Regulatory amendments to clarify program requirements and improve program efficiency for Emissions Performance Standards (EPS) and GHG Reporting programs

The Emissions Performance Standards (EPS) program is Ontario’s alternative to the federal Output-Based Pricing System for industrial emissions. On January 1, 2022, the EPS program took effect to regulate GHG emissions from large facilities in manufacturing, resource and electricity generation industries.

The EPS program is tailored to Ontario's environment and economy. It encourages industries to reduce their emissions, without driving away business and job creators.

Now that the first compliance period under the EPS program has been completed, the ministry has identified opportunities for improvement.

Ontario has made amendments to the EPS and GHG Reporting programs to:

• clarify program requirements.
• improve program implementation and administration.
• address fundamental changes in some Ontario industries.

These amendments apply to:

• Ontario Regulation 241/19: Greenhouse Gas Emissions Performance Standards regulation (O. Reg. 241/19 or EPS Regulation).
• GHG Emissions Performance Standards and Methodology for the Determination of the Total Annual Emissions Limit (the EPS Methodology).
• Ontario Regulation 390/18: Greenhouse Gas Emissions: Quantification, Reporting and Verification regulation (O. Reg. 390/18 or the Reporting Regulation).
• Guideline for Quantification, Reporting and Verification of Greenhouse Gas Emissions (the Guideline).

Key amendments include:

1. Adding industrial activities
2. Changing the terminology for production parameters
3. Changing the Total Annual Emissions Limit determination
4. Assigning and revoking Baseline Emissions Intensities
5. Recognizing significant transformation in the steel sector
6. Clarifying applicability of some Methods
7. Expanding eligibility for Renewable Natural Gas
8. Addressing Temporary shutdowns
9. Clarifying GHG emissions to be reported
10. Other clarifying, technical or administrative changes

See below for more details.

When these changes apply:

• The amended EPS regulation and amended EPS Methodology will apply immediately and be applicable for the 2023 compliance period.

• Most of the amended GHG Reporting Regulation and amended Guideline will apply immediately, and be applicable for the 2023 compliance period with the following exception:
  • amendments related to removing a barrier to the use of renewable natural gas (RNG) in the EPS program will be applicable starting with the 2024 compliance period.

• For greater clarity, only the March 2024 versions of the EPS Methodology and the Guideline apply to the 2023 emissions year.

Regulatory impact analysis

• The proposed amendments are not expected to cause additional compliance costs for affected facilities.
• Several of the proposed amendments to the EPS and GHG reporting programs (for example, adding industries, removing a barrier to RNG) are expected to reduce regulatory burden for facilities that participate in the program.

Other information

The federal program

The federal carbon pricing system has two parts:

• an Output Based Pricing System (OBPS) that regulates GHG emissions from large emitters in manufacturing, resource and electricity generation industries by imposing a charge for emissions exceeding a facility limit.
• a fuel charge on transportation and heating fuels used by households and enterprises not covered by the OBPS.

Provinces and territories can create their own pricing programs for fuels and/or emissions from industry, but they must meet a benchmark (minimum criteria) established by the federal government. This benchmark is the basis for the federal government’s decision on whether to either impose, or continue to impose, the federal carbon pricing system in a jurisdiction.

Ontario’s Emissions Performance Standards Program

The EPS program is intended to:

• Encourage the industrial sector to reduce GHG emissions
• Minimize competitiveness impacts and the risk of production leaving the province for other jurisdictions with less stringent climate policies.

Ontario’s GHG Reporting Program

Certain businesses and industrial facilities, including ones in the EPS program, are required to report their annual GHG emissions under Ontario’s GHG reporting program.

The EPS program is supported by the GHG Reporting program, which provides the required verified emissions, production and emissions limit data for all registrants in the EPS program. These are needed to determine either a facility’s compliance obligation or the number of emissions performance units (EPUs) it is eligible to receive for emitting less than its emissions limit.

Amendment details

Changes made to the EPS Regulation and EPS Methodology

1) Adding industrial activities:

Context: The list of industrial activities currently covered by the EPS program is set out in Schedule 2 of the EPS Regulation. The activities in the list were determined by the ministry to be at either a medium or high risk of leaving the province for other jurisdictions with less stringent climate policies and fewer competitiveness impacts from carbon pollution pricing. To ensure the EPS program continues to meet the federal benchmark, additional industries may only be covered under the EPS program if they are assessed as being at either medium or high risk.

The following industries (North American Industry Classification System codes or NAICS) were assessed as being at high risk:

• NAICS 3273 (Cement and concrete product manufacturing)
• NAICS 3328 (Coating, engraving, cold and heat treating and allied activities)
• NAICS 33591 (Battery manufacturing)

The changes include: adding the NAICS codes above to the list of industrial activities in Schedule 2 of the EPS regulation.

