The pan Canadian Framework on Clean Growth and Climate Change Exploring Canada’s energy transition Isabelle Turcotte Senior Analyst, Federal Policy Pembina Institute 23 March 2018

State of play – ON’s emissions trends Outline State of play – ON’s emissions trends Recap of climate policy in Ontario Policy principles for a strong EPS The EPS Covered sectors Types of emissions Performance standards Performance standards for electricity generation Compliance mechanism EITE analysis Concluding remarks

1- State of play Ontario’s emissions trends

1. State of play: emissions’ trends in ON ON is the 2nd largest emitter and has a key role to play in meeting our Paris commitment and building a low-carbon, competitive economy Key messages: Alberta and Ontario are the highest and second-highest provincial emitters – without Ontario – Ontario hence will play a key enabling role in meeting its ghg reduction commitment target under Paris and biulding a strong low-carbon economy. (paris target being 30% below 2005 levels by 2030.

1. State of play: emissions’ trends in ON In ON the 3 largest emitting sectors are transportation (35%), buildings (21%), and heavy industries (19%) – we can’t decarbonize the economy without addressing those Key messages: Ontario’s emissions have fallen by 10% since 1990, mostly driven by the coal phase out which was completed in 2014. The three largest emitting sectors in Ontario are transportation (35%), buildings (residential and commercial) (21%), and heavy industries (19%), including iron, steel, and chemicals. We know that we need to reduce emissions in all economic sectors to limit dangerous ghg, we stand no chance of accomplishing this goal if we don’t credibly tackle these sectors.

2. Recap of climate policy in Ontario (ON) 2016: ON established a cap-and-trade with the Climate Change Mitigation and Low-Carbon Economy (CCMLCE) Act   The individual and joint auctions generated over $2.8b for Ontarians   July 2018: ON repealed the CCMLCE Act Breaking contracts with companies, who lost investment in allowances Leaving ON without GHG reduction targets and a plan to prevent dangerous climate change Erasing popular programs that led to economic growth and cleaner air. The C&T collected revenue from big polluters & reinvested to help households and businesses save $ October 2018: Feds decision on backstop application November 2018: ON released a new climate plan and files court case against feds (setting $30M aside and abdicating $420m in fed support) Reversing years of progress & weakening ON’s GHG reduction targets by 27% Failing to demonstrate how it will lead On to a low-carbon economy January 2019: The federal OBPS kicked in February 2019: ON announced the proposed regulatory approach for heavy industry Ontario climate plan destruction, cap and trade destruction and impact Policy certainty, loss in mitigation (see fed gov report, 30mt I think) But highlight that this is a recongitiion of the key role carbon pricing plays in building a low carbon compeititive economy Info on compensation for lost investment in allowances, Vintage 2021 are not reimbursed, arge emitters such as fuel distributors and utilities that could have passed down the cost of allowances to consumers are ineligible for compensation https://carbon.canadianclean.com/carbon-pulse-stories/ On the LCELF Nov. 9, 2018 - The Canadian government announced it plans to reinvest money allocated to Ontario as part of its Low Carbon Economy Fund after the Ontario government cancelled the cap and trade program last week. Canada's Minister of Environment and Climate Change, Catherine McKenna, says that the government will explore options for reinvesting the remaining Ontario portion of the fund in initiatives that improve energy efficiency, reduce emissions, save money and create jobs across the province. The government plans to release more details in the coming months. https://www.canadianbiomassmagazine.ca/news/ottawa-to-reinvest-funding-after-ontario-cancels-cap-and-trade-7117 Raise the mission impossible report: we can decarbonize heavy industry. sweet Since June 2018, Ontario’s climate policy decisions have been costly for Ontarians and businesses, have muddied the investment environment and left the province without a credible, holistic plan to address the most pressing issue of our time

