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January 1st 2012 - Québec Marches Into Emissions Trading

 

January 1st 2012 - Quebec Marches Into Emissions Trading  

Tom Markowitz - Monday, January 02, 2012

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January 1st 2012 - Québec Marches Into Emissions Trading

 

(c)Enerhope.com 2012

Version française:  cliquez ici

On December 15th, Pierre Arcand, Minister of Sustainability, Environment and Parks of the Canadian Province of Québec, announced the adoption of a new Regulation establishing a Québec cap-and-trade system for greenhouse gases, based on the Western Climate Initiative's Design for the WCI Regional Program http://www.westernclimateinitiative.org/the-wci-cap-and-trade-program/program-design  .

The Canadian provinces of Québec, Ontario, Manitoba and British Columbia, and the US State of California are still partners in the Western Climate Initiative. Of these, California is proceeding with a large, comprehensive cap-and-trade system (See Enerhope's November 2nd, 2011 article, California Cap-and-Trade - Some Cause for Concern)
http://enerhope.advancedwebsites.ca/_blog/California_Cap-and-Trade_-_Some_Cause_for_Concern .

On November 17th, six US States, New Mexico, Arizona, Washington, Oregon, Montana and Utah, formally withdrew from the Western Climate Initiative. (See Enerhope's November 23rd, 2011 article, Six States Withdraw from the Western Climate Initiative) http://www.enerhope.com/_blog/Six_US_States_Withdraw_from_the_Western_Climate_Initiative_-_November,_2011

Here is a brief description of Québec’s cap-and-trade system, from the Québec Government's official website:
http://www.mddep.gouv.qc.ca/changements/carbone/Systeme-plafonnement-droits-GES-en.htm

"Description of the cap and trade system for GHG emission allowances

“A compliance period is a period at the end of which a regulated emitter must return to the Government a number of emission allowances equal to the total audited GHG emissions that it declared for that period.
•The cap and trade system for GHG emission allowances will begin with an initial phase consisting of three compliance periods. These will be preceded by a transition year, to allow emitters and participants to familiarize themselves with how the system works.
•In 2012, emitters and participants will be able to register with the system, take part in pilot auctions and exchange (buy and sell) GHG emission allowances on the market. No reduction or capping of GHG emissions will be required during this transition year.
•The capping and reduction of GHG emissions will start officially on January 1, 2013. Exceptionally, the first compliance period will be for two years. It will begin on January 1, 2013 and end on December 31, 2014. The other two compliance periods will be for three years each.
•Starting on January 1, 2013 some 75 operators, primarily in the industrial and electricity sectors, whose annual GHG emissions equal or exceed the annual threshold of 25 kt CO2e (25 thousand tonnes of carbon dioxide equivalent), will be subject to the capping and reduction of their GHG emissions.
•Starting on January 1, 2015 (when the second compliance period begins), the operators of businesses that distribute fuel in Québec or import fuel for their own consumption, and whose annual GHG emissions due to its combustion reach or exceed the annual threshold of 25 kt CO2e , will also be subject to capping and reduction."

Starting in 2012, Québec's cap-and-trade system will cover all emitters in specified industrial and electricity generation sectors that presently emit 25,000 or more tonnes of CO2e per year. The list of covered industries includes fossil fuel electricity, aluminium, iron and steel, non-ferrous metals, pulp and paper, chemicals, petroleum refineries, cement and lime kilns, and a few others. The Cap will be decreased gradually, from year to year.

Environment Canada's Facility Greenhouse Gas Reporting website  http://www.ec.gc.ca/ges-ghg/Default.asp?lang=En&n=040E378D-1 lists 57 sites in Québec that would be "under the Cap," according to these criteria, based on their 2009 emissions.

