Lawyers in Canada: Davis LLP - Legal Advisors Since 1892

BC follows California - looks to force automakers to cut tailpipe emissions

posted by Daniel Jarvis

BC has introduced Bill 39 - 2008 Greenhouse Gas Reduction (Vehicle Emissions Standards) Act, which is designed to force automakers to reduce tailpipe emissions in an effort to battle climate change and provide consumers with a range of vehicle options. The legislation targets auto manufacturers, and sets out pre-determined fleet-average GHG emissions standards for family vehicles such as cars, SUVs, minivans and small trucks. Under the “fleet average” approach, manufacturers can continue to sell vehicles that exceed the allowed emissions standards, provided that they offset this by selling enough low or zero emission vehicles.

The new tailpipe standards follow California’s 2004 regulation and once fully implemented in 2016, the standards are expected to reduce GHG emissions by 30%, relative to current models and achieve a reduction of personal vehicle GHG emissions of nearly 600,000 tonnes annually in B.C.

Canada fails to establish Kyoto registry - CERs may cease to be a compliance option

Posted by Andrew Lord

Canada has failed to comply with its administrative obligations under the Kyoto Protocol. In a report release April 17, 2008, the UNFCCC Compliance Committee concluded that Canada had not established a registry system as required by the Protocol. The registry system is required to track Canada's Assigned Amount Units (i.e., allowances) under Kyoto system and to settle emissions trades under the Kyoto Flexibility Mechanisms (CDM, JI and trading of AAUs).

The report is not a final determination of Canada's compliance. However a "question of implementation" has been formally raised with the Compliance Committee's Enforcement Branch. Should the Enforcement Branch make a final decision that Canada is not complying, it can impose the following sanctions (which were recently imposed on Greece for its non-compliance):

• declare Canada to be in non-compliance;
• require Canada to submit a plan to address the non-compliance within 3 months; and
• prohibit Canada from participating in the Kyoto Flexibility Mechanisms.

This final sanction is the most severe. It would make it impossible for regulated entities in Canada to purchase Certified Emissions Reductions ("CERs") from CDM projects. According to its recently released document "Turning the Corner: An action plan to reduce greenhouse gases and air pollution", the government intends to allow regulated entities to purchase CERs to cover up to 10% of their compliance obligations. By failing to create a Kyoto registry, Canada has frustrated its own intentions in this regard.

Fortunately, the government signed a deal on February 14 with Perrin Quarles Associates to develop the registry this year. Perrin Quarles Associates developed New Zealand's registry and is working on a system for RGGI. Canada may therefore be able to pull itself back into administrative compliance and avoid the sanctions above.

Even if Canada is able to comply with its administrative obligations under Kyoto, it will still face a steep uphill struggle to comply with its substantive emissions reduction obligations. Statistics Canada released data this week showing that Canada's emissions increased by 25% from 1990 to 2005. Reuters UK reports that this increase was the highest of any G8 nation. It is also a leagues away from Canada's Kyoto obligations, which calls for a 6% reduction from 1990 levels by 2012.

BC Set to Regulate a 5% Biofuel Requirement by 2010

Posted by Daniel Jarvis

On April 17th, Bill 16 - Greenhouse Gas Reduction (Renewable And Low Carbon Fuel Requirements) Act passed the 3rd reading in the BC Legislature. The Bill, brought in by Richard Neufeld, BC’s Minister of Energy, Mines and Petroleum Resources, proposes a requirement for fuel suppliers to carry an average of 5% renewable fuel content by 2010. This would apply to both biodiesel in diesel fuel and ethanol in gasoline.

Overall, the Bill is a broad framework, with much of the detail left to be brought in through yet-to-be introduced regulations. For now though, the targets have been set, along with mandatory reporting requirements for fuel suppliers. Failure to comply with reporting requirements or biofuel carrying obligations triggers automatic administrative penalties, as set out in the Bill.

The Bill also sets requirements for reduced “carbon intensity”, a defined term, which looks at the Greenhouse Gas Emissions attributable to the fuel proportionate to the energy provided by the fuel in its expected use. This looks at the life-cycle of the biofuels, and the carbon emitted in processing, extracting, refining and transporting them. The idea is to regulate a certain default intensity level, which would penalize fuel suppliers who carry fuels with a high carbon intensity (for example, from those produced overseas from palm oil and shipped to BC).

