Regulations Amending the Output-Based Pricing System Regulations: SOR/2020-114
Canada Gazette, Part II, Volume 154, Number 12
SOR/2020-114 May 27, 2020
GREENHOUSE GAS POLLUTION PRICING ACT
P.C. 2020-394 May 27, 2020
Her Excellency the Governor General in Council, on the recommendation of the Minister of the Environment, pursuant to paragraphs 192(e) and (f) of the Greenhouse Gas Pollution Pricing Act footnote a, makes the annexed Regulations Amending the Output-Based Pricing System Regulations.
Regulations Amending the Output-Based Pricing System Regulations
1 Section 13 of the Output-Based Pricing System Regulations footnote 1 is renumbered as subsection 13(1) and is amended by adding the following:
(2) Despite subsection (1), for the compliance period that ends on December 31, 2019, the annual report and the verification report must be submitted to the Minister on or before October 1, 2020.
2 (1) Section 57 of the Regulations is amended by adding the following after subsection (1):
(1.1) Despite subsection (1), for the compliance period that ends on December 31, 2019, the regular-rate compensation deadline is April 15, 2021.
(2) Section 57 of the Regulations is amended by adding the following after subsection (2):
(2.1) Despite subsection (2), for the compliance period that ends on December 31, 2019, the increased-rate compensation deadline is June 15, 2021.
3 The portion of subsection 69(3) of the Regulations before paragraph (b) is replaced by the following:
Other compensation deadlines
(3) If a corrected report is submitted to the Minister in respect of a compliance period for which the regular-rate compensation deadline set out in subsection 57(1) or (1.1) has not expired, the compensation deadline in respect of that compliance period is the later of
- (a) the compensation deadlines set out in subsection 57(1), (1.1), (2) or (2.1), as the case may be, and
Coming into Force
4 (1) Subject to subsection (2), these Regulations come into force, or are deemed to have come into force, on May 31, 2020.
(2) If these Regulations are registered after May 31, 2020, section 3 comes into force on the day on which these Regulations are registered.
REGULATORY IMPACT ANALYSIS STATEMENT
(This statement is not part of the Regulations.)
The Output-Based Pricing System Regulations footnote 2 (the Regulations), established under the Greenhouse Gas Pollution Pricing Act footnote 3 (the Act), were published in the Canada Gazette, Part II, on July 10, 2019. Under the Act, the federal carbon pollution pricing system has two parts: a trading system for large industry, known as the Output-Based Pricing System (OBPS), and a regulatory charge on fuel (fuel charge). The objective of the Regulations is to ensure there is a price incentive for emissions-intensive and trade-exposed facilities to reduce greenhouse gas (GHG) emissions per unit of output, while mitigating the risk of decreased domestic production and carbon leakage to other jurisdictions. The person responsible for a covered facility footnote 4 (regulated parties) must submit an annual report by June 1 of the calendar year following the end of the compliance period for which the report is prepared. To provide assurance of the integrity of this result, the Act requires third-party verification of the annual report.
On March 11, 2020, the World Health Organization (WHO) declared the coronavirus disease (COVID-19) to be a pandemic. As a result, the Government of Canada and the provincial and territorial governments have taken unprecedented measures to help prevent the spread of COVID-19 in order to protect the health of Canadians. Measures like physical distancing, self-isolation, and travel restrictions affect the capacity of regulated parties to meet certain requirements under the Regulations. Therefore, some regulated parties will have difficulty ensuring that their third-party verification body is able to conduct a site visit as required under the Regulations. Regulated parties may also be unable to compile and submit their annual report by the June 1, 2020 deadline for various reasons, including unavailability of internal staff or outside consultants.
The OBPS applies to covered facilities engaged in certain activities in the “backstop” provinces listed in Part 2 of Schedule 1 to the Act. The OBPS currently applies in Ontario, New Brunswick, Manitoba, Prince Edward Island, Yukon, and Nunavut, and partially in Saskatchewan. The decision to have the OBPS apply in a given Canadian province is based on the stringency of a provincial or territorial carbon pollution pricing system and its alignment with the federal benchmark. footnote 5
All obligations under the Regulations are on the person responsible for the covered facility. Person is defined in the Act to include a wide variety of corporate structures and can include an individual, a corporation, a partnership or an association. The Regulations further define a person responsible for a covered facility as the person who owns the facility or is otherwise responsible for the facility, including any person that is the decision maker for the operations of the facility. As an example, the person could be either the owner or operator of a facility.
