Thank you for the…

Thank you for the opportunity to provide comments to the Ministry of the Environment, Parks and Conservation (“MECP”) on Bill 4, The Cap and Trade Cancellation Act, 2018.

Irving Oil was founded in 1924 and is a global refining and marketing company, operating Canada’s largest refinery in Saint John, New Brunswick. Irving Oil serves wholesale, commercial and retail customers in Atlantic Canada, Quebec, Ontario, New England and Ireland.

Irving Oil Commercial GP is a registered supplier of petroleum products in Ontario, and in other jurisdictions in Canada, and has been a mandatory participant in the Ontario Cap and Trade Program since its inception.

CAP AND TRADE REGULATION – ALLOWANCES
Ontario Regulation 144/16 – The Cap and Trade Program (the “Cap and Trade Regulation”) set the first compliance period for 4 years (January 1, 2017- December 31, 2020). Suppliers of petroleum products were not entitled to receive any free allowances from the Government of Ontario (the “Government”). As such, suppliers of petroleum products were required to purchase all allowances for compliance. Based on the 4-year compliance period set by the Government, many suppliers chose long-term purchasing strategies. In many cases, suppliers purchased allowances which extended beyond a calendar year’s obligation. Further to this, the auction process itself does not allow for the purchase of a precise number of allowances. The quantity of allowances successfully purchased by a bidder is not known until the auction is settled. A practical strategy to deal with this uncertainty is to purchase more allowances than may be required for a given year, particularly since, under the program, allowances would not expire and could be used in subsequent compliance periods.

Allowances could also be purchased at auction by a participant under an Ontario account, with the intent to transfer a portion of allowances to satisfy an obligation held by the same party in another jurisdiction, such as Quebec and California. This measure consolidated the party’s multi-jurisdiction auction administration costs.

In response to the conditions noted above, many fuel suppliers implemented proactive compliance strategies and made early purchases of the emission allowances to satisfy regulatory compliance obligations under the Cap and Trade Regulation through to 2020. These allowances were not purchased on speculation. They were purchased as part of a diligent regulatory compliance strategy that would ensure that the participant would be able to comply with its obligations under the Cap and Trade program.

COST RECOVERY ISSUES
Bill 4 would forcibly retire all eligible instruments that are in excess of the participant’s obligation requirements under the Cap and Trade program with respect to its activities during the shortened compliance period of January 1, 2017 to July 3, 2018. This would result in the retirement of excess emission allowances that were purchased in good faith pursuant to a compliance obligation under the Cap and Trade Regulation.

Further, Bill 4 would leave suppliers of petroleum products with excess allowances without any remuneration as they are ineligible for compensation under Bill 4. These suppliers cannot pass the costs through to consumers (as described in the July stakeholder briefings). Fuel supply is based on a global commodity market. Individual suppliers will not be competitive if they increase their prices to recuperate the investments made for the excess allowances since other suppliers have not made similar investments and are at a significant cost advantage. The assumption that suppliers can simply increase their costs to consumers is inaccurate.

PRESERVATION OF FAIRNESS
The Government has publicly committed to a fair and orderly wind down of the Cap and Trade program. However, with those intentions in mind, there are mandatory participants who in good faith purchased allowances from the Government through Western Climate Initiative (WCI) joint auctions and will be negatively impacted. Bill 4 proposes to simply erase any benefit of those purchases without compensation for certain participants, including petroleum product suppliers, who are left with no reasonable avenue to obtain compensation. The proposed wind down treats mandatory participants disparately and unfairly. It creates uncertainty and does not respect the investments made by petroleum product suppliers who have chosen to do business in Ontario.

In order to preserve the fairness of the program wind down, the Government should identify opportunities to enable all mandatory participants with excess allowances to recover a benefit from those investments through other carbon markets or through an offset allocation against any future Ontario or federal carbon obligation.

We strongly encourage the Government to work with counterparts in the WCI to seek an avenue for Ontario participants: 1) to transfer their excess purchased allowances into affiliated accounts in Quebec or California or 2) to sell these excess allowances to participants in those jurisdictions on the secondary market, neither of which would require any involvement in future auctions. This would provide an opportunity for Ontario participants to generate some benefit from their investments without drawing from Ontario’s allowance holding proceeds. This may require assurances to WCI partners that Ontario will continue to use the funds it obtained from the sale of these allowances to support initiatives designed to reduce greenhouse gases, as required by the Climate Change Mitigation and Low-carbon Economy Act, 2016.

Alternatively, the Government should hold the funds it received from Ontario participants in relation to purchased excess allowances on behalf of the participant, to be allocated in favour of that participant in any future Ontario or federal climate change program; including as an offset against any future federal climate change tax.

Bill 4 penalizes suppliers of petroleum products in Ontario who are holders of excess emission allowances as of July 3, 2018. We strongly encourage the Government to examine alternatives that would allow mandatory participants to derive a benefit from these investments and ensure that all mandatory participants are treated equally and fairly.

Irving Oil appreciates MECP’s commitment to engaging industry for input into the wind down of the Ontario Cap and Trade program. We look forward to further consultation on this matter.