October 11, 2018 Ministry of…

October 11, 2018

Ministry of the Environment, Conservation, and Parks

Re: Cap and Trade Cancellation Act

To whom it may concern,

CRH Canada Group Inc. (CRH) is one of the nation's leading vertically integrated building materials manufacturers and construction companies. CRH is a proven provider of innovative cement, aggregate, concrete and construction solutions for building projects across Canada, the Great Lakes Region and the northern US. The CRH Cement plant located in Mississauga, Ontario, were mandatory participants in Ontario’s Cap & Trade program, and we would like to provide comments on its cancellation and the financial impact that this has on CRH. There are three key implications of the Cap & Trade Cancellation Act directly affecting compliance entities that we would like to highlight in this document.

1. Cash Purchase of Allowances and Proposed Compensation
2. Initiatives for greenhouse gas reduction projects based on funding from Cap & Trade Program
3. Potential significant cost increase under federal system (regulatory change while not considering blanket legislation from the federal level)
4. Policy and Market Certainty

1. Cash Purchase of Allowances and Proposed Compensation
Under the Ontario Cap & Trade mechanism, industries were required to submit emission compliance units to cover verified emissions. Free allowances given to entities were not meant to cover the emissions of an entire compliance period, so additional compliance units needed to be purchased. In making prudent financial decisions under the enacted legislation at that time regarding greenhouse gas emissions, some covered entities purchased allowances.

Some of the factors that an entity might consider when deciding to purchase allowance are:

Product costing
Without proper costing and subsequent appropriate pricing of goods sold, the plant may not be solvent. Direct costs need to be allocated to each unit produced in order to provide proper costing, in order to properly price goods for sale. Under Cap & Trade, the cost of carbon needed to be allocated to the cost of the goods produced. The allowances purchased allowed for the determination of product cost budgeting.

Risk Management
As Cap & Trade operated as a market for the pricing of allowances, there were many outside factors that could affect the price of allowances. The minimum price under the Cap & Trade system rises 5% each year + inflation. In order to set the price of carbon and not to be subject to the future increase in prices as well as price swings in the market, the decision to lock prices eliminates the need for estimating carbon costs.

The issue with the mechanism for the calculation of compensation of Cap & Trade instruments is that only the amounts purchased in excess of the obligations including the free allowances would be compensated, even though compliance is not required. This means that entities that did not act proactively and did not purchase allowances are given an unfair financial advantage, resulting in a competitive disadvantage for those entities that acted proactively. This situation is akin to selective taxation, as there was no choice in complying with the regulations, just timing of purchase of the allowances in order to adhere to currently enacted legislation at that time. It is essentially a pre-payment of tax, which should be subject to refund upon revocation of such tax.

We would propose to consider reviewing the compensation framework such that entities that purchased allowances are not penalized for proactively managing their position in the Cap & Trade program. This could be achieved through compensation for the entire total dollar amount actually paid for allowances purchased in the auction. These funds are now held in the Cap & Trade wind-down account and could effectively be returned to entities that purchased allowances.

2. Initiatives for greenhouse gas reduction projects based on funding from Cap & Trade Program
Under the Cap & Trade Program, a portion of the funds received from the auctions by the MECP were being allocated to contribute to greenhouse gas reduction projects. The allocation of these funds to entities was based on meeting certain criteria and an application process. The application process consumed both internal human resources and financial resources, as (examples of costs) were required in order to submit applications for project funding.

With the Cap & Trade Cancellation Act, these opportunities are in a state of uncertainty. It is not clear whether the collected auction revenue will still be used for funding, as this has been changed to the “Cap & Trade Wind-down account”. It has been stated recently that the unallocated Cap & Trade revenue is ~$1 billion.

It is understood that future funding of projects cannot occur as the MECP will no longer be collecting revenues under Cap & Trade, however a significant amount of revenues has already been collected at this point, and after compensation is provided to eligible entities there will still be a significant amount left.

We would propose to consider one of these options:
• Compensation in the amount of financial resources that were already expended in applying for the funding under Cap & Trade
• Continue with funding of the project as contemplated, using funds that were collected already from Cap & Trade for the purposes of greenhouse gas reduction projects.
• Provide the option for pro-rated reduced funds for those that want to continue with projects, with less funding.

3. Exposure to potential significant cost increases
Under the Cap and Trade program, as a manufacturing entity, CRH was provided partial relief through the free allowance allocation mechanism “Product Output Benchmark Method”, at least until 2020.

Without a carbon pricing system in place, Ontario may be subject to the Federal Backstop, the costs of which are substantially higher.

Although the details of the Federal Backstop are not precisely determined at this point, based on the current information and best estimates, the additional cost of carbon under the Federal Backstop as compared to the previous Cap & Trade program will be approximately $9,000,000.

Given that the passage of Bill 4, Cap and Trade Cancellation Act, 2018 may actually subject Ontario entities to increased carbon costs, we would propose the MECP to consider a more fair compensation framework from the Cap and Trade Wind-down account to impacted Ontario entities.

4. Policy and market certainty
It is essential for the proper functioning of a policy, and to the affected business community, that there is certainty in terms of the rules and timetables of policy and compliance obligations. Ontario compliance entities need to know what they are expected to do, when, and how. Without clear and stable policy decisions or direction, the resulting costs and risk premiums is sizable and impactful on business decisions and evaluations for capital and investment. Certainty and stability are critical for creating an attractive business environment, without this, investments in Ontario may be at risk.

We would ask that consideration be given to these matters as the Cap and Trade Cancellation Act writes GHG targets, repeals the Low Carbon Economy Act, and develops a Climate Change Action Plan.

We thank you for the opportunity to provide comments and appreciate your thoughtful consideration.