The person responsible for a covered facility must submit an annual report, along with a verification report, by June 1 of the calendar year following the end of the compliance period for which the report is prepared. Starting January 1, 2019, each calendar year represents a compliance period. For covered facilities located in Yukon and Nunavut, the 2019 compliance period started on July 1, 2019. For facilities that become a covered facility partway through a year, like a voluntary participant, footnote 6 the compliance period starts on the effective date of registration as an emitter under Part 1 of the Act. footnote 7 For example, for a covered facility with an effective date of registration as an emitter on September 1, 2019, the 2019 compliance period started on September 1 and ended on December 31, 2019.
The annual report identifies whether facilities have emitted more or fewer emissions than allowed by the emissions limit. It also identifies how much compensation for excess emissions must be provided by the person responsible or how many surplus credits must be issued. To provide assurance of the integrity of this result, the Act requires third-party verification of the annual report. The verification must meet the requirements of the Regulations, which include ensuring that the covered facility is visited by a verification body. Site visits allow a verification team to collect sufficient and appropriate evidence to support their determination to a reasonable level of assurance as to whether the annual report is reliable. In some cases, a site visit may be necessary for a verification body to complete a verification in accordance with their professional standards. footnote 8
The verification report, which summarizes the conclusions of the verification process, must be submitted at the same time as the annual report. The deadline for the submission of the verification report and the annual report is ahead of the prescribed compensation deadlines. The verification report plays an important role in the process used by the Department of the Environment (the Department) to assess the validity of the information provided in the annual report, assess compliance and determine whether compensation must be provided or whether surplus credits are to be issued. The third-party verification and site visit are especially important for the 2019 compliance period given that the associated annual report and verification report are the first reports submitted under the Regulations.
A covered facility that emits less than its annual limit receives surplus credits, with each credit representing one tonne of GHGs expressed in terms of carbon dioxide equivalent (CO2e). When the GHG emissions of a covered facility are above its annual limit, the person responsible for a covered facility can provide compensation for its excess emissions by the regular-rate compensation deadline. The regular-rate compensation deadline is December 15 of the calendar year in which the related annual report must be submitted. The person responsible can meet the compensation obligation at the regular rate by paying the excess emissions charge for the calendar year in which the compliance period falls or by remitting one compliance unit per tonne of excess CO2e emissions, or a combination of both. footnote 9 Compliance units include federal surplus credits, federal offset credits, footnote 10 as well as eligible provincial and territorial offset credits recognized under the Regulations.
If compensation is not provided in full by the regular-rate compensation deadline, it must be provided at the increased rate by the increased-rate compensation deadline. The increased-rate compensation deadline is February 15 of the calendar year following the regular-rate compensation deadline (i.e. the second year following the compliance period). The Act sets the increased-rate compensation at four times the regular rate. If the compensation for excess emissions is not provided by the increased-rate compensation deadline, the facility is out of compliance with the Regulations.
The objective of the Regulations Amending the Output-Based Pricing System Regulations (the Amendments) is to provide regulated parties with additional time to meet their regulatory requirements relating to the 2019 compliance period, given the constraints on business operations imposed by the COVID-19 measures.
The Amendments will apply to persons responsible for covered facilities; that is, to the same regulated parties to which the Regulations apply. The Regulations include a number of deadlines for the submission of reports and the provision of compensation. The Amendments will delay three of these compliance deadlines for the 2019 compliance period only, as follows:
- Move the deadline for the submission of the annual report and the verification report for the compliance period ending December 31, 2019, from June 1, 2020, to October 1, 2020;
- Move the regular-rate compensation deadline for the compliance period ending December 31, 2019, from December 15, 2020, to April 15, 2021; and,
- Move the increased-rate compensation deadline for the compliance period ending December 31, 2019, from February 15, 2021, to June 15, 2021.
On April 8, 2020, a Notice of Intent was published on the Department’s website, indicating that the Minister of the Environment intended to put forward an amendment to the Regulations footnote 11 to delay certain deadlines for Governor in Council approval. This publication served to give regulated parties advanced notice of the Amendments prior to their finalization.
A formal consultation period and a prepublication comment period were not undertaken due to the urgent need to provide compliance flexibility to industry stakeholders, who requested delayed deadlines during the unprecedented and extraordinary operational circumstances stemming from the COVID-19 pandemic. In addition, no changes in policy or program implementation are being introduced by the Amendments.
