Cap and Trade in British Columbia

A primer on the program and its potential impact on B.C. business

By Lynn Sully and Ward Stendahl

Over the past two years, the struggling global economy and its rather anemic recovery have dampened the enthusiasm of politicians and the public to pursue significant action on climate change. Yet B.C. and a few other provinces and U.S. states are boldly moving ahead with a cap and trade system that will take effect a year from now, in January 2012.

 B.C. has pledged to reduce greenhouse gas emissions by at least 33 per cent below 2007 levels by 2020. To get there, the government has adopted a carrot and stick approach aimed at motivating individuals and businesses to make the shift to a more sustainable and low-carbon economy.

A key element of the plan is the Greenhouse Gas Reduction (Cap and Trade) Act. Passed in May 2008, this legislation made B.C. the first province in the country to bring in laws setting fixed limits (or caps) on greenhouse gas emissions. The legislation also lays the groundwork for B.C.’s participation in the Western Climate Initiative, a regional market-based cap and trade strategy to reduce greenhouse gas emissions in member jurisdictions.

How does a cap and trade system work?

Under cap and trade, limits are set on the emissions of carbon dioxide (CO2) and other greenhouse gases such as methane, perfluorocarbons and nitrous oxide (collectively known as equivalent carbon dioxide or CO2e) by companies in regulated industries. Over time, these limits are lowered to ensure that the jurisdiction actually reduces its overall emissions. (B.C.’s carbon tax, in contrast, is meant to encourage businesses and individuals to choose lower-carbon options, but there is no guarantee that they will do so or that total emissions will be reduced.)

Each regulated facility within the system has a cap on its allowable CO2e emissions. If a facility is able to reduce its emissions below this maximum amount, it has a credit (also called an allowance) that it can then save for future use or sell to another facility that has exceeded its maximum emissions. Companies can also purchase carbon offsets to reduce their emissions.

The idea is that companies will choose the most economically advantageous way to reduce emissions, either by improving the energy efficiency of their operations (and earning revenue from selling their unused allowances) or by purchasing offsets or credits from others.

Cap and trade systems are proven to work: in the 1990s, a cap and trade system in the U.S. reduced sulphur dioxide pollution (one of the main causes of acid rain) far below mandated levels and at a much lower cost to industry than expected.

The Reporting Regulation: ensuring accurate data

Of course, a cap and trade system can only succeed if participants are confident in the reliability and consistency of emissions data reported by regulated facilities. To that end, the B.C. government introduced the Reporting Regulation in November 2009, which provides the reporting and data collection framework that underpins the Greenhouse Gas Reduction Act. The Reporting Regulation defines the types of operations that need to register and report emissions, as well as the methods to be used to calculate and verify them.

Under the terms of the regulation, facilities that produce 10,000 metric tonnes of CO2e or more must report their 2010 emissions by March 31, 2011. Those who produce more than 25,000 metric tonnes must have their emissions verified by a third party and participate in the cap and trade system.

The types of facilities affected include large manufacturers; chemical, metal and petrochemical producers; companies involved in electricity transmission and natural gas transmission and distribution; and pulp and paper producers. It’s estimated that approximately 200 operations in the province will need to register and report their emissions, with about 40 of these required to comply with the cap and trade system since they produce more than 25,000 metric tonnes of CO2e annually.

Additional regulations define emissions
trading and offsets
The provincial government is putting in place two other regulations to support the cap and trade program.

The first, the Emissions Trading Regulation, outlines how the market for allowances will work – the rules regarding “how allowances are created, distributed for free or auctioned, traded, tracked and retired for compliance” (B.C. Ministry of Environment, Consultation Backgrounder – Carbon Pricing).

The second, the Cap and Trade Offsets Regulation, defines the offsets program, essentially describing how offsets will be registered, quantified, verified, monitored and issued. An offset project must reduce greenhouse gas emissions, increase the storage of carbon or remove greenhouse gases from the atmosphere.

Consultation papers on both regulations were distributed in the fall of 2010 and open for comments from stakeholders until early December. Based on this input, the government is drafting the regulations and developing guidelines for their implementation.

The potential impact on B.C. businesses

“Until the specific details of the cap and trade program are hammered out, we can only wait and see how the new legislation will affect companies operating in the province,” says Linda Woo, CGA, Chief Financial Officer for Rescan Environmental Services, an environmental consulting company with an international client list. As a Vancouver Sun editorial stated last summer, “History will judge whether the decision by British Columbia and a few other members of the Western Climate Initiative to push ahead with a cap-and-trade scheme to limit carbon initiatives is bold or foolish.” 

Contacts in government, industry associations and non-profit organizations were interviewed for a report prepared for Industry Canada in August 2010 titled Economic Impacts of a Cap and Trade Program on B.C.’s Industries and asked for their thoughts on the potential effect of the program.

The consensus from those interviewed is that some industries will undoubtedly be harder hit than others. For example, many mining and forestry companies have already taken steps to improve their energy efficiency and they will be able to do little more to reduce their operations’ greenhouse gas emissions other than by curtailing production. These industries also sell their products on the world market at globally set prices, so they will have to absorb any additional costs themselves without being able to pass them on to end consumers.

On the other hand, companies involved in clean technology, the alternative fuel and energy industry, and certain sectors of the forestry industry are expected to benefit from the cap and trade program.

Yet while the new legislation will add an additional layer of regulation and cost to business, bottom-line costs are anticipated to be less onerous than the impact of fluctuating exchange rates and volatile commodity prices. Those interviewed for the report also felt confident that so long as the carbon price remained relatively low (as is predicted) companies would remain in B.C. and not relocate to other jurisdictions with less stringent regulations around greenhouse gas emissions.

An uncertain environment

The uncertainty associated with details of the cap and trade program (such as the allocation of allowances, carbon prices and availability of offset projects) and the absence of a national strategy are posing additional complications for B.C. companies. Interviewees suggested that the “lack of definitive rules around the Western Climate Initiative program and the indecisiveness of the federal government in regards to their own climate policies prevented companies from moving forward and investing in new technologies, energies and production processes.” 

With a struggling global economy, climate change legislation has stalled in many U.S. jurisdictions. Although seven U.S. states originally signed on to the Western Climate Initiative, only California and New Mexico have committed to going ahead with the cap and trade program. Arizona and Utah have pulled out and Washington, Oregon and Montana failed to pass cap and trade legislation, putting in doubt whether they will be able to implement the program in 2012.

The recent midterm elections in the U.S. and the advances of the Republican Party are also seen as diminishing the chances of the U.S. passing national cap and trade legislation that is now before the Senate. Given that the Canadian government has vowed to follow the lead of our largest trading partner, it seems unlikely that we’ll see national leadership on a Canadian strategy.

As a society, we are often caught up in either/or thinking, believing that we must choose either the economy or the environment, but not both. B.C. and the other participants in the Western Climate Initiative are hoping that their proactive approach points to a new way forward – one that supports a vibrant and sustainable economy while reducing greenhouse gas emissions. Time will tell.