Here is a graphical summary of the Québec sites that would be subject to the new Regulation, if their 2013 emissions equalled their 2009 emissions:

Based on 2009 Emissions Data:
Total Sites: 57
Total Emissions from All Sites: 19,410 kt CO2e (23.7% of Québec's total, all sources)

Source of Information:
Environment Canada's Facility Greenhouse Gas Reporting website
http://www.ec.gc.ca/ges-ghg/Default.asp?lang=En&n=040E378D-1

The Need/Opportunity for Emissions Trading
Québec leads the other Canadian Provinces in reduction of greenhouse gases. On a per-person basis, Québec's annual GHG emissions in 2009 were 10.4 tonnes CO2e per capita, compared to 20.5 tonnes per capita for Canada as a whole, and a massive 71.0 tonnes per capita for Québec's "dance partner," the Province of Alberta.

Québec's total of GHG emissions in 2009 was 81.8 megatonnes CO2e, which was 2.5% lower than its total in 1990. This despite a population increase of 11.9% during the same period.

According to Québec's official Inventory of Greenhouse Gas Emissions http://www.mddep.gouv.qc.ca/changements/ges/2009/inventaire1990-2009.pdf , the reduction from 1990 to 2009 occurred mostly in the industrial sector, which benefited from improved technology and energy efficiency, but also suffered from economic conditions which caused the closing of some industries.

Opportunities for emissions reductions in electricity generation, aluminium production, and pulp-and-paper are somewhat limited (see below).

Québec, already leading the Canadian Provinces in GHG emission reductions, has a limited opportunity for reductions through cap-and-trade.

The one sector which has increased its emissions significantly is road transportation, specifically light trucks and heavy duty diesel vehicles. Road transportation is not amenable to emissions trading. Its emissions should be reduced by a combination of other policies and programs.

The Cap
The Regulation does not specify the size of the Cap. In 2013, the Cap will be how many megatonnes of CO2e? In 2015, how many megatonnes? How many allowances will the Government of Québec create?

If Québec does not announce a Cap for total emissions by the capped sector in 2013, how can anyone measure whether the program is a success?

The Capped Sector
Starting in 2013, every site in certain industries that emits 25,000 or more tonnes of CO2e will be "under the Cap," required by Regulation to monitor and report its annual GHG emissions, and, at the end of each compliance period, to retire to the Government of Québec a quantity of allowances equal to its reported emissions.

Electricity
Québec is well known for its massive hydro-electric system. Very few megawatt-hours are generated by fossil-fuel combustion. In 2009, electricity generation by fossil-fuel combustion emitted one percent of Québec’s GHG emissions. The few major fossil-fuel generators are owned by Hydro-Québec, an agency of the Québec Government.

Aluminium
Québec's aluminium industry has made inspiring reductions in GHG emissions. Between 1990 and 2009, GHG emissions by Québec's aluminum industry dropped by 38%, even when production of aluminium increased by 120%. The emission reductions were caused by the adoption of new technologies that are mentioned in Canada's National GHG Inventory.
http://unfccc.int/national_reports/annex_i_ghg_inventories/national_inventories_submissions/items/5888.php

After achieving an excellent reduction in emissions, the aluminium industry may have difficulty in reducing its emissions further to meet the regulatory requirements of the new cap-and-trade system.

Pulp and Paper
Formerly the giant of Québec industry, pulp and paper is now in decline. Globalization of the industry, decline in market for products, increasing use of recycled fibre in paper products, and a decline in forest resources have seriously reduced the pulp and paper industry, which is now responsible for only 0.7% of Québec's GHG emissions.

Nevertheless, during the past 20 years, the pulp and paper industry has improved its efficiency. Since 1990, the Energy Intensity Index of Canada’s pulp and paper industry has improved by 21%.
http://oee.nrcan.gc.ca/sites/oee.nrcan.gc.ca/files/pdf/publications/industrial/cipec/annualreport-2010/docs/cipec-ar-2010-en.pdf

The weakened pulp and paper industry may encounter difficulties in meeting its new responsibilities under Québec’s new cap-and-trade system.

Fuel Distributors
Starting on January 1, 2015, the operators of businesses that distribute fuel in Québec or import fuel for their own consumption, and whose annual GHG emissions due to fuel combustion equal or exceed 25 kt CO2e, will also be under the Cap.