Although measures to limit the spread of COVID-19 vary in different parts of the country and are changing frequently, numerous regulated parties and verification bodies have notified the Department that COVID-19 related restrictions are affecting their ability to meet, in the short-term, various legal obligations under the Regulations. As a result, the industry requested that compliance deadlines be extended.
While industry stakeholders requested deferred timelines and have informally indicated support for the changes following the publication of the Notice of Intent, should the COVID-19 restrictions persist, they may find that a four-month deferral is insufficient. Provinces and territories have been informed of the Amendments and have not raised concerns.
Modern treaty obligations and Indigenous engagement and consultation
The Amendments are not expected to impact Indigenous peoples differently, directly or indirectly; and, they would respect the federal government’s obligations in relation to rights protected by section 35 of The Constitution Act, 1982, modern treaties, and international human rights obligations.
A number of options were considered to provide additional flexibility to address regulated parties’ challenges due to workforce disruptions and other restrictions. The Department considered the merits of several different approaches, as described below.
The option of maintaining the reporting and compensation deadlines of the Regulations and relying on enforcement discretion in situations of non-compliance was considered, as this approach would not require regulatory amendments. However, if third-party verification and related site visit requirements are not completed, the Department may not be in a position to accurately assess whether the quantity of excess emissions or of surplus credits to be issued identified in the annual report is accurate. In addition, some regulated parties may still take actions to try to meet deadlines that are not in-line with multi-level government direction related to COVID-19 mitigation measures, such as physical distancing, to avoid being out of compliance with the Regulations or having to pay the increased rate compensation obligation. A regulatory approach was therefore chosen to ensure regulated parties have additional time to fulfill the reporting, verification, and compensation requirements; and, to provide regulatory certainty.
Waive the site visit verification requirement
Consideration was given to amending the Regulations to remove the site visit verification requirement for the 2019 annual report only. However, the site visit helps ensure that accurate information is included in the first annual report submitted by regulated parties and is particularly important given the new and complex requirements of the Regulations. Given the potentially significant financial value of compliance obligations and surplus credits, it is critical that a third-party verification with a site visit take place for the first reporting year under the Regulations. Therefore, this regulatory option was not chosen.
Extend reporting and compensation deadlines by four months
Delaying the reporting and compensation deadlines by four months would give regulated parties additional time to compile and submit their annual reports and prepare for third-party verification. The Amendments will therefore provide additional certainty and defer the compensation requirements mentioned above for regulated parties, while also demonstrating a continued commitment to action on climate change.
Benefits and costs
Measures like physical distancing, self-isolation, and travel restrictions affect regulated parties’ ability to meet certain requirements of the Regulations. For example, some regulated parties will have difficulty ensuring that their third-party verification body is able to conduct a site visit on time, as required under the Regulations. The Amendments, which delay reporting and compensation deadlines by four months, are not expected to affect the efficacy of the Regulations and are therefore expected to have net benefits for all regulated parties. The benefits and costs of the Amendments have been assessed qualitatively, as described below.
Without the Amendments, which extend the reporting and compensation deadlines, some regulated parties may take actions to try to meet deadlines that are not in-line with multi-level government direction related to COVID-19 mitigation measures, such as physical distancing. The Amendments therefore help ensure that regulated parties respect the COVID-19 measures by delaying third party verification.
Time between annual reporting and compensation obligations is required to allow the Department to review reported information and issue surplus credits. It also allows time for regulated parties to buy or sell credits, and provide compensation. Allowing sufficient time for these processes is especially important in the first year of implementation of the Regulations (2019 compliance period), during which credits will first be issued and emissions trading will be established. The Amendments, which provide the same amount of time to verify the accuracy of reporting before the compensation deadlines as required by the Regulations, will help ensure correct issuance of surplus credits, which have potentially significant market value.
It is possible that regulated parties that have their covered facilities located in remote areas or in areas where COVID-19 restrictions are in place longer may have greater difficulty meeting the requirement to have their site visited by a third party. The delay in reporting is particularly beneficial for these regulated parties.
Delaying the reporting and compensation deadlines for the 2019 compliance period by four months will defer the obligations for this period, but will not remove or change them. The Amendments delay the reporting benefits of the Regulations but should not decrease the overall benefits, including the quantity of GHG reductions, given that regulated parties already took measures to comply with the Regulations in 2019. This modification is not expected to affect proper functioning of the OBPS in the long-term, nor will it change federal government costs. The costs of the Amendments (i.e. the delayed reporting benefits) are therefore negligible, particularly when compared to the benefits.