Rationale: This change allows eligible facilities that engage in these industrial activities to register in the EPS program and apply for exemption from the federal carbon charge.

2) Changing the terminology for production parameters:

Context: The EPS Regulation, the Reporting Regulation, the EPS Methodology and the Guideline all used the term “production parameter” to mean both the product being produced and the amount of the product produced. Also, our experience with the 2022 compliance period revealed there was some confusion about which production parameters needed to be reported and verified and how to assess the impact of errors in the production parameters.

The changes include:

• replacing the term production parameter with two terms:
  • “Activity component” means the product or other input required for calculations in the EPS Methodology (e.g., intermediate clinker produced).
  • “EPS parameter” means the measurable property of the product or the other input (e.g., mass in tonnes of intermediate clinker produced).
• clarifying the reporting and verification requirements for EPS parameters.

Rationale: These changes improve clarity and ensure that all the EPS parameters that apply to a facility are reported and verified, not just the ones for products. They also clarify that errors in the EPS parameters need to be considered in terms of their impact both individually and as part of the Total Annual Emissions Limit (TAEL).

3) Changing the Total Annual Emissions Limit determination:

Context: The EPS Methodology sets out the methods for determining the facility’s TAEL. These methods include sector-based and facility-specific performance standards for numerous products.

Generally, a facility’s annual activity emissions limit (AAEL) under a method is calculated by multiplying a baseline emissions intensity (BEI) for an activity component by a stringency factor (i.e., the annual reduction requirement, 1≥SF>0) to determine the performance standard. Then the performance standard is multiplied by the amount of the EPS parameter for each activity component for the year and the sum of the results is the AAEL. The TAEL is the sum of all the AAELs. In other words:

Step 1: Performance Standard = Baseline Emissions Intensity x Stringency Factor

Step 2: Annual Activity Emissions Limit (AAEL) = sum of the results from each Performance Standard x the amount of the EPS Parameter

Step 3: Total Annual Emissions Limit for a facility = sum of all AAELs at the facility

A compliance obligation is the amount by which a facility’s verified emissions exceed its verified TAEL. When a facility’s verified emissions are less than its verified TAEL, the facility is eligible to receive credits (i.e., emissions performance units (EPUs)).

EPS facilities are required to have the number of compliance instruments in their EPS account equal to their compliance obligation by December 15 of the same year the GHG report is submitted. If there is a shortfall, an additional compliance obligation is required to be met by the following February 15 (three compliance units must be surrendered for each one the facility is short).

The Cumulative Outstanding Amount (COA) calculation in the EPS regulation determined the amount that a facility was required to deduct from its next TAEL determination when it was out of compliance with the December 15 and February 15 deadlines. Remaining out of compliance for several years resulted in the cancellation of the facility’s registration in the EPS program. However, the COA calculation did not properly calculate outstanding obligations for facilities that were out of compliance for two or more consecutive years.

The changes include:

• setting out the determination of the TAEL in the EPS regulation (it was previously in the EPS Methodology).
• removing the COA calculation.
• adding clear criteria for cancelling a facility’s registration when it is out of compliance with the December 15 and February 15 deadlines for more than two consecutive years.

Rationale: These changes greatly simplify requirements, improve clarity and resolve the issue with the COA calculation while maintaining an incentive for ongoing compliance.

4) Assigning and revoking Baseline Emissions Intensities:

Context: A BEI for an activity component is an output-based standard that is developed using historical emissions, production data and established criteria. When there are multiple facilities in a sector that have an activity component in common, the ministry will work with them to develop a sector-based BEI for that activity component. Facilities can also apply for a facility-specific BEI for an activity component.

• Sector-based BEIs are set out in Method A in the EPS Methodology and are used by eligible facilities in the sector to calculate an emissions limit.
• Facility-specific BEIs are issued by the Director to an EPS facility in a notice that indicates if they can be used to calculate an AAEL using either Method D or Method E in the EPS Methodology.

The changes include:

1. Adding the BEI application process and associated criteria to the EPS regulation and removing those elements from the EPS Methodology.

2. Clarifying the criteria that apply to emissions and production data that are used to develop a BEI.
   • When a facility has completed or substantially completed an eligible modification, the highest proportion of GHG emissions from the industrial activity or product associated with the eligible modification must be attributable to the transitional activity component for which a transitional BEI is being calculated under Method D in the EPS Methodology.

3. Adding new or revised BEIs for activity components for certain facilities to Method E (facility-specific) in the EPS Methodology.
   • This is to ensure affected facilities have the means to calculate appropriate emissions limits based on their current operations.

4. Adding the circumstances for revoking facility-specific BEIs. These include:
   • the BEI was calculated using data that contained an error, omission or misstatement (e.g., the production parameter was not properly defined, the baseline emissions or production data contained significant technical errors, etc.).
   • the notice indicated it was to be used in Method D and it will be re-issued for use in another method (e.g., Method E).
   • the facility-specific BEI will be replaced with a sector-based BEI (e.g., Method A).

