared to its baseline emissions intensity. The baseline is the facility’s emissions intensity at an earlier 2003, 2004 and 2005 level for facilities which were in operation in 2000, or the third year after the commencement of commercial operation for newer facilities.
In general, and subject to specific guidelines and limitations under the SGER system, an SGER emitter can reduce the emissions of GHGs by acquiring
Each of these credits is equivalent to one tonne of GHG reductions, avoidances, or removals.
The Alberta government has announced its intention to replace the SGER system with a new Output Based Allocation system (OBA) that will apply to SGER Emitters. The program is essentially the same as the SGER, however it will set emissions intensity baselines on a sector basis, not on historical performance. The intensity levels are expected to be quite high (top quartile for most SGER Emitters and at the top decile for oil sands emitters), therefore requiring emitters to use offsets, EPCs or fund credits, supporting the continued growth of the market for offsets.
Alberta has announced that it will reduce methane emissions from oil and gas operations in that province by 45% by 2025, by applying new emissions design standards to new Alberta facilities” developing an initiative on methane reduction and verification for existing facilities, and backstopping this with regulated standards that take effect in 2020, to ensure the 2025 target is met. It is expected that the system will function like the OBA system with respect to the use of EPCs and fund credits but offsets will be included.
Alberta has indicated that there will be an oil sands specific output-based allocation approach involving a $30/tonne carbon price for oil sands facilities based on results already achieved by high performing facilities. In addition, Alberta has passed legislation creating an emissions limit on the oil sands of a maximum of 100Mt in any year, with some special permissive provisions for cogeneration and new upgrading capacity; the statute indicates that the 100 Mt limit is incorporated into the SGER, perhaps supporting the view that if oil sands facilities would exceed the 100 Mt limit in a year, they would be entitled to use offsets, EPCs or fund credits to meet the limit although the government has indicated only the ability to use fund credits to date. Again, there is no certainty that a market for offsets will be created through the Alberta oil sands GHG emissions initiatives.
Cap and trade, carbon levies, and carbon markets are gaining traction as viable systems that combat climate change through market based approaches. Understanding how to navigate the regulations associated with these systems is critical for businesses. Business preparedness for the low-carbon economy will ensure that your business stays competitive. The CSG team has the experience and expertise to guide your business through carbon pricing regulations.
If you have any questions about how these systems affect your business, contact CSG today.