One particularly interesting feature of the Bill is that the 5% biofuels target is an average target set for all fuel suppliers across the province. The Bill contains a provision allowing fuel suppliers to meet this target by transferring CO2 equivalent credits attributable to the biofuel carried amongst one another. For example, those suppliers carrying a higher percentage of biofuel content (say 10%), would be able to notionally transfer this extra percentage to a supplier carrying less biofuel content (1-2%) to achieve the 5% average. This is designed to provide some flexibility in the scheme, and to take into account the variation in weather in the province, since the warmer southern portions of BC can support a higher percentage of biodiesel in the mix that in the colder northern climate.

BC launches Standard Offer Program for clean power projects between 0.05 and 10MW

Posted by Andrew Lord

BC continues to deliver on the BC Energy Plan: A Vision for Clean Energy Leadership. On April 11, BC Hydro launched a Standard Offer Program (the "BC SOP"). The BC SOP is intended to complement BC's traditional power tender process by giving smaller developers a streamlined way to sell power to BC Hydro.

The BC SOP sets out several eligibility requirements, including but not limited to the following:

• The project must be located in BC;
• It must have a nameplate capacity between 0.05 and 10 MW;
• The energy generated by the project must be clean, renewable or high efficiency co-generation;
• Only proven generation technologies are eligible (but nuclear is excluded). Proven generation technologies must meet specific criteria in the SOP Rules, particularly that the technology has been used in at least three plants, each for at least three years, to a standard of reliability generally required by Good Utility Practice (as defined in the Standard Form Electricity Purchase Agreement);
• All prescribed permits must be obtained before an application is submitted;
• The developer must have rights to use the proposed project site and that site must be appropriately zoned; and
• The project must also be able to interconnect to the grid. However, a formal interconnection study is not required until the project has been pre-screened by BC Hydro.

For developers, a key feature of the BC SOP is that BC Hydro will enter into a long term power purchase agreement. The proposed Standard Form Electricity Purchase Agreement gives developers the option of selecting a term of anywhere from 20 to 40 years (in whole years).

The pricing mechanism in the BC SOP is significantly different from that in Ontario's Standard Offer Program. In Ontario, the price per kilowatt hour depends on the type of generation technology used. For example, wind power fetches $0.11/kWh whereas photovoltaic power commands $0.42/kWh. Under BC's program, the price will not vary by generating technology. Instead, the price will be based on the following:

1. A base price that will depend on where in the province the power will be delivered to BC Hydro. The base prices listed in the SOP Rules currently range from $0.06994/kWh in Peace Region to $0.08423/kWh on Vancouver Island;


2. A CPI escalation of the base price up to the year when the Electricity Purchase Agreement is signed;


3. A time of day and month price adjustment. The adjustments currently range from a factor of 126% for Heavy Load Hours in February to 72% for Light Load Hours in July; and


4. The price of Environmental Attributes (if applicable). Currently, that price is set at $0.0310/kWh (to be CPI-adjusted) for any project that receives an Environmental Certification and delivers power to BC Hydro. The adjustment in point (3) will not be applied to the price of Environmental Attributes.

The price paid for Environmental Attributes reflects the fact that the Standard Form Electricity Purchase Agreement provides that the developer must assign all rights to Environmental Attributes to BC Hydro. This provision means that developers cannot sell the Environmental Attributes to other market players as part of voluntary carbon offsets, BC Emissions Reductions Units (under BC's proposed cap-and-trade law), renewable energy certificates (RECs), or other instruments that are based on Environmental Attributes. The provision may therefore limit a developer's flexibility in obtaining carbon financing for their project. However, the approval process under the BC Standard Offer Program provides developers with an opportunity to request changes to the Standard Form Electricity Purchase Agreement. Some developers may attempt to negotiate out of the Environmental Attributes assignment clause.

The SOP also provides for some cost-sharing. The developer is responsible for certain interconnection costs while BC Hydro will bear the costs of certain network upgrades.

For more information about the BC SOP, refer to the Standing Offer Program Rules and the Standard Form Electricity Purchase Agreement.

BC introduces cap-and-trade legislation to complement carbon tax

Submitted by Andrew Lord

Having introduced a significant carbon tax earlier this year, the BC government unveiled a second plank in its aggressive effort to tackle climate change. On April 3, 2008, the BC government introduced Bill 18, Greenhouse Gas Reduction (Cap and Trade) Act (the "Act"). The Act would create a cap-and-trade system for greenhouse gas emissions in the province that could be an effective complement to the carbon tax.