Small business lens
Some voluntary participants opting into the OBPS are small businesses. The Amendments, which delay the reporting and compensation deadlines for the 2019 compliance period by four months, are expected to benefit all regulated parties, including small business participants. Small businesses will likely benefit more than medium and large businesses, as they typically have less resources to meet the requirements of the Regulations.
Under the Amendments, the administrative requirements will be delayed by four months, but otherwise will be maintained. Therefore, the one-for-one rule does not apply as there is no incremental change in administrative burden for businesses.
Regulatory cooperation and alignment
The objective of the Amendments is to reduce regulatory burden in the short-term and help businesses maintain liquidity during and as they emerge from the pandemic period. This is in line with other measures taken by the Government of Canada in response to the restrictions that help prevent the spread of COVID-19, such as extending the filing and payment dates for the 2019 tax year.
Several provincial governments have also announced changes to GHG measures:
- British Columbia announced that it will not increase the carbon price by $5 this year;
- Quebec suspended some provisions within its cap-and-trade regime;
- Alberta delayed the compliance reporting deadline under the Carbon Competitiveness Incentive Regulation from March 31 to June 30, 2020; and
- Newfoundland and Labrador delayed their annual report, verification and compliance deadlines under the Management of Greenhouse Gas Reporting Regulations for the calendar year 2020.
Despite the COVID-19 restrictions, most major international carbon pricing systems have maintained compliance deadlines to date. The Government of Canada is delaying deadlines by four months to provide additional time for regulated parties to have their annual reports verified by a third party. This additional flexibility will help ensure compensation obligations and quantity of surplus credits are correct, which should maintain the overall effectiveness of the regime.
Strategic environmental assessment
The Regulations were developed under the Pan-Canadian Framework on Clean Growth and Climate Change (PCF), specifically the Pan-Canadian Approach to Pricing Carbon Pollution. The Amendments continue to support the implementation of the PCF and the Pan-Canadian Approach to Pricing Carbon Pollution. A strategic environmental assessment (SEA) was completed for the PCF in 2016. The SEA concluded that proposals under the framework will reduce GHG emissions and are in line with the 2016–2019 Federal Sustainable Development Strategy.
In accordance with the Cabinet Directive on the Environmental Assessment of Policy, Plan and Program Proposals, a preliminary scan concluded that a strategic environmental assessment is not required for the Amendments because they do not change the environmental objectives of the Regulations.
Gender-based analysis plus
No gender-based analysis plus (GBA+) impacts have been identified in association with the Amendments.
Implementation, compliance and enforcement, and service standards
The modifications to the reporting and compensation deadlines come into force on May 31, 2020, if the Amendments are registered prior to June 1, 2020. If they are registered on June 1, 2020 or after, these modifications would still take effect on May 31, 2020, as prescribed by the Amendments. The Act allows amendments to the Regulations to take effect earlier than the day on which they are registered, if they were the subject of a Notice of Intent and regulations provide for a retroactive coming into force date. As noted above, these Amendments were outlined in a Notice of Intent published on April 8, 2020.
Due to the delay to both compensation deadlines, the Amendments also adjust the deadlines for providing compensation when a corrected report is provided in respect of the 2019 compensation period. This specific change comes into force on May 31, 2020 or on the day of registration if registration is after May 31, 2020.
Since the Amendments only delay reporting and compensation deadlines for the 2019 compliance period, the implementation plan for the Regulations remains unchanged, but will be adjusted to reflect the delayed deadlines.
Compliance and enforcement, and service standards
The Department has developed an electronic reporting module in the Department’s Single Window System that is available to regulated parties to submit annual reports and verification reports. The Department continues to develop a system through which regulated parties will be able to provide compensation or receive surplus credits on the modified timelines consistent with the Amendments.
To support regulated parties’ understanding of the Amendments, the Department will reach out directly to the authorized official of each facility; continue to maintain a general inquiries inbox and phone line; and respond to questions from regulated parties. The performance measurement requirements for the Regulations remain unchanged by the Amendments; the results of which will be included in annual reports to Parliament regarding implementation of the Act, as required under Part 4 of that legislation. For example, key indicators that will be used to measure performance include awareness of the Regulations and associated requirements, annual compensation levels, and changes to industry emissions intensity.
When verifying compliance, enforcement officers will apply the principles found in the Compliance and Enforcement Policies developed by the Department. The Department intends to develop service standards related to compensation activities (e.g. for the issuance of surplus credits).
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