Ontario Bill 4, Cap and…

Ontario Bill 4, Cap and Trade Cancellation Act, 2018

I am writing to comment on behalf of the Industrial Gas Users Association (IGUA) about the Ontario Bill 4, Cap and Trade Cancellation Act, 2018.

IGUA represents the interests of large industrial gas users in Ontario and Quebec on natural gas and energy issues. Our membership spans key sectors of Ontario’s economy including mining, steel, pulp and paper, chemicals, refineries and manufacturing. IGUA’s members own and operate some of the largest industrial facilities in Ontario producing commodities that compete with international suppliers leaving them trade‐exposed. Industry accounts for a third of all energy used in Ontario and for about half of the natural gas use. Energy intensive heavy industries, like IGUA members, use energy to produce bulk materials and products needed to support the life-style choices of the public. They are major employers in their local, and often remote, communities.

Energy used by heavy industry is directly tied to output production. The energy objective for this sector of the economy should be to reduce the carbon and energy intensity of output product, not to reduce total energy consumption if it means reducing plant output.

Context
On July 25th, the Ontario Government introduced the Cap and Trade Cancellation Act, 2018, which will repeal the Climate Change Mitigation and Low-carbon Economy Act, 2016, if passed. This proposed Act sets out the legal framework to wind down the Cap and Trade Program, describes a compensation framework and establishes a requirement for the Minister of Environment, Conservation and Parks to prepare a climate change plan and subsequent progress reports in respect of the plan. The Government posted the proposed Act on the Ontario Environmental Registry on September 11, 2018 to gather stakeholder input over a 30-day comment period ending today, October 11, 2018.

The objective of this submission is to communicate IGUA members’ input on – 1) the fair treatment of industry participants who were pro-active in purchasing allowances under the Cap and Trade Program; 2) tailored solutions for industry actors who utilize energy from cogeneration systems for economic and operational efficiency; and 3) the need for recycling of revenues obtained from industrial participants from a now relevant Federal carbon pricing program to avoid economic and emissions leakage of Ontario businesses.

In addition, IGUA is offering its extensive collective industrial business experience to support the Government in the development of its Made-in-Ontario climate change plan.

Fair Treatment for Pro-Active Cap and Trade Program Participants
Ontario’s new government has indicated that it intends to build a practical, affordable and responsible government to rebuild Ontario and deliver on its plan for the people. The plan is to: “…lower Ontarians’ tax bills, help create and protect jobs, and ensure Ontario is once again open for business” in addition to putting “…everyday workers and families first” . With a clear mandate through the election, one of the first actions of the new government was to introduce legislation to cancel the Climate Change Mitigation and Low-carbon Economy Act, 2016.

The Cap and Trade Program, launched on January 1, 2017, defined compliance obligations for mandatary program participants through 2020. The regulation resulted in significant administrative burden and included significant financial penalties as well as imprisonment for non-compliance. Emissions intensive businesses across Ontario were gratis allocated allowances based on facility-specific issues including trade exposure. For most facilities the allocated allowance amounts were insufficient to ensure compliance with the 2017-2020 obligation under the Cap and Trade Program. Businesses took a variety of approaches to meet their obligation, from pro-active purchasing of allowances through government auctions to maintain compliance with regulation from program initiation, to a wait-and-see approach, opting to hold off purchasing allowances until closer to the date of required remittance in 2021.

To ensure competitiveness with other jurisdictions that did not impose a Cap and Trade obligation on businesses, as well as equity between mandatary program participants in Ontario that implemented differing compliance plans, we request that the government remedy businesses for any expenditures for allowance acquisition beyond gratis allocation. Not compensating businesses for the allowances purchased to be in regulatory compliance (characterized as retired in Section 6 (2) of Bill 4), will hurt the bottom line of businesses that had been pro-active in managing compliance under the Cap and Trade Program. It will put those Ontario businesses at a competitive disadvantage alongside competitors that had taken a wait-and-see approach. The allowances acquired, beyond those allocated gratis, represent a sunk cost for the pro-active businesses – one that cannot be recovered through other market mechanisms since the July 2018 introduction of O.Reg. 386/18 Prohibition Against the Purchase, Sale, and other Dealings with Emission Allowances and Credits.

Request to government: IGUA members request that Ontario businesses be reimbursed for all allowances that were purchased to meet the legal requirements of the Cap and Trade Program, including those described as retired in Bill 4. Business should NOT be reimbursed for any allowances allocated gratis. The financial remedy should be funded by the money appropriated under Section 11 of Bill 4, and essentially result in a return of proceeds from government to businesses that paid into the mechanism between January 2017 and mid-2018. The government reimbursement of funds for allowances purchased for compliance will reduce the negative financial impacts imposed by the Cap and Trade Program, remove the competitive disadvantage burdening businesses that were pro-active under Cap and Trade and help to protect jobs at affected businesses in Ontario.