3. Policy principles for strong EPS Maintain the incentive to reduce carbon pollution Be targeted: Mitigation measures should only apply to EITE sectors that have demonstrated material competitiveness impacts due only to carbon pricing policy differences between jurisdictions. Be transparent: Any support for EITE sectors must be justified by data and analysis. Be consistent and fair: The broad framework for assessing EITE competitiveness pressures should be consistent across sectors and aligned with the stringency of climate policies outside of the system. Be temporary: Any support should be transitional in nature and be phased out when carbon pricing and/or regulatory equivalency with other jurisdictions is achieved. Be simple: Any EITE mechanism should be simple to implement, administer and comply with Through the Pembina Institute’s engagement and analysis for the development of Alberta’s output-based allocation system11 and the B.C. EITE working group,12 we have defined the following design principles to ensure that an OB pricing system is as effective and efficient as possible. Adherence to these principles will be critical to maintain the credibility and effectiveness of the resultant policy. These principles guide the remainder of our feedback, with a view to ensuring that the OB pricing system maintains investment (and investor confidence) in Canadian industries while motivating the development and use of innovative and efficient technologies (both economically and environmentally).

The EPS – covered sectors Proposal Same sectors to be covered by the federal OBPS Comment The government must demonstrate by credible analysis how any sector to be regulated under the EPS warrants relief through this subsidy; the program should target only those sectors that can demonstrate material competitiveness pressures through both emissions intensity & trade exposure Electricity generation, Institutions, GHG operators, thermal energy supply do not fall under this category

The EPS – Types of emissions Proposal Cover fixed and non-fixed emissions Comment We recommend Ontario include vented, fugitive, and flared emissions from oil and gas facilities starting in 2020 to incentivize facilities to take earlier action and take advantage of low-cost mitigation opportunities that also reduce waste of resources.

The EPS – Performance Standards (PS) Proposal Establish PS on a sector basis where there are multiple facilities making similar products Establish separate PS for fixed process and non-fixed process emissions Comment Driving innovation: sector standards should be based on top quartile or better and increase in stringency over time Separate standards for fixed and process emissions significantly weaken the signal to innovate and reduce emissions. AB, BC, Fed all apply one standard. PS= EI x SF where SF= 100 for fixed emissions and 98-95% in 2019 for process emissions

The EPS – Performance Standards (PS) Proposal Comment Very weak signal: on a sector basis 100% of pollution from fixed emissions would free, between 98-95% of emissions would be free in 2019 Comparison: For the vast majority of the 38 industrial activities (23 sectors with 74 standards) included in the fed OBPS, 80% of pollution from fixed and non fixed emissions would be free (Exceptions: petrochemicals and cement SP set at 90%, lime SP set at 95%) SF for low category should be lower than for medium category PS = Performance Standard for Sector EI = Average Emission Intensity of the Sector in tonnes of CO2e per unit of production SF = Stringency Factor expressed as a fraction, e.g. 0.95.

The EPS – PS for electricity generation Proposal ‘’PS based on what is achievable by natural gas fired electricity generators. In recognition of the significant reductions made in the electricity sector, a stringency factor may not be applied’’ 420 tonnes CO2 per GWh Comment Electricity is neither EI or TE and should not be included in the EPS Average EI for generation of electricity is much lower than 420 (closer to 150). This effectively rewards pollution and penalizes renewables. Best in class in natural gas is 370 Pie chart from: https://cns-snc.ca/media/ontarioelectricity/ontarioelectricity.html 2019

The EPS - Compliance mechanism Proposal - 3 compliance mechanisms Payment Compliance units for emissions below AEL Voluntary credits Comment Compliance units Value should be vintaged to the price at which it was created plus a reasonable rate of return per year to avoid windfall profits The eligibility of an offset credit should be contingent upon the ability of both the offset program and protocol under which it was created to deliver real, additional, verifiable, permanent, and enforceable offsets. Voluntary programs do not fall under this category. Only provincial offsets programs should be eligible (and eventually ITMOs) Flexibility is good, ability to create incentive for reduciotns in non regulated sectors is good, but Meeting our climate comitment and transitioning to a comptitive low-carbon economy requires not the offset of emissions, but rather the permanent reduction of emissions at the facility level in every EITE sector.