This Cap over fuel distributors is a mistake.

Cap-and-trade succeeds in regulating direct emissions by large, direct emitters. Cap-and-trade does not succeed in reducing indirect emissions.

Capping fuel distributors for their indirect emissions, i.e. for emissions by their customers, will be a serious mistake. Québec motorists who buy and consume gasoline from service stations will not be under any regulatory obligation to reduce their greenhouse gas emissions. Instead, the Québec motorists will see a price increase of 2% to 4% in the price of gasoline, varying with the week-by-week price of allowances. The motorists will resent this price increase but will not reduce their emissions.

The Government of Québec can implement many other policies and programs to reduce emissions from motor transportation.

Allocation
Starting in 2013, The Government of Québec will allocate allowances to capped facilities, according to intensity-based formulas, which are specified in the Regulation.

For example, The Government will give allowances to each fossil-fuel electricity generator, based on a formula of xxx allowances per thousand megawatt-hours of generated electrical energy. How big is the target intensity factor, xxx? We do not know. What are the target intensity factors for allocation of allowances to the Capped facilities?

On December 14th, Hugo Joncas wrote in the business magazine Les Affaires: “But, two weeks before the start date (January 1st) the target intensity factors have not yet been published. According to Minister Arcand, most of the affected industries know the targets that Québec will impose on them. “We are already there,” he said. “There are about 100 large emitters in Québec. We have discussed the system with most of these companies.”
http://www.lesaffaires.com/secteurs-d-activite/environnement/ges-quebec-garde-le-cap-pour-les-emissions-industrielles/538861

In 2012, before the cap-and-trade system begins, the Government of Québec will award allowances for early reduction to capped facilities which meet established criteria.

Starting in 2013, the Government will also sell some allowances by auction. How many? The Regulation estimates that 5,000 kilotonnes of allowances will be auctioned in 2013. What will be the auction price? We cannot forecast the auction price, because the Government has not announced how many kilotonnes the Cap will be. A “hard” Cap, a scarcity of allowances, will drive up the price of each allowance. An easy Cap, an abundance of allowances, will drive down the price.

Québec appears to be following California, which, in turn, is following the seriously troubled RGGI cap-and-trade system, in auctioning allowances. (See Enerhope's June, 2011 article, "New Jersey Withdraws from the RGGI")http://www.enerhope.com/_blog/New_Jersey_Withdraws_from_the_RGGI_Cap-and-Trade_System

Auctioning of allowances adds to the price of electricity and consumer products, and is perceived as an unfair tax by opponents of cap-and-trade. The consumer of products of capped facilities must pay the price of the products, plus the price of emission reductions, plus the auction price, plus the price of speculation by investors.

Proponents of allowance auctions reply that Québec’s revenue from cap-and-trade can be used to finance emission reduction projects.

However, in at least one US State which auctions allowances, some of these revenues have been used to pay down the state deficit, instead of financing emission reductions.

The mechanics of auction create the need for secrecy, which contradicts the need for transparency in the cap-and-trade system.

The alternative to auctioning of allowances is free allocation of all allowances to capped facilities, according to a fair scheme, under a hard Cap, tracked by a vigilant, transparent registry. The successful cap-and-trade programs which reduced smog gases from USA electricity generators in the late 1990’s featured free allocation.

Inter-State Trading
Québec intends to negotiate and sign agreements with the other WCI partners (California, Ontario, Manitoba, British Columbia) to join together the state and provincial cap-and-trade systems in one big carbon trading market.
http://www.mddep.gouv.qc.ca/communiques/2011/c20111215-faits-saillants.pdf

The possibility of joining together the carbon trading markets of Québec and California has caused some concern among some Québec economists.

Claude Villeneuve, of l’Université du Québec à Chicoutimi, expressed his concerns in Montréal’s La Presse on December 17th that Québec industries will need to buy allowances and offsets from California, without selling any to California.
http://www.cyberpresse.ca/environnement/climat/201112/17/01-4478846-reduction-des-ges-le-quebec-aura-besoin-de-la-californie.php

Offsets
Québec will develop a Regulation for Offsets in its cap-and-trade system. The plans for an Offset system are not yet ready for publication.