Under the Act, the BC government would issue B.C. Allowance Units ("BCAUs"), each corresponding to a right to emit one tonne of carbon dioxide equivalent, to companies in designated sectors. Those companies would then only be permitted to emit the amount of greenhouse gases for which they held BCAUs. This is the "cap" that makes the policy environmentally effective. Those companies who emit more than their assigned amount of BCAUs would have several alternative compliance options, which together constitute the "trade" element that makes implementing the cap more economically efficient. Such companies could do the following:

• Purchase BCAUs from other companies who were able to cut their emissions below their assigned amounts;
• Purchase Recognized Compliance Units ("RCUs") from other jurisdictions (discussed below);
• Create or acquire BC Emissions Reductions Units ("BCERUs"), which will be generated by projects that avoid or sequester emissions, to offset their excess emissions; or
• Pay an administrative penalty.

The details of the BC cap-and-trade system will be developed in parallel with the Western Climate Initiative (the "WCI"). The WCI, whose signatories include BC, Manitoba, California, Oregon, Washington, New Mexico, Arizona, Utah and Montana, will implement a regional cap-and-trade system. By harmonizing the systems, BC hopes to create increased liquidity for carbon instruments. The Recognized Compliance Units mentioned above are expected to largely be sourced from WCI members.

The Act will also establish the administrative apparatus required to track the allocation and trading of the various units and to approve BCERUs and RCUs.

Carbon taxes and cap-and-trade systems are recognized as two ways of placing a price on carbon. The two approaches are significantly different both in the way they achieve the goal of reducing emissions and also in the breadth with which they may be implemented. With respect to the way a emissions are reduced, carbon taxes put a price on carbon in the expectation that consumers will shift demand away from carbon-intensive products. That price incentive should result in reduced emissions. However the result is not guaranteed, particularly if the price signal is not strong enough. Cap-and-trade systems, by contrast, legislate what amounts to a scarcity of emissions. Combined with measures to create a liquid market, that scarcity results in a price for carbon. However it is the legislated scarcity, and not the price signal, that controls the level of emissions. Because that scarcity can be controlled directly, reduced emissions can be guaranteed to a much greater extent than through carbon taxes. With respect to the breadth with which the two approaches can be implemented, a carbon tax can be implemented for all types of consumers, from big businesses to individuals, and can thus drive down emissions across the economy. In contrast, a cap-and-trade system is complex to administer and is thus better suited for large emitters than for individual consumers.

These counterbalancing differences make a carbon tax and a cap-and-trade system complementary. BC therefore appears to be undertaking a very sophisticated, progressive, and hopefully effective approach to addressing the problem of climate change. Check back here for updates as Bill 18 makes its way through the BC Legislative Assembly.

Is climate change "material"? OSC calls on public companies to quantify their environmental risks

Posted by Andrew Lord

Reporting issuers must improve their disclosure of known and contingent environmental liabilities in continuous disclosure documents. That is the message of the Ontario Securities Commission’s Staff Notice 51-716 on Environmental Reporting (the “Staff Notice”), released February 27, 2008. It is a message that could become relevant not just to companies operating in environmentally sensitive areas, but to any company that faces risk from climate change.

The Staff Notice is discussed in detail in our Davis LLP online bulletin. Most generally, it calls on reporting issuers to provide more detailed discussion and quantitative analysis of their known and contingent environmental liabilities. Improved disclosure of material environmental liabilities must be made in annual financial statements, management discussion and analysis (MD&A), and annual information forms (AIF), as applicable.

The call for improved environmental disclosure has obvious implications for companies with direct involvement in environmentally sensitive industries. However, the Staff Notice is broad enough that any company whose business may be materially affected by climate change, or climate change legislation, may also be required to improve its disclosure. The Staff Notice specifically comments that companies must address material environmental risks generally. Climate change is an environmental risk that can materially affect the performance of a wide variety of industries. It can do so by, for example, altering the production and use of resources that depend on the weather (e.g., grain farming and skiing), leading consumers to choose different types of products (e.g., T-shirts instead of parkas), and creating new markets (e.g., voluntary carbon offsets). The Staff Notice also notes that companies must identify and discuss the financial and operational impact of environmental laws. As discussed elsewhere in this blog, laws designed to mitigate the effects of climate change are evolving rapidly. The imposition of carbon taxes and the implementation of mandatory cap-and-trade greenhouse gas trading systems are legislative changes that could have a profoundly material impact on the financial performance of companies. Both the risks of climate change and the effect of relevant laws may have to be addressed to meet the requirements described in the Staff Notice.

The challenge for reporting issuers is that many of the relevant environmental liabilities, including those posed by climate change, are contingent. Even though the financial impact of such risks may be difficult to predict, the Staff Notice sets a clear expectation that reporting issuers will apply business judgment to quantitative information that is reasonably available to provide detailed discussions and quantified estimates of these risks.