Rationale: These changes ensure a fair and consistent approach for the development of output-based standards. They allow some facilities for which current methods are not feasible to transition to facility-specific standards. They also support administrative efficiency.

5) Recognizing significant transformation in the steel sector:

Context: Method A (sector-based) in the Methodology sets out BEIs for common steel production processes (e.g., producing coke, producing iron from smelted iron ore). Two large steel producers are expected to make a transition to cleaner steel production (e.g., replacing existing coke ovens and blast furnaces with new electric arc furnaces) in the coming years. These steel processes are subject to the sector-based standards in Method A.

The investments being made at these facilities are expected to lead to significant emissions reductions. Other facilities may also undertake transformative initiatives in the future that will result in significant, permanent emissions reductions.

The changes include:

• identifying the two steel facilities in EPS regulation by their GHG ID numbers.
• establishing transitional standards by adding a new method to the EPS Methodology (Method G) and setting facility-specific BEIs for the processes that are being replaced and the new ones that are being implemented (e.g., blast furnace, electric arc furnace).
• applying a stringency factor of one (i.e., no reduction requirement) to these facilities:
  • starting in 2023 for existing processes that will either be replaced or modified.
  • for new equipment (e.g., electric arc furnace), starting when there is production from the new equipment.
• providing the Director authority to issue BEIs to any EPS facility that is expected to significantly and permanently reduce its annual GHG emissions, not as a result of decreased production, within five years of a request.

Rationale: These changes recognize the significant transformation to cleaner production in the steel sector and the large-scale emissions reductions that are expected as a result. They also lay the groundwork for the ministry to consider similar approaches for companies making large-scale emissions reductions in the future.

6) Clarifying applicability of some Methods:

Context: Each method in the EPS Methodology has an introductory section with eligibility criteria. These sections explain which facilities can and cannot use the method. These criteria ensure that there is no double counting of emissions or EPS parameters when two or more methods are used.

The eligibility criteria for Method C “Cogeneration Thermal Energy Sector Performance Standard” exclude thermal energy that was already included in the development of BEIs under Method A or Method E or is included in equations under Method E. This prevented some facilities with cogeneration systems from using these methods.

Additionally, Table B.1 in Appendix B, which sets out which facilities can use Method B (Electricity Generation Sector Performance Standard) or Method C or which facilities can include thermal energy transferred (TET) in a Formula under Method E, also excluded some facilities with new, or future, cogeneration systems from using these methods.

For example:

• petroleum refineries were excluded as they are set out in Method A, but the sector-based BEIs for their applicable activity components do not account for thermal energy.
• facilities with cogeneration systems that use a facility-specific BEI under Method E were excluded if they did not deduct an amount of thermal energy transferred from their cogeneration system in the determination of the AAEL for Method E.
• facilities that recently implemented cogeneration systems were excluded.

The changes include:

• adjusting the criteria to ensure these methods are applied consistently across sectors.
• clarifying how thermal energy transfers from cogeneration systems are considered under Method C when a facility-specific BEI applies.
• changing table B.1 to allow facilities with recently implemented cogeneration systems to use the applicable methods.

Rationale: These changes ensure a consistent approach for facilities with cogeneration systems.

Changes made to the GHG Reporting and Guideline

1) Expanding eligibility for Renewable Natural Gas:

Context: In the GHG Reporting Regulation, carbon dioxide emissions from renewable natural gas (RNG) that is used directly at the facility can be deducted from the facility’s verified emissions. When RNG is added to Ontario’s natural gas pipeline system, it is mixed with natural gas and therefore is not delivered directly to the facility. As a result, emissions from the combustion of RNG that was purchased by the facility and added to Ontario’s natural gas pipeline was not eligible to be deducted from an EPS facility’s verified emissions.

The changes include:

• amending the verification amount determination in the GHG Reporting regulation to deduct carbon dioxide from the combustion of RNG purchased by the EPS facility and added to Ontario’s natural gas pipeline system.
• amending the Guideline to include new subsections in the Standard Quantification Method for “ON. 20 Fuel Combustion and Flaring” which set out the reporting, quantification and record keeping requirements. These include:
  • The EPS facility has one or more contracts in place for the purchase of RNG.
  • The final delivery point in the RNG contract is the EPS facility.
  • The RNG is demonstrated to be biomass (e.g., landfill gas).
  • The RNG meets the fuel quality requirements to be injected into Ontario’s natural gas pipeline system and is added to the pipeline in Ontario.
  • There are transfer record(s) available that show the contiguous flow of the RNG from the RNG supplier to the EPS facility.
  • The amount of carbon dioxide from the combustion of RNG purchased is calculated in accordance with the prescribed formula.