Registry (« Allowance Tracking Module »)
Québec’s Law Concerning the Quality of the Environment specifies the following:
“46.11. To assure the compatibility and the traceability of allowances, the Minister will maintain a Public Registry of Allowances, which will identify the owners of the allowances, the number of allowances held by each owner, and the types of allowances held in the owners’ accounts, as well as any other information determined by Government regulation.”
http://www.canlii.org/fr/qc/legis/lois/lrq-c-q-2/derniere/lrq-c-q-2.html

However, the Regulation creating Québec’s cap-and-trade system, in its description of the Registry (Section 35), does not mention all of the same Registry information as the enabling legislation.

" The public register of emission allowances provided for in section 46.11 of the Environment Quality Act (R.S.Q., c. Q-2) shows a summary of emission allowance transactions, in non-nominative form..."

http://www.mddep.gouv.qc.ca/changements/carbone/reglementPEDE-en.pdf

 

The Regulation mentions only that the Registry will present to the public a summary of trades of allowances, without naming buyers or sellers.

The Regulation fails to convey the instructions or the intent of the statute that authorized the creation of the cap-and-trade system.

 

The Québec Cap-and-Trade Registry, as described in the Regulation, violates one of the basic principles of cap-and-trade: A Fair and successful cap-and-trade system must have a vigilant, transparent Registry, showing the complete life history of each allowance, from creation, through trades, to retirement.

Allowances are public assets. The public has a right to know what the Government does with them, either through free allocation or through auction.

An important guide to the creation of a cap-and-trade system, the USEPA’s Tools of the Trade, explains why a comprehensive “Allowance Tracking Module” is necessary:

“The Allowance Tracking Module, or ATM, is the accounting system for the trading program, keeping track of account information, account holdings, and transactions. As with other components of the system, public access to the data is important. Market participants, including sources, brokers, and other allowance owners, can use the data to verify transactions and monitor holdings. The public, interest groups, and academics can use the data to evaluate the effectiveness of the cap-and-trade program, identify barriers to cost-effective trading, assess overall market activity, identify trading trends, and analyze the emission implication of trades.”

“The ATM can play a critical role in all allowance transactions, including the issuance, transfer, retirement, and cancellation of allowances. The regulating authority can use the ATM to issue and distribute allowances according to a prescribed method (e.g., allocation formulas, auctions, sales). A computerized ATM can also ensure that trades are valid by reviewing the data to verify that account numbers are correct, the seller owns the allowances being transferred, and the allowances are still valid (i.e., they have not been retired for compliance or cancelled)”
http://www.epa.gov/airmarkets/resource/docs/tools.pdf

The Regulation mentions a very complex system of accounts within the Registry. Each capped facility will have a General Account, and a Compliance Account. The Minister himself will have an Allocation Account, a Reserve Account, an Auction Account, a General Account, and a Retirement Account.

Public and Media Reaction
Montréal’s Le Devoir reported that Québec’s environmental community reacted very positively to the Minister’s announcement on December 15th. Six major environmental NGOs sent their congratulations to Minister Arcand, while denouncing the behaviour of Canada’s federal government.
http://www.ledevoir.com/environnement/actualites-sur-l-environnement/338524/ges-quebec-impose-des-plafonds

On the other hand, as reported in the business publication Les Affaires, Québec’s industries expressed some concern, pointing out that Québec industries had already achieved massive emission reductions, and had not been informed what emission targets they would be required to achieve under the new cap-and-trade system.
http://www.lesaffaires.com/secteurs-d-activite/environnement/ges-quebec-garde-le-cap-pour-les-emissions-industrielles/538861

Recommendation
Evidently, some changes will be necessary to operate an effective Québec cap-and-trade system for greenhouse gases.

Félicitations de vos réductions, mais….faites les changements!


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