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Change is a coming: 2023-2030 Federal Carbon Pricing Guideline and the Saskatchewan Output-Based Performance Standards Program
Change is a coming:
2023-2030 FEDERAL CARBON PRICING GUIDELINE AND THE SASKATCHEWAN OUTPUT-BASED PERFORMANCE STANDARDS PROGRAM
BY MCKERCHER LLP LAWYERS, ANDREW J. DUSEVIC AND TYLER K. GRAY
In February of 2022, and in response to the 2023-2030 carbon pricing benchmark released by Environment and Climate Change Canada (ECCC), the Government of Saskatchewan announced a new output-based performance standards (OBPS) program for industrial emissions under the Prairie Resilience strategy.
The new Saskatchewan OBPS includes significant potential changes for Industrial Process Emissions, driven by the increasing cost of carbon in the coming years. From 2023-2030, the minimum carbon pricing schedule sees an annual increase of $15 per tonne per year, resulting in an increase from $50 per tonne CO2e in 2023 to $170 per tonne in 2030.
The federal government requires that provincial OBPS programs maintain the minimum federal carbon pricing signal in order for the provincial program to replace the federal carbon pricing backstop. Carbon pricing signal refers to the concept that carbon pricing systems should incentivize lowering emissions, or in this case, moving towards zero emissions. Naturally, this incentive decreases proportionally to the amount of carbon credits available and that are applicable to one’s emissions. In response to the pricing guideline, the Government of Saskatchewan has proposed significant changes to its OBPS compliance program.
One potential impact of this direction is that the use of emissions credits will become increasingly expensive over the next eight years and nominally financially beneficial relative to paying per tonne of emissions. Further, the provincial government has signalled that offset credits will no longer be able to be used to meet compliance obligations. There is also concern about whether previously earned Offset Credits will be honoured and useable under the new OBPS program. Meanwhile, the provincial government has advised that they will work with industry to find alternative markets on which these offset credits may be sold. A second impact under the new OBPS is that performance credits will be awarded on a 1:1 basis relative to per tonne reductions in emissions, with performance credits able to be sold between regulated emitters. This is a departure from the previous approach of awarding credits where emissions were reduced by 10, 15, or 20 per cent (depending on the sector) below permitted limits in a given year.
Finally, the Government of Saskatchewan will continue to incentive carbon capture, utilization and storage (CCUS) technology by permitting individual regulated emitters to leverage CCUS against emissions incurred at facilities they own or operate in Saskatchewan, and across compliance years as part of their overall compliance strategies. These CCUS credits may not be sold or purchased between regulated emitters, and the Government of Saskatchewan has provided little information on how they will be awarded and what limitation, if any, on their use.
Impacts on industry
The signalled changes in the new Saskatchewan OBPS have the potential to create further pricing pressure and risk to the Saskatchewan potash industry
relative to its competitors in the global marketplace and may cause significant disruption and redirection of compliance programs and investment decisions made by industrial emitters.
The removal of offset credits from use as a compliance option will have an obvious effect on internal compliance programs, but also eliminates a potential avenue for innovation. For example, industry may no longer pursue offset projects that have benefits to the public at large in addition to, and beyond, the generation of an offset credit. The Government of Saskatchewan has promised to support industry in finding alternative markets for the sale of its offset credits. Still, it remains unclear whether this support will be able to meaningfully address the loss of offset credits in internal operations.
The proposed restrictions on CCUS credits, namely the inability to leverage CCUS credits through a hub of projects between various partners and across a number of facilities, may, without alteration, force regulated emitters to take a much more siloed approach to emissions reduction as opposed to collaborative efforts to reduce emissions across industry. This approach may create disproportionate challenges to regulated emitters depending on where they find themselves in the industry’s supply chain and based on their corporate footprint in Saskatchewan.
With no draft legislation available to the public, the lingering uncertainty surrounding the ability of industry stakeholders to collaborate to meet compliance obligations may ultimately validate the concern that the new OBPS program will further intensify market pressure and competitive risk. What is clear is that regulated emitters must renew their focus on reducing their carbon footprint; less they pay the (increasing) price.
The McKercher LLP Natural Resources Advisory Group is the foremost Saskatchewan advisory team, achieving the best business and legal outcomes for clients participating in Saskatchewan’s natural resource sectors. Contact partner Bruce Harrison for potash matters and partner Chris Masich for environmental matters. s
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