Québec has an enforceable emissions reduction mandate requiring that greenhouse gas (GHG) emissions be reduced by 20% below 1990 levels by 2020.
For all participating members of the Western Climate Initiative (WCI), the adoption of the Regulation establishing the cap-and-trade system for greenhouse gas emission allowances (Regulation) is the first of two main steps toward the emergence of a regional North American carbon market. The second step will consist of concluding a series of recognition agreements, between the different partners, to link their systems together. Such a linking, with the California cap-and-trade, is underway.
First compliance periods in the Québec cap-and-trade scheme starts on 1 January 2013 and ends on 31 December 2014. The following periods are of 3 calendar years as of 1 January 2015.
Pursuant to the said notification, however, the first year of implementation of the system will begin on January 1, 2012 and it will be a transition year. It will allow emitters and participants to familiarize themselves with how the system works.
Over the course of the year 2012, emitters will also be able to make any adjustments that may be necessary to meet their obligations under the system for capping and reducing GHG emissions, which will come into force on January 1, 2013.
Registration of participants for the scheme
Industrial establishments subject to the system are those that emit 25 000 tonnes or more of CO2 equivalent per year (emissions threshold). Starting in 2015, companies that import or distribute in Québec fuels that are used in the transportation and building sectors (and whose combustion generates an amount of GHGs greater than or equal to 25 000 tonnes of CO2 equivalent per year) will also be subject to the capping and reduction of their emissions.
An application for registration for the system must be sent to the Minister of Sustainable Development, Environment and Parks (Minister):
(1) on or after 1 May 2012 but not later than 1 September 2012, in the case of an emitter other than an emitter referred to in point (2) whose reported emissions for 2009, 2010 or 2011 for an establishment are equal to or exceed the emissions threshold;
(2) on or after 1 May 2012 but not later than 1 September 2014, in the case of an emitter pursuing fuel distribution activities whose reported emissions for 2012 or 2013 are equal to or exceed the emissions threshold prior to 1 January 2014;
(3) not later than 1 September following the submission of the first emissions report reporting emissions equal to or exceeding the threshold, in the case of an emitter referred to in points 1 or 2 above, whose verified emissions for an establishment are equal to or exceed the emissions threshold during a year following the years mentioned in those points.
The interesting feature of Québec cap-and-trade (distinguishing it from the EU ETS) is that subject to the scheme is also an entity that acquires electricity generated outside Québec, except electricity produced in a territory under the responsibility of a government other than that of Québec with which an appropriate agreement specified in the Québec regulations has been entered into, for its own consumption or for sale in Québec, if the greenhouse gas emissions attributable to the generation of the quantity of electricity acquired, calculated in accordance with the Regulation, are equal to or exceed the emissions threshold.
Every person, other than an emitter, interested in purchasing Québec emission allowances must apply to the Minister for registration for the system as a participant. In such a case an application for registration in the system may be submitted to the Minister on or after 1 May 2012.
The Québec cap-and-trade system for greenhouse gas emission allowances applies the concept of the holding limit constituting the total number of emission units that an emitter or a participant may hold in its general account and, where applicable, its compliance account.
Holding limit is calculated using equation:
HLi = 0.1 x Baseline + 0.025 x (Ci –Baseline)
where specific symbols used mean:
HLi = holding limit for year i;
0.1 = maximum proportion of the number of emission units constituting the Baseline that an emitter or a participant may hold;
Baseline = 5,000,000, being the estimated number of emission units that will be auctioned in 2013;
0.025 = maximum proportion of the number of emission units in excess of the Baseline and issued in year i that an emitter or a participant may hold;
Ci = annual cap of emission units for year i.
Notwithstanding that, emission units recorded in the compliance account of an emitter and needed to cover estimated GHG emissions for the current year or verified emissions for preceding years are not subject to the holding limit. Furthermore, pursuant to the Regulation an emitter or a participant that reaches or exceeds one-half of its holding limit must, at the Minister’s request, explain its strategy and the reason for holding the emission units concerned.
Every transaction notice for emission units that would cause the buyer’s holding limit to be exceeded will be refused by the Minister.
For the purposes of the holding limit related entities are considered to be a single entity with an overall holding limit that they can distribute among themselves by allotting percentage shares.
The distribution must be disclosed to the Minister when the related entities register for the system or, in the case of a new business relationship, within 30 days from the creation of that relationship. The information must, however, be sent to the Minister within 60 days prior to an auction when one of the related entities wishes to be registered as a bidder.
Pursuant to the Regulation the emissions allowances auctions in the Québec cap-and-trade system consist of a single round of bidding, using sealed bids. The emission units will be auctioned in lots of 1,000 units of the same vintage.
There is also foreseen the minimum price of the emission units sold at an auction, which is set at:
(1) 10 Canadian dollars per emission unit, for auctions conducted in 2012;
(2) for auctions conducted in any year after 2012, the price set in point (1) increased annually by 5%.
The Regulation applies also auction purchase limit which consists in that the quantity of emission units that may be purchased by a single bidder at an auction held prior to 1 January 2015 is limited to:
(1) for vintage 2013 and 2014 emission units 15% in the case of an emitter (with some exceptions), or 4% in the case of any other participant;
(2) for vintage 2015 and subsequent emission units, 25% in the case of any bidder.