Rationale: Supports the use of RNG in Ontario and provides another way for EPS facilities to reduce their emissions. This means they will be able to lower their compliance obligations or increase the number of EPUs they are eligible to receive. The changes ensure a fair and consistent approach for the treatment of biomass in the EPS program. They also safeguard against double counting of the carbon dioxide emissions reductions from RNG purchased through clear ownership records.

2) Addressing Temporary shutdowns:

Context: The GHG Reporting regulation did not have any mechanism to adjust an EPS facility’s compliance obligation when it continued to emit GHGs during periods of zero production. Since the TAEL is based on production, this would lead to a large discrepancy between the facility’s verified emissions and its TAEL, meaning it would have a large compliance obligation.

The changes include: amending the GHG Reporting regulation and Guideline to reduce a facility’s verification amount if the following criteria are met:

• the shutdown period at the EPS facility is at least 180 consecutive days in a calendar year.
• there is no production during the shutdown period.
• no more than one notice of temporary shutdown has been given by the Director in the previous two consecutive years.
• no more than two notices of temporary shutdown have been given in the previous five years.

If a facility meets these criteria and submits a request to the Director by January 31 of the calendar year following the shutdown, the Director will, no later than March 31, issue a written notice to the facility that sets out the first and last day of a temporary shutdown period. Emissions that occur between these dates are omitted in the determination of the facility’s verified emissions.

Eligible facilities will continue to be required to report their total facility emissions, including emissions during the shutdown period, in their annual GHG emissions report and have the report verified for the compliance period in which shutdown occurs.

Rationale: The amendments provide compliance relief to EPS facilities in situations when they have to shut down temporarily (e.g., for re-tooling). The policy aligns with the program intent – to make large polluters accountable for their GHG emissions while minimizing competitiveness impacts and carbon leakage

3) Clarifying GHG emissions to be reported:

Context: The GHG Reporting regulation requires all facilities in the province that engage in Specified GHG Activities and emit 10,000 tonnes of carbon dioxide equivalent in a year to report their GHG emissions to the ministry annually. The list of Specified GHG Activities is set out in Schedule 2 of the GHG Reporting regulation.

The regulation required the facility to report the amount of GHGs emitted during all Specified GHG Activities at the facility.

The regulation also requires EPS facilities to calculate the amount of GHG emissions that need to be verified by an accredited verification body (i.e., an independent third-party). The verification amount calculation deducts emissions from sources not listed in Schedule 2 (i.e., activities that support regulated activities, such as emissions from a landfill) from the facility’s total GHGs emitted.

Stakeholder feedback indicated that it was unclear that all GHGs emitted at the facility are required to be reported, including those from sources not listed in Schedule 2.

The changes include:

• clarifying how facility emissions from activities that support regulated activities are to be included in reports.
• updating references to these provisions in the EPS regulation.

Rationale: These changes clarify how emissions from other sources are to be included in reports and improve consistency in reporting.

Other clarifying, technical or administrative changes made:

Context: Under certain circumstances, the verified emissions and/or the verified TAEL under the EPS regulation must be replaced with values based on historical data in the determination of a facility’s compliance obligation. These circumstances include:

• the verification statement indicated the verifier found significant errors in the emissions, an EPS parameter or TAEL that were not corrected.
• the verifier didn’t provide a conclusion on the emissions, an EPS parameter or TAEL in the verification statement.
• no verification statement was submitted.

These substitution rules ensure facilities do not benefit from non-compliance.

Our experience with the 2022 compliance period revealed there was some confusion about whether the omission of some EPS parameter conclusions from the verification statement would require the Director to substitute a new TAEL.

The changes include: Amending the EPS regulation to clarify:

• that the verified TAEL will be replaced with a substituted value if one or more EPS parameters is missing a conclusion in the verification statement.
• the conditions under which a verification statement will be deemed to have not been submitted.
• how revised reports are considered.

Rationale: These changes improve clarity on when and why these substitution rules apply

Context: Other technical, administrative or clarifying changes.

The changes include:

• clarifying definitions and terms and addressing technical issues in the EPS Regulation, GHG Reporting regulation, EPS Methodology and the Guideline.
• amending the EPS regulation and the GHG Reporting regulation to clarify that the previous owner or operator must comply with the regulations in respect of the compliance period that is the year before a change in ownership takes place.
• amending the GHG Reporting regulation to clarify verification rules to limit the risk of verifiers having a conflict of interest by including reports verified under the federal Output-based Pricing System in the total number of reports that can be verified by the same verifier within a nine-year period.
• amending the EPS regulation to clarify the four years during which a brand-new facility, or a facility that has undertaken a major modification, must meet the minimum greenhouse gas emissions threshold of 10,000 tonnes of carbon dioxide equivalent which is a registration requirement.

Rationale: These changes clarify program requirements and improve program implementation and administration.