The EPS – EITE analysis Proposal Comments EI TE Doesn’t isolate for carbon pricing EI doesn’t account for the portion of emissions that are actual priced Thresholds for medium and low category should be differentiated 20 10

The EPS – EITE analysis

Mission Possible! The Energy Transition Commission - a coalition of business, finance and civil society leaders from across the spectrum of energy producing and using industries Conclusions of report published in nov 2018: To achieve even the 2°C goal, it is essential for energy and industrial systems to achieve net-zero CO2 emissions within themselves Good news! To achieve even the 2°C goal, and to have any chance of reaching the aspired 1.5°C limit, it is essential for energy and industrial systems to achieve net-zero CO2 emissions within themselves – i.e. without permanently relying on offsets from the land use sector. The ETC strongly believes that this is achievable by 2050 in developed economies and 2060 in developing economies2

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Carbon pricing Why price pollution: Each additional tonne of emissions results in social and economic consequences A carbon price helps to “internalize” the negative external costs associated with carbon emissions, currently borne by society Putting a price on pollution will help cut carbon emissions, and will support Canadian businesses as they compete in a low-carbon global economy

Carbon pricing – the approach PCF commitment: Ensure all provinces and territories have a price on pollution in place by 2019 Provinces can implement their own system as long as it meets a set of minimum requirements set in the benchmark Options for compliance with the benchmark An explicit price based system Carbon tax starting at $10 per tonne in 2018, rising to $50 per tonne by 2022 Carbon levy and performance based emissions system Cap-and-trade system with cap declining to 30% below 2005 levels by 2030 Applying the federal backstop – in which case all revenues stay in the province A fossil fuel charge paid by fossil fuel importers and distributers An output-based pricing system for heavy emitters

Carbon pricing - Progress The federal government has been engaging with Canadians on the carbon pricing system over the past 2 years May 17: Technical paper on the federal carbon pricing backstop January 18: Regulatory framework for the output-based pricing system and draft legislative proposal relating to the Greenhouse Gas Pollution Pricing Act May 18: Compliance options under the federal output-based pricing system December 18: Regulatory proposal for the Output-Based Pricing System Regulations under the Greenhouse Gas Pollution Pricing Act. Yukon and nunavut opted for the backsotp voluntarily

Carbon pricing - Wins June 2018: Bill C-74, which enacts the Greenhouse Gas Pricing Pollution Act, received Royal Assent in June 2018, effectively creating a national carbon pricing benchmark October 2018: the federal government announced the results of the evaluation of provincial carbon pricing systems and holds strong on implementing the backstop in provinces that do not meet the benchmark Industrial emitter element will apply in: MB, SK (partially), ON, NB, PEI Fossil fuel charge element will apply in: MB, SK, ON, NB January 2019: the industrial element of the federal backstop was implemented (fossil fuel charge will be implemented in April) Draft OBPS regs were published in December 2018 Yukon and Nunavut opted for the backstop voluntarily

The low carbon economy fund $2 billion $1.4 billion to provinces and territories that have adopted the Framework $500M is be available for the Low Carbon Economy Challenge Despite fund, manitoba didn’t originally sign, sk still hasn’t signed

Why put a price on carbon? Carbon pollution (CO2, methane, etc.) is changing the world’s climate Each additional tonne of emissions results in social and economic consequences A carbon price helps to “internalize” the negative external costs associated with carbon emissions, currently borne by society Putting a price on pollution will help cut carbon emissions, and will support Canadian businesses as they compete in a low-carbon global economy Carbon pricing is broadly understood as being an efficient, cost effective tool to reduce emissions. Gives industry and consumers a price signal to change their behaviors but also flexibility in how to do so.

B.C.’s approach to carbon pricing Illustrating the tax on carbon approach

Environmental results From 2007 to 2014, the province has seen a 5.5% decrease in emissions, despite an 8.1% increase in population. And the province’s real GDP is up by 12.4% over the same period.

Economic results Source: Statistics Canada, 2000-2014

Relief from the full carbon price through an output-based allocation pricing system Benchmark system that evaluates carbon pollution within an industry and rewards top quartile performers Provides an incentive for firms within the same sector to compete to reduce emissions Protects emissions-intensive and trade exposed industries while also maintaining a price signal to reduce pollution We’ve seen a model of a carbon pricing system where a carbon tax is applied to a broad source of fossil fuels. BC has served as a model for the pan canadian pricing benchmark, but the fed government understands that it might not be directly applicable in other provinces that have emissions intensive and trade exposed industries. The fed carbon pricint backstop (currently being developed) will provides relief from the full price of carbon pricing for those industries.

Output-based allocations in the oilsands