When bidders are related entities, the purchase limit applies to all those entities. They must indicate to the Minister, in the application for registration for the auction the distribution of the overall purchasing limit among the related entities, in percentages.
Similarities with California cap-and-trade program
Interesting comparisons for the two North American cap-and-trade programs can be found in the document released by California Air Resources Board titled ‘Proposed Amendments to the California Cap on Greenhouse Gas Emissions and Market-Based Compliance Mechanisms to Allow for the Use of Compliance Instruments Issued by Linked Jurisdictions, Staff Report: Initial Statement of Reasons’ of 9 May 2012 (available at www.arb.ca.gov). The basic parameters in that regard are as follows:
Baseline year – 1990
Like California, Quebec requires the authorities to establish a 2020 GHG emissions level for Québec relative to a 1990 emissions baseline.
Emissions thresholds for inclusion
Emissions thresholds for inclusion are identical for both programs. Québec and California each adopted two levels of emissions thresholds: 25,000 MTCO2e and 10,000 MTCO2e. At the level of 25,000 MTCO2e emissions per year or greater, each jurisdiction requires reporting entities to meet rigorous reporting requirements (e.g., annual reporting, specific reporting methods, third party verification, accuracy requirements). For determining if the 25,000 MTCO2e threshold is met, Québec includes emissions from all six Kyoto Protocol gases, plus nitrogen trifluoride (NF3), but excludes any CO2 emissions from combustion and fermentation of biomass and biofuels. California includes CO2, CH4, and N2O emissions from sources explicitly specified in the GHG reporting regulation.
Facilities with 10,000 to 25,000 MTCO2e of annual emissions are also required to report their emissions under both programs, to monitor for leakage of facilities that are close to the cap-and-trade threshold requirements.
Québec‘s program, similar to California covers the same 7 GHGs listed in AB 32; carbon dioxide (CO2), methane (CH4), nitrous oxide (N2O), hydrofluorocarbons (HFCs), perfluorocarbons (PFCs), sulfur hexafluoride (SF6), and nitrogen trifluoride (NF3).
Currently, Québec does not cover biomethane and geothermal emissions in its GHG reporting regulation because there is no presence of these sources in the province. Although these emissions are required to be reported under the California reporting regulation, both are exempt from California‘s cap-and-trade program. In addition, Québec‘s reporting regulation does not cover CO2 suppliers, but oil and gas production sources are required to report. Beginning in 2015, all fuels are covered under the cap.
The regulators assume that one feature that must be identical in both programs is the quarterly auction. This will enable joint auctions in the regional cap-and-trade program. Provisions that must be identical in policy and practice cover requirements regarding eligibility for auction participation, publication of auction-related information, process for tie breaks in an auction, settlement for an auction, purchase limits by auction participant type, bidding process, dates for auctions, and financial requirements. A single auction provider and a single compliance instrument tracking system that will facilitate a joint auction for California and Québec are also envisioned.
The two programs are proposing the same holding limits.
Allowance Price Containment Reserve
Both the California and Québec program have incorporated the concept of an Allowance Price Containment Reserve (Reserve) which allows regulated entities to purchase allowances at quarterly auctions at set prices.
Start dates for enforcement
Start dates for enforcement are identical for both programs. In Québec‘s program, covered entities will have a compliance obligation for their GHG emissions starting on January 1, 2013. Unlike California‘s program, Québec‘s program only requires a compliance obligation surrender after each compliance period instead of both a partial annual compliance obligation surrender and then a triennial compliance obligation surrender after each compliance period (Government of Québec 2011 and Title 17, California Code of Regulations section 95853, section 95855, and section 95856). This difference does not affect the ability to link the programs; it only requires California entities to provide evidence of periodic acquisition and surrender of compliance instruments during the compliance period.
Every entity that is covered by Québec‘s cap-and-trade program is required to surrender compliance instruments equal to its covered GHG emissions. As with California‘s program, compliance instruments can be either an allowance or an offset credit. As in California‘s program, a covered entity in Québec can only meet eight percent of its compliance obligation surrender using offset credits.
It is anticipated that Québec will issue its own compliance offsets. Under these proposed amendments, Québec issued compliance offsets could be used by California entities to meet their compliance obligation, up to the 8 percent limit.
Requirements for determining the boundaries of reporting entities
Overall, Québec and California have similar requirements for determining the boundaries of their reporting entities.
December 2012 update
In December 2012, Québec finalised its regulations that support its cap-and-trade program.
In effect both the California and Québec programs have final regulations with equivalent detail related to know-your-customer requirements, disclosure of corporate associations, and auction participation requirements.
The Québec compliance offset program is also equivalent to the California program. For the destruction of ozone depleting substances protocol, Québec clarified that only materials extracted from equipment in Canada would be eligible for offset credit under their program. Québec has also created a very narrow early action program similar to California’s early action program. This early action program would allow some of existing landfill projects to transition to Québec’s compliance offset protocol and continue to operate and generate offset credits.
The text of the Regulation and further details for the scheme design are available on the website http://www.mddep.gouv.qc.ca/changements/carbone/Systeme-plafonnement-droits-GES-en.htm.