Remedy for Facilities Using Cogeneration Systems
Regulation of businesses with cogeneration systems on-site, or those relying on steam/electricity from a nearby cogeneration system, is very complex from an emissions, energy and contractual perspective. This was recognized by the Ontario government through the implementation and refinement of the Cap and Trade Program and resulted in amendments to rules for treatment of facilities with cogeneration systems late in 2016 or while the program was underway in 2017. These amendments and other facility specific remedies were negotiated with individual entities to address the complexities of cogeneration systems and ensure equitable treatment amongst cap and trade program participants.

The case study that follows describes the unique treatment negotiated between one industrial facility using energy from a cogeneration system and the government of Ontario. This example is intended to illustrate one of several unique cases, each one requiring individual negotiations with the government to develop bespoke treatment aimed at levelling the playing field under cap and trade.

Case study
Facility: Atlantic Packaging’s Whitby Mill, manufacturer of 100% recycled paper products
Industry: pulp and paper, a recognized trade exposed industry under Ontario’s Cap and Trade Program, requiring protection from exogenous competitors in jurisdictions with no carbon price
Primary energy consumption: purchased steam from an adjacent site (Whitby Cogeneration Plant)
Emissions: <10,000 tCO2e (below the Cap and Trade Program opt-in threshold), the Mill generates very few greenhouse gas emissions directly, given its arrangement to purchase steam from an adjacent site
Compliance obligation under Cap and Trade Program: none, because the Mill’s emissions are less than the Cap and Trade Program’s threshold
Costs under Cap and Trade Program: full carbon costs associated with the natural gas used to generate the steam payable as pass-through on steam price under non-utility generator (NUG) contract
Remedy for Whitby Mill’s unique situation: The Ontario government made a special concession to permit Atlantic Packaging’s Whitby Mill to opt-in to the Cap and Trade Program as a voluntary participant. The government then provided gratis allocation to the Mill to account for the carbon price passed through on the purchased steam to ensure equitable treatment compared to other pulp and paper facilities with compliance obligations that would have qualified for gratis allocation under program rules.

Request to government: Ontario businesses that were granted remedies including gratis allocation on the basis of a unique trade exposure situation related to cogeneration rules under the Cap and Trade Program, such as Atlantic Packaging’s Whitby Mill, should be reimbursed for those allowances to remedy the competitive disadvantage experienced by those businesses while the Climate Change Mitigation and Low-carbon Economy Act was in effect. The financial remedy should be funded by the money appropriated under Section 11 of Bill 4, and essentially result in a return of proceeds from government to businesses that paid into the mechanism.

Revenue Recycling to Relevant Industry Sectors/Sub-Sectors
Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures received Royal Assent on June 21, 2018. Part 5 of C-74, Greenhouse Gas Pollution Pricing Act, imposes the federal carbon pricing backstop in jurisdictions where the federal government determines that the provincial system is insufficient, using one of two elements: a charge/tax on fossil fuel consumption assessed based on carbon intensity by fuel type, and an output-based pricing system (OBPS) for industrial facilities. As Ontario does not yet have a climate change plan deemed sufficient by the Federal Government, industrial facilities in Ontario will be covered under the OBPS.

Under Ontario’s Climate Change Mitigation and Low-carbon Economy Act a facility-specific approach to regulating emissions was applied to industrial emitters with the intent to drive abatement and avoid leakage. The Federal Government’s OBPS employs a sector-specific approach. There is concern amongst emissions intensive and trade exposed industrials that a sector-specific approach will not adequately protect the province from economic and emissions leakage of businesses. It will be important for the Ontario Government to ensure this issue is mitigated as much as possible. Specifically, all revenue collected, from emissions intensive and trade exposed industrial facilities in Ontario, by the Federal Government under the OBPS, is recycled to the sectors/sub-sectors of the Ontario economy from which they came. Reattribution of revenues from industrials to broader residents or homeowners of Ontario is an unacceptable transfer of wealth. IGUA members hold that investing proceeds back into the industrial sector will result in: cost effective emissions reductions, deployment of technology and significant economic benefits for the province. Revenue recycling back into relevant Ontario industrial sectors/sub-sectors will help avoid the ‘compliance trap’ challenge faced by many facilities where climate/carbon compliance obligations constrain access to capital needed to invest in emissions reductions.

Request to government: All revenues generated through the Federal Government’s OBPS in Ontario should be recycled to the relevant industrial sector/sub-sectors in the province. This will address competitiveness issues and leakage pressure which Ontario businesses face due to past and future carbon policies. By supporting industry, Ontario workers and jobs will be protected.

Final comment: IGUA and its members have broad and extensive industrial business backgrounds with considerable experience to bring to the table. IGUA would appreciate an opportunity to contribute in a positive and collaborative manner to the development of the government’s Made-in-Ontario climate change plan to be implemented instead of the Federal Carbon Pricing Backstop.